diff --git a/raw/aaer/2015/AAER-3619.txt b/raw/aaer/2015/AAER-3619.txt new file mode 100644 index 0000000000000000000000000000000000000000..f4043134814612092bcf8dda2ce0aeb71264471a --- /dev/null +++ b/raw/aaer/2015/AAER-3619.txt @@ -0,0 +1,166 @@ + + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 74039 / January 13, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3619 / January 13, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16333 + + : + : + : +In the Matter of : + : ORDER INSTITUTING PUBLIC + : ADMINISTRATIVE PROCEEDINGS + JAMES T. CRANE, CPA, : PURSUANT TO RULE 102(e) OF + : THE COMMISSION’S RULES OF + : PRACTICE, MAKING FINDINGS, AND + Respondent. : IMPOSING REMEDIAL SANCTIONS + : + : +____________________________________ : + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against James +T. Crane (“Respondent” or “Crane”) 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 + 2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 1. Crane, age 38, was a certified public accountant licensed to practice in the +Commonwealth of Massachusetts, until his license expired on June 30, 2010. He served as Chief +Financial Officer of Subaye, Inc. (“Subaye”) from October 29, 2007 until March 10, 2011. + + 2. Subaye was, at all relevant times, a Delaware corporation that purported to +have its primary operations in the People’s Republic of China. Subaye claimed to be a leading +online services provider for small-to-medium sized businesses in China, but presently it is inactive. +Subaye’s common stock was registered with the Commission pursuant to Section 12(b) of +Securities Exchange Act of 1934 (“Exchange Act”) and was listed on the NASDAQ Stock Market +under the ticker “SBAY” from March 15, 2010 until November 21, 2011. The NASDAQ Stock +Market filed a Form 25 (Notification of Removal from Listing and/or Registration under Section +12(b) of the Exchange Act) on November 10, 2011, and Subaye no longer has a class of stock +registered pursuant to the Exchange Act. + + 3. On October 20, 2014, a final judgment was entered by consent, against +Crane, permanently enjoining him from future violations of Section 10(b) of the Exchange Act and +Rules 10b-5, 13a-14, 13b2-1 and 13b2-2 thereunder, and Section 105(c)(7)(B) of the Sarbanes- +Oxley Act of 2002, and from aiding and abetting any 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, thereunder, in the civil action +entitled Securities and Exchange Commission v. Subaye, Inc. and James T. Crane, Civil Action +Number 1:13-cv-03114-PKC, in the United States District Court for the Southern District of New +York. Crane also was ordered to pay a civil penalty of $150,000 and was barred from serving as +an officer or director of a public company for a period of ten years. + + +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 3 + 4. The Commission’s complaint contained allegations, which Crane neither +admitted nor denied, that, among other things, Crane engaged in a fraudulent scheme that +resulted in Subaye’s filing materially false and misleading financial statements in the company’s +annual report on Form 10-K for the fiscal year ended September 30, 2010, and a report on Form +8-K/A filed on January 26, 2011. The Complaint alleged that Crane, as Subaye’s Chief +Financial Officer, engaged in a number of improper accounting practices, which included +circumventing or failing to implement a system of internal accounting controls, falsifying the +books, records and accounts of Subaye, providing false documents to Subaye’s independent +auditors, signing false management representation letters that were provided to the auditors, +making materially false or misleading statements to Subaye’s accountants, and signing a false +certification of Subaye’s Form 10-K for 2010. In addition, the complaint alleged that, after +being barred from doing so by the Public Company Accounting Oversight Board (PCAOB) in +January 2011, Crane remained associated with Subaye, an issuer of U.S. registered stock, in a +financial management or accounting capacity. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Crane’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Crane is suspended from appearing or practicing before the Commission as an +accountant. + + B. After ten years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he/she works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify any criticisms + 4 +of or potential defects in the respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; + + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring partner reviews and quality control +standards. + +C. The Commission will consider an application by Respondent to resume +appearing or practicing before the Commission provided that his state CPA license is +current and he has resolved all other disciplinary issues with the applicable state boards of +accountancy. However, if state licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Respondent’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3620.txt b/raw/aaer/2015/AAER-3620.txt new file mode 100644 index 0000000000000000000000000000000000000000..b8810f8f02394489ed89b396cfd121a4853d6775 --- /dev/null +++ b/raw/aaer/2015/AAER-3620.txt @@ -0,0 +1,379 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 74112 / January 22, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3620 / January 22, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16352 + + +In the Matter of + +Walid Hatoum + +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 Walid Hatoum (“Hatoum” 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. These proceedings arise from violations of the Foreign Corrupt Practices Act of +1977 (the “FCPA”) [15 U.S.C. 78dd] by Respondent Walid Hatoum concerning offers of +payment and other benefits to foreign officials in Qatar in connection with the award of +government contracts to PBS&J International, Inc. (“PBSJ&J Int’l”), a wholly-owned subsidiary +of PBSJ Corporation (“PBSJ”). + +Respondent + +2. Walid Hatoum (“Hatoum”), age 55, is a United States citizen who initially +worked for PBSJ as an engineer from 1986 until 1990. In February 2009, Hatoum was rehired to +join PBS&J Int’l as its Director of International Marketing, even though his prior employment +file at PBSJ had been marked “Ineligible for Rehire.” Although Hatoum did not formally join +PBS&J Int’l until April 2009, he assisted PBS&J Int’l with identifying projects as early as +November 2008. Hatoum was promoted to President of PBS&J Int’l in mid-June 2009, and +became an officer of PBSJ at the same time. +Relevant Entities + +3. The PBSJ Corporation (“PBSJ”) was an employee-owned engineering and +construction firm incorporated in Florida and headquartered in Tampa. Through the relevant +period, PBSJ’s common stock was registered pursuant to Section 12(g) of the Securities +Exchange Act of 1934 (“Exchange Act”) and PBSJ filed annual and quarterly reports as required +under Section 13(a) of the Exchange Act and Rules thereunder.2 +4. PBS&J International, Inc. (“PBS&J Int’l”) was a wholly-owned subsidiary of +PBSJ headquartered and incorporated in Florida. PBS&J Int’l was a provider of engineering, + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +2 On October 1, 2010, after the conduct at issue, WS Atkins plc (“Atkins”), a public limited engineering and +design company based in the United Kingdom and organized under the laws of England and Wales, acquired PBSJ +and all of its common stock. Atkins is traded on the London Stock Exchange under the symbol ATK.L. That day, +PBSJ filed a Form 15 with the Commission, which terminated all offerings of its securitie s and removed all +remaining securities from registration under Section 12(g). Post-acquisition, PBSJ became an indirect wholly- +owned subsidiary of Atkins. On April 1, 2011, PBSJ changed its name to The Atkins North America Holdings +Corporation. + + + 3 +architectural and planning services in international markets, including the Middle East. PBS&J +Int’l currently is a subsidiary of Atkins. +Facts + +5. During 2009, PBS&J Int’l won two multi-million dollar development contracts. +One contract was for work in Qatar and the other was for work in Morocco. Both were +competitively solicited and approved by the Qatari Diar Real Estate Investment Company +(“Qatari Diar”). Qatari Diar was established by the Qatari government to coordinate the +country’s real estate development. +6. PBSJ and PBS&J Int’l, through Hatoum, offered bribes to the then-Director of +International Projects at Qatari Diar (“Foreign Official”), to secure Qatari government contracts +by planning to funnel funds to a local company the Foreign Official owned and controlled +(“Local Partner”). Foreign Official, a former business colleague of Hatoum’s at another U.S. +engineering firm, worked for Qatari Diar throughout 2009, until his resignation from Qatari Diar +on December 21, 2009. Prior to joining PBSJ, Hatoum and Foreign Official discussed directing +business in the Middle East to Local Partner. +7. In return, Foreign Official provided PBS&J Int’l with access to confidential +sealed-bid information and pricing information on the two government contracts that helped +PBS&J Int’l tender bids that had a greater likelihood of being awarded, including a government +contract for which the Foreign Official was the project manager. +Offers and Promises Made to Foreign Official + +LRT Project in Qatar + +8. In November and December 2008, Hatoum began discussing potential +employment with PBSJ. Even before he received a formal employment contract, Hatoum met +with PBS&J Int’l to discuss opportunities to grow PBS&J Int’l business in the Middle East. +Hatoum discussed projects involving Qatari Diar, including a light rail transit project in Qatar +(“the LRT Project”). +9. In January 2009, Hatoum arranged for Foreign Official’s brother, through Local +Partner, to introduce PBS&J Int’l to Qatari Diar senior executives involved in the LRT Project. +Soon after that meeting, PBS&J Int’l decided to bid on the LRT Project. PBS&J Int’l added +Foreign Official’s company, Local Partner, on its proposal team as a subcontractor to handle +local operations such as hiring local labor, as well as complying with bonding and insurance +requirements. In return, Hatoum and PBS&J Int’l agreed to pay the Foreign Official, through +Local Partner, 40% of profits realized from any LRT Project contract as well as reimburse its +direct costs. The remaining profits were to be split between PBS&J Int’l (40%) and another +U.S.-based subcontractor (20%), which would perform all of the planning and engineering +services for the LRT project. + + + 4 +10. At that time, Hatoum was the only person at PBS&J Int’l who had any knowledge +about Foreign Official’s ownership interest in Local Partner. Had PBSJ conducted meaningful +due diligence at that time, it would have discovered the Foreign Official’s dual role as both +government official and third-party owner/operator of Local Partner. +11. During the bidding process, Foreign Official gave confidential sealed bid +information to PBS&J Int’l to assist it in winning the LRT Project in return for promised +payments. Foreign Official also made strategic and technical decisions on many aspects of the +LRT Project that favored PBS&J Int’l with Hatoum’s knowledge. +12. Foreign Official used a Local Partner alias to communicate that information to +Hatoum and other PBSJ and PBS&J Int’l employees while disguising his involvement on +multiple conference calls and in dozens of emails to the United States. Hatoum was aware that +Foreign Official was using the alias in communications with PBSJ employees, officers, and +directors and with Qatari Diar. Hatoum flew to the Middle East to meet with Qatari Diar +officials, including Foreign Official, to discuss PBS&J Int’l’s qualifications for the LRT Project. +At the meeting, neither Foreign Official nor Hatoum informed Qatari Diar that Foreign Official +was working for Local Partner and providing confidential information and other assistance to +help PBS&J Int’l win the contracts. +13. Following its initial submission, PBS&J Int’l revised its bid, based on information +and guidance provided by the Foreign Official, to best position itself to win the LRT Project and +to withstand possible challenges from competitors. On or about August 3, 2009, Qatari Diar +awarded the LRT Project contract worth approximately $35.6 million to PBS&J Int’l. +14. After the award, PBS&J Int’l opened a joint account with Local Partner that was +accessible to Foreign Official’s wife. PBS&J Int’l also authorized a four-year letter of credit +relating to a bank guarantee in Qatar. The letter of credit was a precondition for receipt of the +first contract payment by Qatari Diar to PBS&J Int’l, an upfront, 10% (approximately $3.6 +million) payment, which was deposited into the joint account. +15. Once the award was received, Hatoum offered Foreign Official an “agency fee” to +Local Partner for 1.8% of the LRT Project contract amount (equivalent to approximately +$640,000). Additionally, PBS&J Int’l agreed to pay half of the salary of Foreign Official’s wife, +who worked for Local Partner. +Design Contract in Morocco + +16. In addition to the LRT Project, Qatari Diar opened a Morocco hotel resort +development (“Morocco Project”) for competitive bid. On August 7, 2009, PBS&J Int’l emailed +its Statement of Qualifications for the design contract to Foreign Official, the Qatari Diar project +manager for the Morocco Project. +17. In October 2009, Hatoum offered payment to Foreign Official in the form of an +agency fee to Local Partner to secure the Morocco Project. The Morocco Project was worth + + + 5 +approximately $25 million to PBSJ Int’l, of which the Foreign Official was offered an agency fee +of 3% of the contract amount, which equates to approximately $750,000. Hatoum instructed a +PBS&J Int’l employee to hide the agency fee within the company’s bid proposal by inflating +other components of the offer for the Morocco Project. +18. Foreign Official attended meetings with PBS&J Int’l employees to discuss the +project but neither Foreign Official nor Hatoum told employees that he was working for Local +Partner. At the same time, Foreign Official, using his Local Partner alias, reviewed and made +changes to PBS&J Int’l’s original bid offer via email and phone. He also made key technical and +strategic proposal decisions throughout the bidding process and instructed PBS&J Int’l to lower +its offer to a specific dollar amount. By doing so, he ensured PBS&J Int’l’s final bid had a +greater likelihood of being approved by Qatari Diar. On or around October 19, 2009, Qatari Diar +informed PBS&J Int’l that it was awarded the Morocco Project. +Red Flags + +19. PBSJ and PBS&J Int’l officers and employees ignored multiple red flags that +should have led them to uncover the payment scheme. For example, PBS&J Int’l and PBSJ +employees knew that Local Partner was providing them with confidential sealed bid information. +Hatoum also informed the employees that he was obtaining information from someone that +Hatoum described as a “good friend” and “top executive” at Qatari Diar. Before PBS&J Int’l +submitted its bid for the Morocco Project, a PBS&J Int’l officer learned that the husband of one +of the Local Partner employees was a government official working on the Morocco Project. The +PBS&J Int’l officer learned of Foreign Official’s role while attending dinner with Hatoum, +Foreign Official and the Foreign Official’s wife. In addition, a PBSJ employee knew that +“agency fees” to Local Partner were disguised as legitimate costs within the Morocco Project +bid. + +Discovery of the Payment Scheme + +20. Shortly after PBS&J Int’l was awarded the Morocco Project contract, PBSJ’s +former Chief Operating Officer commented to PBSJ’s then-general counsel that PBS&J Int’l was +successful in winning two contracts in the Middle East within a fairly short period of time. +PBSJ’s then-general counsel asked Hatoum how he was able to win the LRT and Morocco +Project contracts over companies with far more international experience. Hatoum told PBSJ’s +then-general counsel PBSJ offered “agency fees” in order to win the projects and, when asked, +admitted there “would be a problem” if the agency fees were not paid. PBSJ’s then-general +counsel immediately launched an investigation of this issue. +21. Three weeks later, in November 2009, a Qatari government official informed +Hatoum and the then-President of PBSJ that Qatari Diar had discovered Foreign Official’s +involvement in Local Partner and was rescinding PBS&J Int’l’s contract for the Morocco +Project. Hatoum then secretly made an offer of employment to a second Qatari foreign official +in return for influencing Qatari Diar to reinstate the contract. However, Qatari Diar refused to + + + 6 +reinstate the contract and did not provide PBS&J Int’l any proceeds for the project. PBSJ +suspended Hatoum in December 2009. Hatoum also began deleting emails and other records. +22. PBS&J Int’l and Qatari Diar negotiated a termination of the LRT Project contract +effective December 31, 2009. In January 2010, Qatari Diar entered into a bridge contract with +PBS&J Int’l to continue work on the LRT Project (the “Bridge Contract”) until a replacement +company could be found. Ultimately, the period of performance on the Bridge Contract was 16 +½ months. PBS&J Int’l earned $2,892,504 in profits on the Bridge Contract. PBSJ and Qatari +Diar caught Hatoum’s scheme before any of the offered and authorized amounts were paid. +Hatoum Caused PBSJ’s Inaccurate Books and Records + +23. Hatoum authorized illicit payments to Foreign Official that were not accurately +and fairly reflected on PBSJ’s books and records. Hatoum directed subordinates to conceal some +of the payments he offered and authorized to Foreign Official within bids. Other offers and +promises to pay authorized by Hatoum to Foreign Official were improperly described in the +books and records as legitimate transaction costs with his knowledge. + +Hatoum Caused PBSJ’s Internal Accounting Control Failure + +24. On April 22, 2009, Hatoum signed a “Business Conduct Standards” agreement for +PBSJ employees in which he agreed that “I will neither accept nor give bribes or kickbacks of +any value for services or favorable treatment for contracts.” As a high level manager at PBS&J +Int’l and later as an officer of PBSJ, Hatoum was responsible for maintaining and ensuring +compliance with PBSJ’s internal accounting controls at PBS&J Int’l. Hatoum, however, +repeatedly exploited the company’s internal accounting control deficiencies to offer and +authorize payments to Foreign Official through Local Partner totaling approximately $1,390,000 +to secure the LRT and Morocco Projects, plus 40% of any profits realized from the LRT Project +and partial salary to Foreign Official’s wife. Hatoum instructed subordinates to inflate PBS&J +Int’l bids by concealing payments to Local Partner intended for Foreign Official. Hatoum took +advantage of PBSJ’s accounting controls system by introducing Local Partner as a “legitimate” +potential partner for the LRT Project and authorized a subordinate to execute an agreement to +pay Local Partner 40% of the LRT Project profits without subjecting Local Partner or its +employees to any meaningful due diligence. Hatoum also knowingly executed - and caused a +PBS&J Int’l employee to send a questionnaire requesting advocacy assistance from the United +States Department of Commerce that included false representations about Local Partner and +PBS&J Int’l. Although Hatoum did not participate in PBSJ’s FCPA training until after the +scheme was uncovered, Hatoum was aware of the prohibitions of the FCPA from annual FCPA +training that he received from his former employer. + +Legal Standards and Violations +25. 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 + + + 7 +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 + +26. As a result of the conduct described above, Hatoum violated Section 30A of the +Exchange Act, which prohibits any issuer, officer, director, employee, or agent of such issuer or +any stockholder thereof acting on behalf of the issuer, to make use of the mails or any means or +instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to +pay, or authorization of the payment of any money, or offer, gift, promise to give, or +authorization of the giving of anything of value to any foreign official or any person, while +knowing that all or a portion of such money or thing of value will be offered, given, or promised, +directly or indirectly, to any foreign official for the purposes of (i) influencing any act or +decision of such foreign official in his official capacity, (ii) inducing such foreign official to do +or omit to do any act in violation of the lawful duty of such official, or (iii) securing any +improper advantage in order to assist such issuer in obtaining or retaining business for or with, or +directing business to, any person. +. +27. As a result of the conduct described above, Hatoum caused violations of Section +13(b)(2)(A) of the Exchange Act by PBSJ, 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. + +28. Lastly, as a result of the conduct described above, Hatoum caused violations of +Section 13(b)(2)(B) of the Exchange Act by PBSJ, and violated Section 13(b)(5) and Rule 13b2- +1 thereunder, which requires all reporting companies to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that transactions are recorded as +necessary to permit preparation of financial statements in accordance with generally accepted +accounting principles; and prohibit persons from knowingly circumventing or knowingly failing +to implement a system of internal accounting controls, knowingly falsifying any book, record or +account, and directly or indirectly falsifying or causing to be falsified any book, record, or +account. + +Undertaking + +29. 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 + + + 8 +to such notices and subpoenas, 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. + +30. 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 Walid Hatoum’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), 13(b)(2)(B), +13(b)(5), and 30A of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(2)(B), 78m(b)(5), and +78dd-1] and Rule 13b2-1 thereunder [17 C.F.R. § 240.13b2-1]. + + B. Respondent shall, within fourteen days of the entry of this Order, pay a civil +money penalty in the amount of $50,000 to the Securities and Exchange Commission. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. 3717. Payment must be +made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission and +hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + + + + 9 +Payments by check or money order must be accompanied by a cover letter identifying Walid +Hatoum 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, Assistant Director , +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549-5631. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3622.txt b/raw/aaer/2015/AAER-3622.txt new file mode 100644 index 0000000000000000000000000000000000000000..c14f46549856acb558d14a212a27e50aa0d3bb6b --- /dev/null +++ b/raw/aaer/2015/AAER-3622.txt @@ -0,0 +1,459 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 9714 / January 28, 2015 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 74161 / January 28, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3622 / January 28, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16363 + + +In the Matter of + +FIRST NATIONAL COMMUNITY +BANCORP INC. AND WILLIAM LANCE, + +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 First National Community Bancorp Inc. (“FNCB”) and William Lance (“Lance”). + +II. + +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of +the Securities Exchange Act of 1934, Making Findings, and Imposing 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. First National Community Bancorp (“FNCB” or “the Company”), the holding +company of First National Community Bank located in Dunmore, Pennsylvania, materially +understated the provision for other-than-temporary impairment (“OTTI” or “losses”) for its +investment securities portfolio in FNCB’s financial statements filed with its Annual Report on +Form 10-K for the year-ended December 31, 2009 (“2009 Annual Report”) and quarterly reports +on Form 10-Q for the first and second quarters of 2010. + +2. In 2009, FNCB’s investment securities portfolio included certain pooled trust +preferred securities, and other securities. Pursuant to generally accepted accounting principles +(“GAAP”), FNCB was required to report in its financial statements filed with the Commission the +amount of OTTI on the securities in its investment portfolio. FNCB’s methodology for +determining the amount of OTTI did not comply with GAAP and, as a result, FNCB understated +OTTI for the relevant reporting periods. + +3. During 2009, FNCB’s former Principal Financial Officer, William Lance, was +responsible for establishing and maintaining accounting policies and procedures to ensure that +FNCB calculated OTTI in accordance with GAAP. Lance, however, failed to establish and +maintain the necessary policies and procedures and, as a result, he caused FNCB to record +materially understated OTTI in its 2009 annual financial statement filed with the Commission. +The material understatement of OTTI at year-end 2009 also resulted in FNCB reporting materially +misstated OTTI in its quarterly reports for the first and second quarters of 2010. Lance, however, +had resigned from FNCB prior to the preparation and filing of the quarterly reports Form 10-Q for +the period ended March 31, 2010 and June 30, 2010. + +4. On October 27, 2010, FNCB disclosed that the Company’s 2009 Annual Report +and the financial statements filed for the quarters-ended March 31, 2010 and June 30, 2010, should +no longer be relied upon. FNCB further disclosed that the previously filed financial statements +contained errors relating to, among other things, the accounting for OTTI on certain investment +securities. On December 2, 2011, over a year later, FNCB filed restated financial statements for +the year-ended December 31, 2009 (“2009 Restatement”), which provided for additional pre-tax +losses of $31.5 million, increasing the originally reported net loss before income taxes of $21.4 +million to $52.9 million. FNCB also concluded that its disclosure controls and procedures and +internal controls over financial reporting of OTTI losses during the relevant reporting period were +materially deficient. + + +1 The findings herein are made pursuant to Respondents’ Offer of Settlement and are not binding on +any other person or entity in this or any other proceeding. + + 3 +5. In the 2009 Restatement, FNCB increased OTTI losses by $14.4 million for a +reported total of $20.6 million - more than 230 percent over the originally reported $6.2 million +OTTI amount. Approximately $13.6 million of the $14.4 million increase was attributed +specifically to the flawed methodology used by FNCB for the original OTTI valuations. + +6. In August 2010, approximately two months before FNCB publically announced +its intention to restate its financial statements, FNCB sold 100,000 shares of unregistered stock to +a private investor. The subscription agreement used in the sale incorporated by reference the +materially misstated financial statements for year-end 2009 and the first quarter of 2010. + +7. As a result, FNCB violated several provisions of the federal securities laws, +including the reporting, internal controls, and books and records provisions. Lance was a cause of +FNCB’s reporting, internal controls, and books and records violations with regard to the 2009 +Annual Report. + +RESPONDENTS + +8. First National Community Bancorp Inc. (“FNCB”), the holding company of First +National Community Bank, is located in Dunmore, Pennsylvania. FNCB’s common stock is +registered with the Commission pursuant to Section 12(g) of the Exchange Act, and currently +trades under the symbol “FNCB” and is quoted on the OTCQB. + +9. William Lance (“Lance”) was the Principal Financial Officer (“PFO”) and +Executive Vice President at FNCB in 2009. Lance resigned from FNCB in February 2010. + +FACTS + + A. FNCB’s Assets in 2009 Included a Portfolio of Investment Securities For + Which an Analysis of OTTI was Required Pursuant to GAAP. + +10. As of December 31, 2009, FNCB’s investment securities portfolio was valued at +$273.6 million. The portfolio was comprised of pooled trust preferred securities that were +marketed as Preferred Term Securities, Ltd. (“PreTSLs),2 as well as U.S. Government agency +securities, tax-exempt obligations of states and political subdivisions, government sponsored +agency and private label collateralized mortgage obligations, residential mortgage-backed +securities, and corporate debt and equity securities. +11. The PreTSLs in FNCB’s investment portfolio were reported as available-for-sale +securities (“AFS”). AFS are reported at fair value with net unrealized gains and losses included + +2 “PreTSLs” are a proprietary product developed and marketed by two broker-dealers. They are +collateralized debt obligations created by pooling and securitizing trust preferred securities issued by community +and regional banks and thrifts, insurance companies, and/or real estate investment subsidiaries. + + + 4 +in accumulated other comprehensive income, which is a component of shareholders’ equity.3 +When the fair value of FNCB’s PreTSLs declined below their amortized cost, FNCB was required +to assess whether the decline in fair value was other than temporary. GAAP requires that an OTTI +loss be recognized in the statement of operations when the present value of cash flows expected to +be collected from a security is below its amortized costs.4 In other words, to determine whether the +decline in fair value of its PreTSLs was other-than-temporary, FNCB needed to assess whether +these securities had experienced a credit loss as a result of a decrease in expected cash flows to be +received on the securities. To measure credit losses to be recognized in the statement of +operations, GAAP requires the holder of a security to estimate expected future cash flows +considering all available information relevant to the collectability of the security, including +information about past events, current conditions, and reasonable and supportable forecasts.5 + +12. Banks and other financial institutions may retain consultants to create models to +calculate the present value of expected cash flows which are used to estimate the amount of OTTI +to be recognized for investment securities. In order for the models used by valuation experts to +measure OTTI in a manner consistent with GAAP, the selection of the assumptions to estimate +expected future cash flows must be reasonable and supportable. The work of a consultant does not +relieve a reporting company or its management of the ultimate responsibility for accurately +reporting the amount of OTTI for its investment securities. + +B. FNCB’s Methodology for Determining OTTI Losses on the PreTSLs Did Not + Comply with GAAP. + +13. Lance was responsible for developing and implementing policies and procedures to +ensure that FNCB recorded OTTI in accordance with GAAP. Lance failed to do so. Lance relied +on OTTI calculations that were not based on reasonable and supportable assumptions in preparing +the OTTI disclosures in FNCB’s 2009 Annual Report.6 + +3 ASC 320-10-25 and ASC 320-10-35. In July 2009, the Financial Accounting Standards Board issued the +FASB Accounting Standards Codification (“ASC”) as the single source of authoritative nongovernmental U.S. +generally accepted accounting principles. The Codification was effective for annual periods ending after September +15, 2009. All existing accounting standards documents were superseded. + +4 ASC 320-10-35-33C. + +5 ASC 320-10-35-33G. + +6 Both prior to and during the time when Lance was supervising the preparation of FNCB’s 2009 Annual +Report, the staff of the Commission’s Division of Corporation Finance questioned FNCB about its OTTI +methodology, including the manner in which FNCB chose the assumptions on which it based its OTTI estimates. In +particular, in a letter to FNCB dated September 25, 2009, the staff asked FNCB, among other things, to identify all +of the “key assumptions” that it used, including whether it considered “the specific collateral underlying each +individual security” (emphasis in the original) and had “different estimates of deferrals and defaults for each +security,” and explain how FNCB determined that the assumptions were appropriate and consistent with GAAP. +Lance reviewed the comment letter and coordinated the preparation of FNCB’s response. The Commission staff +again wrote to FNCB, in January 2010, prior to Lance’s departure and before FNCB’s 2009 Annual Report had been +filed, specifically raising concerns about FNCB’s practice of applying the same deferral and default rate to all of the + + + 5 + +14. During 2009 and as of year-end 2009, FNCB used the services of two private +valuation consultants, Valuation Firm A (“VFA”) and Valuation Firm B (“VFB”) to assist it in +estimating OTTI on the PreTSLs in its investment portfolio.7 + +15. VFA was the vendor from whom FNCB had purchased the PreSTL securities. In +2009, VFA offered Lance a selection of pre-determined assumption scenarios for use with its OTTI +valuation model, each representing a different combination of outcomes for, among other things, +default and deferral rates, loss severity, prepayment speeds, and other factors that are to be taken +into account in determining OTTI. The scenarios ranged from a scenario that resulted in little or +no impairment (referred to as “Scenario 6,” which, among other things, assumed the lowest default +rate and the highest recovery rate) to a scenario that yielded significant impairment. However, it +was Lance’s responsibility to select for each individual security in FNCB’s portfolio a set of +assumptions or factors (whether a pre-determined scenario, such as those developed by VFA, or +some other combination of factors that was appropriate to each security) to be used in measuring +OTTI for each PreSTL held by FNCB. + + 16. Instead of evaluating what would be reasonable and supportable cash flow +assumptions for each security prior to each periodic report by appropriately considering the +characteristics of each security, including the underlying collateral, changes in default and +deferral rates, and other relevant criteria, Lance chose to apply a single valuation scenario +provided by VFA – “Scenario 6” – to all of the PreSTLs held by FNCB. According to Lance, +Scenario 6 projected defaults based on the long-term historical loss rates for FDIC-insured +banks, which Lance conceded was “obviously a very low number” and he acknowledged that +“[l]osses were occurring at a higher rate at that point.” Lance chose the scenario that yielded the +least amount of impairment, but testified that he did so based on an expectation that bank failures +and, therefore, default and deferral rates would not continue at the then-current levels for an +extended period of time. Lance did not document his rationale or why he believed such +assumptions were reasonable and supportable. Scenario 6, the scenario that Lance selected, was +applied by VFA to model OTTI for all of the PreTSLs in FNCB’s portfolio as of year-end 2009. + +17. VFB also calculated OTTI for the PreTSLs held by FNCB at year-end 2009. +VFB’s model relied upon unreasonable assumptions regarding future cash flows and the timing of +the liquidation of the collateral related to issuers that had deferred or defaulted. Lance did not + +PreTSLs in FNCB’s portfolio, without regard to, among other things, differences in the collateral underlying each +PreTSL and other individual characteristics of each security. In the January 2010 letter, the Commission staff +commented, “[W]e believe you must look at the specific collateral of each individual security to develop the credit +deferral/default assumptions for your estimated cash flows and that simply using the same credit default assumption +. . . for all of your securities is not a reasonable methodology consistent with the guidance.” + +7 FNCB had used VFA to model the amount of impairment of the PreTSLs since their purchase. By mid- +2009, in response to questions raised by its regulators, FNCB sought the assistance of a second valuation expert to +model OTTI impairment for its securities investments. FNCB considered both models in determining the amount of +OTTI to record. + + + 6 +know, and never inquired about, the assumptions that VFB used to model the OTTI for the +PreTSLs in FNCB’s investment portfolio and, for that reason, was unable to assess whether the +assumptions used by VFB were reasonable in light of the particular circumstances, and the +condition of the collateral underlying each, of the securities in question. + +18. VFB modelled OTTI for the PreTSLs in FNCB’s portfolio using assumptions that it +chose and concluded that there was no material impairment for all but one of the PreTSLs. VFB, +however, calculated a material impairment for the security denominated “PreTSL-XXVIII” and +provided Lance with a range of potential impairment for that security from $4.1 million to $1.1 +million. Despite having failed to determine whether the assumptions used by VFB were +reasonable and supportable, Lance caused FNCB to record the lowest amount of impairment on the +range: $1.1 million. + +C. FNCB Recorded Materially Misstated OTTI at Year-End 2009 + and Lance Was a Cause of That Failure. + +19. Lance relied on the analyses provided by VFA and VFB and caused FNCB to +record OTTI that had been estimated using models that did not include reasonable and supportable +assumptions and therefore did not estimate OTTI credit losses consistent with GAAP, despite the +concerns raised by the Commission staff. As a result, FNCB materially understated OTTI for the +PreTSLs in FNCB’s portfolio as of year-end 2009. In the 2009 Restatement, FNCB re-calculated +estimated future cash flows based on revised assumptions consistent with GAAP requirements and +as a result recorded an additional OTTI loss of approximately $13.6 million for the PreTSL +securities, including an additional loss of approximately $5.9 million for PreTSL-XXVIII. + + 20. Lance resigned from FNCB on or about February 11, 2010, a month before FNCB +filed its 2009 Annual Report with the Commission on March 10, 2010. However, he was +primarily responsible for compiling FNCB’s 2009 year-end financial statements that were filed +with the Annual Report, including with respect to the methodology and calculation of OTTI. +Lance did not participate in the preparation of FNCB’s quarterly reports for the first and second +quarters of 2010. + +D. FNCB Materially Misstated OTTI in its Quarterly Reports for the First and + Second Quarters of 2010. + +21. FNCB materially misstated OTTI in its Form 10-Qs for the quarters ended March +31, 2010 and June 30, 2010, as a result of the same accounting errors, including the flawed OTTI +methodology, and books and records and internal control deficiencies that affected the 2009 +Annual Report. + +22. For the periods ending March 31 and June 30, 2010, the application of FNCB’s +revised OTTI methodology for the PreTSLs resulted in increased impairment losses. However, +FNCB determined that certain of the first quarter losses reflected impairments that had existed as +of the fourth quarter of 2009. Accordingly, in its restatement, FNCB recorded a portion of the +increased losses for the first quarter of 2010 in its restated 2009 Annual Report, rather than in the + + 7 +restated quarterly report for the first quarter of 2010. Consequently, net OTTI losses for the first +quarter of 2010 as restated decreased from $0.9 million to $0.3 million. For the second quarter of +2010, however, net OTTI losses as restated increased from $0.6 million to $2.6 million. + + 23. FNCB also revised its prior financial disclosures regarding internal control over +financial reporting to reflect FNCB’s conclusion that internal control over financial reporting were +not effective at the time the original financial statements were filed, and that FNCB had failed to +keep accurate books and records and implement policies and procedures to enable it to prepare +financial statements for these periods that complied with GAAP. + + E. FNCB Provided Materially Misstated Financial Statements to an Investor + Who Purchased FNCB Stock. + +24. On August 4, 2010, FNCB sold 100,000 shares of unregistered common stock at +$3.60 per share to a private investor for a total purchase price of $360,000. The subscription +agreement for this sale of securities expressly incorporated by reference the materially misstated +2009 annual and first quarter 2010 financial statements. + +VIOLATIONS + + 25. As a result of the conduct described above: + +a. FNCB violated Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)], +and Rules 12b-20, 13a-1, and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1, and +240.13a-13], 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. + +b. Lance caused FNCB’s violations of Section 13(a) of the Exchange Act [15 +U.S.C. § 78m (a)], and Rules 12b-20 and 13a-1 thereunder [17 C.F.R. §§ 240.12b-20 and +240.13a-1] by failing to ensure that FNCB’s OTTI estimates were based on reasonable +and supportable assumptions and by causing FNCB to record materially understated OTTI +for a portion of its investment portfolio in its 2009 Annual Report. + +c. FNCB also violated Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. +§ 78m(b)(2)(A)] which requires reporting companies to make and keep books, records, +and accounts which, in reasonable detail, accurately and fairly reflect their transactions +and dispositions of their assets. + +d. Lance caused FNCB’s violation of Section 13(b)(2)(A) of the Exchange +Act [15 U.S.C. § 78m(b)(2)(A)] by failing to ensure the FNCB made and kept books, +records, and accounts which in reasonable detail accurately and fairly reflected the amount +of OTTI to be recorded at year-end 2009. + + 8 + +e. FNCB also violated Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. +§ 78m(b)(2)(B)], which requires all reporting companies to devise and maintain a system +of internal accounting controls sufficient to provide reasonable assurances that +transactions are recorded as necessary to permit preparation of financial statements in +accordance with generally accepted accounting principles. + +f. Lance caused FNCB’s violation of Section 13(b)(2)(B) of the Exchange +Act [15 U.S.C. § 78m(b)(2)(B)] by failing to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that FNCB’s financial +statements, and, in particular its valuation of OTTI, were prepared in accordance with +generally accepted accounting principles. + +g. With respect to FNCB’s sale of stock, FNCB violated Section 17(a)(2) of +the Securities Act of 1933 (the “Securities Act”) [15 U.S.C. § 77q(a)(2)], which makes it +unlawful for anyone 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 the light of the circumstances under +which they were made, not misleading. + +IV. + +UNDERTAKING + + Lance has agreed to the following undertaking: + + Lance shall, within ten (10) days of the entry of the Order, make a payment in the nature of +a penalty in the amount of $20,000 to the Securities and Exchange Commission. If timely payment +is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. Such payment shall be +made in one of the following ways: + + 1. Lance may transmit payment electronically to the Commission, which will + provide detailed ACH transfer/Fedwire instructions upon request; + + 2. Lance 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. Lance 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 + + 9 + Oklahoma City, OK 73169. + +Payments by check or money order must be accompanied by a cover letter identifying +Lance as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to: + +Antonia Chion, Associate Director +Division of Enforcement +Securities and Exchange Commission +100 F Street, N.E. +Washington, DC 20549-5720. + + In determining whether to accept Lance’s Offer, the Commission has considered this +undertaking. Lance agrees that, if he fails to timely comply with this undertaking, the Division of +Enforcement may petition the Commission to reopen this matter to determine whether additional +sanctions are appropriate. + +V. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in the Respondents’ respective Offers of Settlement. + +Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +FNCB cease and desist from committing or causing any violations and any future violations of +Sections 17(a)(2) of the Securities Act and Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the +Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. + +B. Pursuant to Section 21C of the Exchange Act, Lance cease and desist from +committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. + +C. FNCB shall, within 10 days of the entry of this Order, pay a civil money penalty in +the amount of $175,000 to the Securities and Exchange Commission. If timely payment is not +made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. Payment must be made in one +of the following ways: + + 1. FNCB may transmit payment electronically to the Commission, which will + provide detailed ACH transfer/Fedwire instructions upon request; + + 2. FNCB 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 + + + 10 + 3. FNCB 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 +FNCB as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to: + +Antonia Chion, Associate Director +Division of Enforcement +Securities and Exchange Commission +100 F Street, N.E. +Washington, DC 20549-5720. + + +By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3623.txt b/raw/aaer/2015/AAER-3623.txt new file mode 100644 index 0000000000000000000000000000000000000000..a24fcebf303dfcc8f2088f0571432aababd4a12a --- /dev/null +++ b/raw/aaer/2015/AAER-3623.txt @@ -0,0 +1,1376 @@ + + + + + + + + + + + + + + + + SEC.gov | Troy Lyndon and Ronald Zaucha + + + + + + + + !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\/516431","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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Troy Lyndon and Ronald Zaucha , Civil Action No. CV13 00486 SOM KSC (D. Haw.) + + SEC Obtains Final Judgments against CEO of Video Game Company and Purported Consultant in Revenue Inflation Scheme + + + On January 22, 2015, the district court for the District of Hawaii entered a final judgment against Defendant Ronald Zaucha, holding him liable for over $2.6 million in disgorgement, interest and penalties after granting the SEC's motion for summary judgment. Zaucha was also permanently enjoined from violating the antifraud and securities registration provisions of the federal securities laws, and permanently prohibited from participating in any offering of penny stock. + + Previously, on August 21, 2014, the district court entered a final judgment against Defendant Troy Lyndon, holding him liable for over $3.6 million in disgorgement, interest and penalties after granting the SEC's motion for summary judgment as to monetary relief. Lyndon had previously consented to entry of a permanent injunction prohibiting future violations of the antifraud, securities registration, issuer reporting, books and records, internal controls, lying to auditors and false certification provisions of the federal securities laws; an order permanently barring him from acting as an officer or director of a public company; and an order permanently prohibiting him from participating in any offering of penny stock, without admitting or denying the SEC's allegations. + + On September 24, 2013, the SEC had charged Lyndon, the founder of a religious-themed video game manufacturer, Left Behind Games, Inc. ("LBG"), and his friend Zaucha with scheming to falsely inflate the company's revenue by nearly 1,300 percent in the one-year period ended March 31, 2011 through sham circular transactions. + + The SEC alleged that Lyndon, who served as the company's CEO and CFO, caused LBG to issue almost two billion shares of stock to Zaucha as purported compensation for consulting services to the California-based company. In fact, Zaucha provided few, if any, consulting services. Rather, the true purpose of the arrangement was to enable Zaucha to sell millions of unregistered LBG shares of stock into the market and then kick back a portion of his stock proceeds to the company in order to prop up its revenue at a time when it was in dire need of additional funds. The company's stock was suspended by the SEC when the SEC filed its complaint against Lyndon and Zaucha, and the registration of LBG's stock was revoked by the SEC on February 24, 2014. + + Lyndon lives in Honolulu and Zaucha lives in Maui and in Laguna Woods in Orange County, California. + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2015/AAER-3626.txt b/raw/aaer/2015/AAER-3626.txt new file mode 100644 index 0000000000000000000000000000000000000000..faf2761fce9ca933c179f3e6c0181f39cfe8fee6 --- /dev/null +++ b/raw/aaer/2015/AAER-3626.txt @@ -0,0 +1,149 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 74208 / February 4, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3626 / February 4, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16375 + + : + : + : +In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + STEVEN NEIL, CPA, : 102(e) OF THE COMMISSION’S RULES OF + : PRACTICE, MAKING FINDINGS, AND + Respondent. : IMPOSING REMEDIAL SANCTIONS + : + : +____________________________________ : + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Steven +Neil (“Respondent” or “Neil”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting 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. Neil, age 62, is and has been a certified public accountant licensed to +practice in the State of California. He served as Chief Financial and Administrative Officer of +Diamond Foods, Inc. (“Diamond”), from 2008 until he was placed on administrative leave in +February 2012 and terminated from his position in November 2012. Neil’s California license is +currently inactive. + + 2. Diamond was, at all relevant times, a Delaware corporation with its principal +place of business in San Francisco, California. Diamond was engaged in the business of producing +and selling packaged foods, including walnuts. At all relevant times, Diamond’s common stock +was registered with the Commission pursuant to Section 12(g) of the Securities Exchange Act of +1934 (“Exchange Act”), and traded on the NASDAQ National Market. + + 3. On January 9, 2014, the Commission filed a complaint against Neil in SEC +v. Steven Neil (N.D. Cal. Civil Action No. 14-cv-122). On February 2, 2015, the court entered an +order permanently enjoining Neil, by consent, from future violations of Sections 10(b) and +13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, 13b2-2, and 13a-14 thereunder, and +Section 17(a) of the Securities Act of 1933. Neil was also ordered to pay a $125,000.00 civil +money penalty, and prohibited for five years from serving as an officer or director of any entity +having a class of securities registered with the Commission pursuant to Section 12 of the Exchange +Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act. + + 4. According to the Commission's complaint, Neil directed an effort to +fraudulently underreport money paid to walnut growers by delaying the recording of payments into +later fiscal periods. By manipulating walnut costs, Diamond correspondingly reported higher net +income and inflated earnings to exceed analysts’ estimates for fiscal quarters in 2010 and 2011. +After Diamond restated its financial results in November 2012 to reflect the true costs of acquiring +walnuts, the company's stock price slid to just $17 per share from a high of $90 per share in 2011. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Neil’s Offer. + + + 3 + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Neil is suspended from appearing or practicing before the Commission as an +accountant. + + B. After five years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify any criticisms +of or potential defects in the respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring partner reviews and quality control +standards. + + 4 + +C. The Commission will consider an application by Respondent to resume +appearing or practicing before the Commission provided that his state CPA license is +current and he has resolved all other disciplinary issues with the applicable state boards of +accountancy. However, if state licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Respondent’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3628.txt b/raw/aaer/2015/AAER-3628.txt new file mode 100644 index 0000000000000000000000000000000000000000..52bdaa19f8c97c80670a9e87c49256890dcdf0b3 --- /dev/null +++ b/raw/aaer/2015/AAER-3628.txt @@ -0,0 +1,1373 @@ + + + + + + + + + + + + + + + + SEC.gov | David Rivard, CPA + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/516476","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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David Rivard , Civil Action No. 15 Misc 0221 + Securities and Exchange Commission v. David Rivard , Civil Action No. 04 Civ. 1464 + + SEC Charges Accountant with Violating Commission Suspension Order, Seeks Disgorgement of Compensation Received During Suspended Period, and Also Seeks Contempt for Non-Payment of Moneys Owed On Prior Judgment. + + + The Commission today announced that on February 5, 2015, it filed two applications in U.S. District Court for the Eastern District of New York against David Rivard, a former certified public accountant. The first is an application seeking to enforce a prior Commission order suspending Rivard from practicing accounting before the Commission. Securities and Exchange Commission v. David Rivard, 15 Misc 0221 (E.D.N.Y.). The second seeks an order holding Rivard in contempt of a money judgment entered against him in a prior action. SEC v. Rivard, No. 04 Civ. 1464 (E.D.N.Y. Apr. 8, 2004) (2004 Action). Rivard is a resident of East Setauket, New York, and had previously been licensed as a certified public accountant by the State of New York from February 1992, until he surrendered his license, effective March 2008. + + The Commission alleged that Rivard violated an October 27, 2004 Commission Order issued under Rule 102(e)(3)(i) of the Commission's Rules of Practice (2004 Commission Order) that suspended Rivard from appearing or practicing before the Commission as an accountant. In The Matter of David Rivard, CPA, Securities Exchange Act of 1934 Rel. No. 50598, Accounting and Auditing Enforcement Rel. No. 2130, Administrative Proceeding File No. 3-11722 (October 27, 2004). According to the application, from at least April 2009 to April 2014, Rivard violated the 2004 Commission Order. Specifically, in April 2009, Rivard became a financial consultant to Verint Systems, Inc. (Verint), a reporting company under the Exchange Act, whose stock is publicly traded on the NASDAQ. Verint engaged Rivard to help the company restate several years of financial statements. In that capacity, Rivard participated in Verint's financial reporting process by, among other things: editing footnotes to financial statements; compiling data in support of those footnotes; reviewing sales contracts for proper categorization under applicable revenue recognition rules and principles; and preparing internal memoranda on certain accounting processes. + + In the related application in the 2004 Action, the Commission also alleges that from at least April 2009, Rivard hid assets and income and failed to make payments due under a final judgment entered on consent on November 4, 2004 (2004 Final Judgment). Judge I. Leo Glasser issued the 2004 Final Judgment in a civil injunctive action the Commission filed against Rivard, stemming from his role in the $1.4 billion securities and accounting fraud at Computer Associates. In that action, the Commission alleged that Rivard, as the head of Sales Accounting and the company's revenue recognition expert, had allowed Computer Associates to record revenue prematurely from software contracts, backdated his signature on contracts, and lied to outside counsel and the company's auditor, and obstructed the company's internal investigation and the Commission's investigation. Among other things, the 2004 Final Judgment ordered Rivard to pay a total of $158,700.96, comprised of disgorgement ($65,000), prejudgment interest ($18,700.96), and a civil penalty ($75,000). The Commission's application alleges that despite being paid nearly one million dollars in income since April 2009, Rivard has not willingly made a single payment toward his indebtedness. In fact, Rivard actively sought to evade paying his debt by setting up a company in his wife's name, to which he diverted his earnings from Verint during the period of his consultancy. And Rivard made false or misleading statements about his financial and employment situation on sworn financial disclosure forms he submitted to the United States Department of Treasury in connection with his offers to compromise his indebtedness. + + The Commission seeks an order directing Rivard to comply with both the 2004 Commission Order and 2004 Final Judgment, requiring Rivard to disgorge moneys earned by violating the 2004 Commission order, imposing an asset freeze, directing Rivard to provide an accounting, and imposing a finding of civil contempt that Rivard can cure by demonstrating his satisfaction of the 2004 Final Judgment. + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Steven Neil , Civil Action No. 14-cv-122 WHA (N.D. Cal. filed Jan. 9, 2014) + + Chief Financial Officer Settles Accounting Fraud Charges + + The Securities and Exchange Commission today announced that the United States District Court for the Northern District of California entered a final, settled judgment against defendant Steven Neil.  In 2014, the SEC charged Neil with engaging in financial accounting fraud at Diamond Foods, Inc. ("Diamond"), a California-based snack food company. + + According to the SEC's complaint, Neil, Diamond's former CFO, directed an effort to fraudulently underreport money paid to walnut growers by delaying the recognition of related expenses into later fiscal periods.  By manipulating walnut costs, Diamond reported higher net income and inflated earnings to exceed analysts' estimates for fiscal quarters in 2010 and 2011.  After Diamond restated its financial results in November 2012 to reflect the true cost of acquiring walnuts, the company's stock price slid to just $17 per share from a high of $90 per share in 2011.  Diamond subsequently restated its financial statements and terminated Neil. + + Without admitting or denying the SEC's allegations, Neil consented to entry of final judgment, which the court entered on February 2, 2015.  The final judgment orders Neil to pay $125,000 in civil monetary penalties; enjoins him from violating Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934, and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2 thereunder; and bars him from serving as an officer or director of a public company for five years.  As part of the settlement, Neil also agreed to forfeit a legal claim against Diamond related to shares of stock and stock options that the company awarded him in part during the time of the fraudulent financial reporting.  These shares and stock options are worth as much as nearly $1 million at the company's current stock price. + + In connection with the settlement, Neil also agreed to be barred from practicing as an accountant before the SEC, with a right to reapply after 5 years.  The SEC's related order was issued February 4, 2015. + + Previous release:  Litigation Release No. 22902 (Jan. 9, 2014). + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2015/AAER-3632.txt b/raw/aaer/2015/AAER-3632.txt new file mode 100644 index 0000000000000000000000000000000000000000..f5a17e82f1165ead3b81e0a7759fb936e3ae523c --- /dev/null +++ b/raw/aaer/2015/AAER-3632.txt @@ -0,0 +1,99 @@ + UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 74230 / February 6, 2015 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3632 / February 6, 2015 +ADMINISTRATIVE PROCEEDING +File No. 3-13872 + +In the Matter of +Marlin R. Brinsky, 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 28, 2010, Marlin R. Brinsky, CPA (“Brinsky”) 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 Brinsky pursuant to Rule 102(e)(3)(i) of the +Commission's Rules of Practice.1 This order is issued in response to Brinsky’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 Brinsky had been permanently enjoined by a United States +District Court from future violations of Rule 2-02 of Regulation S-X. In a complaint filed on +April 25, 2005, the Commission alleged, among other things, that Brinsky and others +participated in a scheme that resulted in Exotics.com (“Exotics.com”) filing materially false and +misleading financial statements in its Commission filings, including, among others, an amended +current report on Form 8-K filed on September 24, 2001, a quarterly report on Form 10-QSB for +the quarter ended September 30, 2001, and an annual report on Form 10-KSB for the fiscal year +ended December 31, 2001. The complaint further alleged that Brinsky and other members of the +Merdinger, Fruchter, Rosen & Company, P.C. (“MFRC”) audit staff committed acts and/or +omissions that caused them to become non-independent during audits of Exotics.com and caused +audit reports issued by MFRC, among other things, to falsely state that the audits had been +conducted by an independent auditor and in accordance with generally accepted auditing +standards (“GAAS”). The complaint also alleged that Brinsky engaged in a number of improper +accounting practices that caused Exotics.com’s financial statements to depart from generally +accepted accounting principles (“GAAP”). + +1 See Accounting and Auditing Enforcement Release No. 3130 dated April 28, 2010. Brinsky was permitted, +pursuant to the order, to apply for reinstatement after two years upon making certain showings. + + 2 + +In his capacity as a preparer or reviewer, or as a person responsible for the preparation or +review, of financial statements of a public company to be filed with the Commission, Brinsky +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. Brinsky 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, Brinsky’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 Brinsky, it appears that he has complied with the terms of the April 28, 2010 order +suspending him from appearing or practicing before the Commission as an accountant, that no +information has come to the attention of the Commission relating to his character, integrity, +professional conduct or qualifications to practice before the Commission that would be a basis +for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of Practice, +and that Brinsky, 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 +Marlin R. Brinsky, CPA is hereby reinstated to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. + +By the Commission. + + +Brent J. Fields +Secretary + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this section may be made at any time, and the applicant may, in the Commis sion’s discretion, be afforded a +hearing; however, the suspension or disqualification shall continue unless and until the applicant has been reinstated +by the Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3633.pdf b/raw/aaer/2015/AAER-3633.pdf new file mode 100644 index 0000000000000000000000000000000000000000..a3fbd1961e3f260cc0e0c4036325a94ab834b493 Binary files /dev/null and b/raw/aaer/2015/AAER-3633.pdf differ diff --git a/raw/aaer/2015/AAER-3639.txt b/raw/aaer/2015/AAER-3639.txt new file mode 100644 index 0000000000000000000000000000000000000000..d884bbbb7139651b375e67036493dfdfae13dd66 --- /dev/null +++ b/raw/aaer/2015/AAER-3639.txt @@ -0,0 +1,537 @@ + + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 74350 / February 23, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3639 / February 23, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16399 + + + +In the Matter of + +Halpern & Associates LLC +and Barbara Halpern, CPA, + +Respondents. + + + + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS +PURSUANT TO SECTIONS 4C AND 21C +OF THE SECURITIES EXCHANGE ACT +OF 1934 AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Halpern & +Associates LLC and Barbara Halpern (collectively, “Respondents”) pursuant to Sections 4C +1 and + +1 Section 4C provides, in relevant part: + + 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 + +21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice.2 + +II. + + The Commission’s public official files disclose that, at all relevant times, Lighthouse +Financial Group, LLC (“Lighthouse” or “the firm”) was registered with the Commission as a +broker-dealer. + +III. + + After an investigation, the Division of Enforcement and the Office of the Chief Accountant +allege that: + +SUMMARY + + 1. These proceedings arise out of Respondents’ improper professional conduct in their +audit of Lighthouse’s financial statements for the year ended December 31, 2009. Those financial +statements were materially inaccurate in that they overstated the firm’s assets, because its securities +inventory as recorded in its financial statements was based on erroneous, and inflated, figures for +the size of its positions in certain securities, and understated the firm’s liabilities by omitting its +liabilities to one of the broker-dealers through which it engaged in proprietary trading. Those errors +caused the firm’s reported net capital to be overstated by nearly $5 million, or over 350%. +Respondents egregiously failed in several ways to adhere to Generally Accepted Auditing Standards +(“GAAS”) and did not detect those errors in their audit of the financial statements. + +RESPONDENTS + +2. Halpern & Associates LLC (“H&A”) is an accounting and auditing firm based +in Wilton, Connecticut. H&A was founded in 1982, has been registered with the PCAOB since +2004 and has twelve employees. Barbara Halpern is currently the sole owner and president of +H&A. In 2014, H&A was the independent auditor to twenty-eight broker-dealers. In addition to +serving as an independent auditor to broker-dealers and other entities, H&A provides tax advice +and, on a consulting basis, provides broker-dealers with the services of individuals licensed to act + + +2 Rule 102(e)(1)(ii) provides, in pertinent part: + + 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 + +as a broker-dealer’s financial and operations principal. H&A acted as the independent auditor +for Lighthouse from 2002 until Lighthouse withdrew its registration as a broker-dealer in August +2010. + +3. Barbara Halpern, age 61, of Weston, Connecticut, was the engagement partner +on Lighthouse’s 2009 audit. She is currently the sole owner and president of H&A; during the +relevant period she was the 95% owner. During the relevant period, Barbara Halpern was a +certified public accountant licensed to practice in New York and Connecticut. She is currently +licensed in Connecticut. She has held a Series 27 license since 1998 and a Series 54 license +since 1980. + +OTHER RELEVANT ENTITY + + 4. Lighthouse was registered with the Commission as a broker-dealer from August 2, +2000 until October 23, 2010. In December 2010, Lighthouse filed a petition for liquidation under +the U.S. Bankruptcy Code. At all relevant times, Lighthouse’s principal place of business was +New York, New York. During the relevant period, Lighthouse acted as an introducing broker for +retail and institutional customers, engaged in proprietary trading and market-making, and acted as +an underwriter or placement agent for equity and bond issuances. Lighthouse had clearing +arrangements with several clearing brokers, including Penson Financial Services, Inc. (“Penson”), +which at all relevant times was a registered broker-dealer with its principal place of business in +Dallas, Texas. + +FACTUAL ALLEGATIONS + +Background + + 5. Section 15(c)(3) of the Exchange Act [15 U.S.C. § 78o(c)(3)] and Rule 15c3-1 +thereunder [17 CFR 240.15c3-1] require that broker-dealers generally effecting transactions in +securities “at all times have and maintain net capital.” The rule is designed to require a broker- +dealer to maintain sufficient liquid assets to meet all obligations to customers and counterparties +and have adequate additional resources to wind down its business in an orderly manner without the +need for a formal proceeding if the firm fails financially. The net capital rule requires different +minimum amounts of net capital based on the nature of a firm’s business and the method a firm +uses in computing its net capital. + + 6. To compute its net capital for purposes of Rule 15c3-1, a broker-dealer first +calculates its net worth, computed in accordance with generally accepted accounting principles +(“GAAP”), deducts the value of certain illiquid assets, and then adds back certain qualifying +subordinated loans. The final step is to deduct certain specified percentages, or haircuts, from the +market value of the securities or other inventory it holds in its proprietary accounts. Rule 15c3-1 +prescribes differing haircut amounts for a variety of classes of securities and other allowable assets. + +4 + + 7. Section 17(e) of the Exchange Act and Rule 17a-5 thereunder require registered +broker-dealers to file with the Commission annual audited reports containing, among other things, +the broker-dealer’s financial statements for the fiscal year, a calculation of its net capital at fiscal +year-end, and a report of an independent auditor on the financial statements. + + 8. On February 28, 2010, Lighthouse filed its annual audited report (“Annual Audited +Report”), which contained Lighthouse’s financial statements for the year ended December 31, +2009 (“2009 financial statements”). The 2009 Annual Audited Report also contained H&A’s +report on the financial statements. + + 9. The 2009 financial statements overstated the firm’s net capital by approximately +$4.9 million, or over 350%. The overstatement was primarily attributable to the following errors: +3 + +a. First, the financial statements overstated Lighthouse’s assets by incorrectly +including approximately $2,052,257 in long securities positions in the firm’s +proprietary accounts at Penson;4 and + + b. Second, the financial statements understated Lighthouse’s liabilities by + omitting approximately $2,314,484 owed to Penson.5 + +Errors That Led to The Overstatement of Lighthouse’s Long Securities Positions and +Understatement of its Liabilities to Penson + + 10. The overstatement of the total market value of Lighthouse’s long securities positions +in its accounts at Penson was the result of the firm’s use of erroneous – and overstated – numbers of +shares of fifteen securities held in five accounts. Lighthouse calculated the total market value of its +inventory in those accounts to be $3,489,971, whereas based on the actual size of the positions as +shown in Penson’s records, the total market value of Lighthouse’s inventory in its Penson accounts +was only $1,437,714. The 2009 financial statements thus overstated the value of Lighthouse’s long +securities positions by approximately $2,052,257. + + +3 The firm’s reported net capital was also overstated as result of the application of erroneous +and insufficient haircuts to Lighthouse’s assets. + +4 The $2,052,257 figure also takes into account a $251,317 understatement of the value of the +firm’s long securities position that resulted from Lighthouse’s failure to include any of the +inventory in one of the firm’s proprietary accounts. + +5 In addition to the amounts due to Penson discussed at paragraph 11 below, this figure +includes a $113,002 understatement of Lighthouse’s exposure on short positions in +Penson accounts. + +5 + + 11. The 2009 financial statements also understated, by approximately $2,314,484, +Lighthouse’s payables to brokers as a result of the firm’s failure to include negative balances in a +Lighthouse account at Penson. The account, named “Lighthouse Financial Group F/X Account” +(“F/X account”), was one of several Lighthouse administrative accounts at Penson that were used to +hold deposits, resolve failed settlement transactions, and pay clearing balances. Positive balances +in those accounts represented amounts due from Penson to Lighthouse while negative balances +represented amounts due to Penson from Lighthouse. + +The Audit of Lighthouse’s 2009 Financial Statements + + 12. In its Independent Auditors’ report, which was authorized for issuance by Barbara +Halpern, H&A stated that it had audited Lighthouse’s 2009 financial statements in accordance with +GAAS and expressed its opinion that the financial statements fairly presented, in all material +respects, the financial position of Lighthouse as of December 31, 2009. As the engagement partner +on the audit, Barbara Halpern was responsible for supervising the audit and she signed off on all +the work papers. + + 13. In fact, the audit was not conducted in accordance with GAAS and the financial +statements contained in the 2009 Annual Audited Report did not fairly present, in all material +respects, the financial position of Lighthouse as of December 31, 2009 because they reflected the +errors described above. + + 14. The audit was not conducted in accordance with GAAS because, among other +things, Respondents failed to adhere to the most fundamental GAAS requirements: the +requirement to exercise due professional care in planning and performing the audit, which includes +the requirements to properly staff and supervise the audit, to obtain sufficient appropriate audit +evidence to support the auditor’s opinion, and to exercise professional skepticism in evaluating the +audit evidence obtained. + + 15. Respondents failed to exercise due care in planning the Lighthouse auditand +performing the Lighthouse audit, as the auditing standards require. AU § 230.01. The requirement +to exercise due professional care includes the requirement to staff the audit appropriately: +“Auditors should be assigned to tasks and supervised commensurate with their level of knowledge, +skill, and ability so that they can evaluate the audit evidence they are examining.” AU § 230.06. +6 +The individual who was responsible for the testing of Lighthouse’s securities inventory and its +balances with banks and brokers – the “senior auditor” – lacked the knowledge necessary to +evaluate the audit evidence obtained concerning Lighthouse’s proprietary trading. At the time of +the audit, he had only been with H&A for six months, had only six months of experience doing +audit work of any kind, had never audited a broker-dealer, had no understanding of Lighthouse’s + +6 Citations to “AU” are citations to Statements on Auditing Standards in effect at the time +of the audit. Those statements were issued by the Auditing Standards Board of the +American Institute of Certified Public Accountants (“AICPA”). +6 + +proprietary trading, and was not familiar with the professional literature concerning auditing +broker-dealers. By assigning the senior auditor the critical responsibility of testing Lighthouse’s +securities inventory and its balances with banks and brokers despite his lack of knowledge in these +areas, and by failing to properly supervise him, Respondents failed to exercise due care in planning +and performing the audit. + + 16. Respondents also failed to obtain sufficient appropriate audit evidence concerning +Lighthouse’s inventory held at Penson and the firm’s balances with Penson. The audit team sent +Penson an open, i.e. blank, confirmation request seeking “[a]n itemized statement for each of +[Lighthouse’s] accounts with you showing security positions and balances as of December 31, +2009.” Penson did not send anything to the audit team concerning the proprietary trading +accounts. Penson did send monthly account statements for the F/X account and the other +administrative accounts to the audit team. Because the monthly statements reported on a +settlement date basis and Lighthouse’s financial statements reported on a trade date basis, the audit +team did not view them as appropriate audit evidence. + + 17. Having been unable to confirm the firm’s inventory and balances, Respondents +should have performed alternative procedures adequate to obtain sufficient appropriate audit +evidence to support an unqualified opinion, AU § 330.31(“When the auditor has not received +replies to positive confirmation requests, he or she should apply alternative procedures to the +nonresponses to obtain the evidence necessary to reduce audit risk to an acceptably low level.”), +but they failed to do so. + +18. The alternative procedure chosen by Barbara Halpern was to rely on information +provided by Lighthouse, which the audit team mistakenly – and unreasonably – viewed as +information obtained from Penson. Specifically, Barbara Halpern and the senior auditor obtained +from Lighthouse schedules of the firm’s December 31, 2009 trade date inventory at Penson and +trade date money balances with Penson. They referred to those schedules – incorrectly – as a +“screen print” and a “screen shot” of on-line Penson reports. + +19. Respondents failed to exercise due care and professional skepticism in considering +the reliability of those client-provided records, and they failed to obtain audit evidence about their +accuracy and completeness. + +The Audit Procedures Regarding Lighthouse’s Securities Positions + + 20. The purported screen shot of a Penson trade date inventory report provided by +Lighthouse was not a confirmation because it was not a communication received directly from a +third party. AU § 330.04 (“Confirmation is the process of obtaining and evaluating a direct +communication from a third party in response to a request for information about a particular item +affecting financial statement assertions.”) + + 21. The purported screen shot of a Penson inventory report was also not in fact a report +obtained from Penson’s website but rather a schedule that Lighthouse personnel had created. As a +7 + +client-produced record, in order to provide sufficient appropriate audit evidence for the existence +of the securities on the balance sheet, the inventory schedule needed to be – but was not – +subjected to audit procedures. AU §326.08 (“Audit evidence is more reliable when it is obtained +from knowledgeable independent sources outside the entity.”). Respondents failed to consider the +reliability of the information. AU § 326.09 (“The auditor should consider the reliability of the +information to be used as audit evidence, for example, photocopies; facsimiles; or filmed, +digitized, or other electronic documents, including consideration of controls over their preparation +and maintenance where relevant.” ). Moreover, Respondents failed to obtain audit evidence about +the accuracy and completeness of the client-produced record. AU § 326.10 (“When information +produced by the entity is used by the auditor to perform further audit procedures, the auditor +should obtain audit evidence about the accuracy and completeness of the information.”). + + 22. Respondents failed to perform adequate procedures to determine whether +Lighthouse’s accounts at Penson actually held the securities listed on the inventory schedule, +whether the share quantities shown on the schedule were accurate, or whether Lighthouse had +additional securities positions at Penson that were not shown on the schedule. Relatedly, they +failed to perform adequate procedures to test their belief that the schedule was in fact a copy of a +Penson-created record. In fact, the schedule was not a copy of a Penson-created record and it +overstated the size of fifteen of the firm’s long securities positions in its accounts at Penson, and +thus overstated Lighthouse’s assets by approximately $2 million. + +23. Barbara Halpern knew that the purported screen shot of a Penson inventory report +had been provided by the client. She failed to exercise due care and professional skepticism in +evaluating the quality of that audit evidence and thus its sufficiency and appropriateness to support +the auditor’s opinion. + + The Audit Procedures Regarding Lighthouse’s Balances with Penson + + 24. The 2009 financial statements included among Lighthouse’s assets monies due +from Penson to Lighthouse in connection with transactions in five currencies in the F/X account. +The financial statements failed to include, however, amounts due to Penson from Lighthouse. +Those unreported liabilities totaled $2,314,484. + + 25. The balances in the F/X account appeared on a variety of Penson reports including +the December monthly account statements, copies of which Penson had sent directly to +Respondents in response to a confirmation request. Having concluded that the account statements +were not sufficient appropriate audit evidence because they reported on a settlement date, rather +than trade date, basis, and having been unable to obtain a reconciliation of the statements and +Lighthouse’s trade date records, the senior auditor and Barbara Halpen disregarded the account +statements in testing Lighthouse’s balances with Penson. + + 26. To test Lighthouse’s money balances with Penson, Barbara Halpern and the senior +auditor relied on a document bearing the title “Penson Money Line,” which they knew had been +8 + +provided by Lighthouse personnel. The senior auditor labelled the document “screen print” and +Respondents treated the document as a screen shot of a report obtained from Penson’s website. + + 27. The purported screen print of a Penson money line report provided by Lighthouse +was not a confirmation because it was not a communication directly from a third party. AU § +330.04 (“Confirmation is the process of obtaining and evaluating a direct communication from a +third party in response to a request for information about a particular item affecting financial +statement assertions.”) + + 28. The purported screen print of a Penson money line report was also not obtained +from Penson’s website, but instead was a schedule prepared by Lighthouse personnel. As a client- +produced record, in order to provide sufficient appropriate audit evidence for the accuracy and +completeness of Lighthouse’s balances with Penson on the balance sheet, the purported screen +print needed to be – but was not – subjected to audit procedures. AU §326.08 (“Audit evidence is +more reliable when it is obtained from knowledgeable independent sources outside the entity.”); +AU § 326.09 (“The auditor should consider the reliability of the information to be used as audit +evidence, for example, photocopies; facsimiles; or filmed, digitized, or other electronic documents, +including consideration of controls over their preparation and maintenance where relevant.”); AU § +326.10 (“When information produced by the entity is used by the auditor to perform further audit +procedures, the auditor should obtain audit evidence about the accuracy and completeness of the +information.”). + + 29. Barbara Halpern was aware that there were differences between the balances shown +on Lighthouse’s records and the balances shown on the December monthly account statements that +the audit team had received from Penson. Lighthouse’s records showed only positive balances, i.e. +amounts due to Lighthouse from Penson. For the F/X account, they showed a total positive trade +date balance for the account of $2,284,644, whereas the account statements for the F/X account +reported a total value for the account of negative $22,305. + The December monthly account +statements also showed that, in addition to positive balances, there were negative balances in the +F/X account totaling approximately $2.3 million. +7 + + 30. Barbara Halpern assumed that the differences she could not account for were the +result of pending trades, i.e. trades that had been executed but had not yet settled. She did not +request a pending trade report from Penson or otherwise attempt to verify this assumption, however. + + 31 Nevertheless, the December account statements for the F/X account – which +Respondents had obtained from Penson – reported pending trades. Specifically, the account +statements showed that there was only one trade pending settlement on December 31, 2009 for the + +7 For the F/X account, there were multiple positive and multiple negative balances because +balances were calculated separately for each different currency. The Penson account +statements, like the schedule prepared by Lighthouse, reported the balances in both local +currency and U.S. Dollars. +9 + +F/X account: a transaction in Euros at a total cost in U.S. dollars of only $42,838, which would not +account for the discrepancies known to Barbara Halpern. + +32. After receiving from Lighthouse the purported screen print of a Penson money line +report that reflected only positive balances, Barbara Halpern failed to perform, or to have the audit +team perform, adequate procedures to test her belief that the client-produced document was in fact +a copy of a Penson-created record. She also failed to perform, or have the audit team perform, +adequate procedures to test whether Lighthouse in fact had no negative balances with Penson or +that it had positive balances in the amounts shown on the purported screen print. In fact, the +purported screen print she relied upon was not a copy of a Penson-created record and on December +31, 2009, Lighthouse had negative balances in the F/X account totaling approximately $2,314,484 +in addition to the positive balances that appeared on the purported screen shot that had been +supplied by the client. + +33. Barbara Halpern knew that the purported screen print of a Penson money line report +had been provided by the client. She nevertheless relied upon the document without testing the +completeness and accuracy of the information and without understanding what criteria had been +used to generate the document. By relying upon a client-produced record without obtaining audit +evidence about its accuracy and completeness, Barbara Halpern failed to exercise due care and +professional skepticism in considering the reliability of that information and its sufficiency and +appropriateness to support the auditor’s opinion. + +LEGAL ANALYSIS + +Respondents Engaged in Improper Professional Conduct and Caused Lighthouse’s Violations +of Section 17 of the Exchange Act and Rule17a-5(a) thereunder + +34. As a result of the conduct described above, Respondents engaged in improper +professional conduct. Regarding accountants, Rule 102(e)(1)(iv)(B) and Section 4C(b) provide +that the following two types of negligent conduct may constitute “improper professional 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. + +“Applicable professional standards” for auditors primarily refers to GAAP, GAAS, the AICPA +Code of Professional Conduct, and Commission regulations. See Amendment to Rule 102(e) of the +Commission’s Rules of Practice, Securities Act Release No. 7593 (Oct. 19, 1998) (“Rule 102(e) +Release”). With respect to audits of broker-dealer financial statements, the GAAS in effect during +the relevant period is embodied in various Statements on Auditing Standards (“SAS”), as well as +10 + +the Codification of Statements on Auditing Standards, both issued by the Auditing Standards +Board of the AICPA. + + 35. Barbara Halpern failed to adhere to the most fundamental auditing standards: the +standards that require an auditor to exercise due professional care in planning and performing an +audit, AU § 230.01, by properly staffing and supervising the audit, AU § 230.06, by obtaining +sufficient appropriate audit evidence, AU § 326.01, and by maintaining an attitude of professional +skepticism, which includes “a questioning mind and a critical assessment of audit evidence[,]” AU +§§ 230.07-08. An auditor must “obtain sufficient appropriate audit evidence by performing audit +procedures to afford a reasonable basis for an opinion regarding the financial statements under +audit.” AU § 326.01. “The auditor should use professional judgment and should exercise +professional skepticism in evaluating the quantity and quality of audit evidence, and thus its +sufficiency and appropriateness, to support the audit opinion.” AU § 326.13. + + 36. Barbara Halpern also failed to adhere to auditing standards concerning +confirmation, AU § 330, the reliability of audit evidence, including audit evidence in the form of +electronic documents, AU § 326.09, and audit evidence provided by the client, AU §326.08, and +the need to obtain audit evidence about the completeness and accuracy of client-produced +information used to perform audit procedures. AU § 326.10. + +37. As a result of the conduct alleged above, Barbara Halpern failed to adhere to GAAS +in planning and performing the audit of Lighthouse’s 2009 financial statements and preparing the +audit report on those statements. Moreover, those failures occurred in the most critical areas of the +audit – the testing of Lighthouse’s holdings in its proprietary accounts and its liabilities to one of +the broker-dealers through which it engaged in proprietary trading. + +38. Accordingly, Barbara Halpern engaged in at least a single instance of highly +unreasonable or, at a minimum, repeated instances of unreasonable conduct within the meaning of +Rule 102(e)(1)(iv)(B). + +39. Barbara Halpern’s improper professional conduct may be attributed to H&A. + + 40. Section 17 of the Exchange Act requires registered broker-dealers to make and +disseminate certain financial and operational reports. Rule 17a-5(a) requires that certain broker- +dealers file an annual audited report that contains the broker-dealer’s year-end financial statements +and a report on those statements by an independent auditor. Implicit in the requirement that a +registered broker-dealer file financial reports is the requirement that the information contained in +those reports be accurate. See Nikko Securities Co. International, Inc., Exchange Act Release No. +32331 (May 19, 1993). + + 41. As described above, Lighthouse failed to file an accurate annual audited report for +the year ended December 31, 2009. The firm therefore violated Section 17 and Rule 17a-5(a) +thereunder. + +11 + + 42. As a result of the conduct alleged above, Respondents were each a cause of +Lighthouse’s violations of Section 17 of the Exchange Act and Rule17a-5(a) thereunder. + +IV. + +In view of the allegations made by the Division of Enforcement and the Office of the Chief +Accountant, the Commission deems it necessary and appropriate that public administrative and +cease-and-desist proceedings be instituted to determine: + +Whether the allegations set forth in Section III hereof are true and, in connection therewith, +to afford Respondents an opportunity to establish any defenses to such allegations; + +What, if any, remedial action is necessary and appropriate against Respondents pursuant to +Rule 102(e) of the Commission’s Rules of Practice; and + +Whether, pursuant to Section 21C of the Exchange Act, Respondents should be ordered to +cease and desist from committing or causing violations and any future violations of Section 17 of the +Exchange Act and Rule 17a-5 thereunder and whether Respondents should be ordered to pay +disgorgement pursuant to Section 21C(e) of the Exchange Act. + +V. + +IT IS ORDERED that a public hearing for the purpose of taking evidence on the questions +set forth in Section IV hereof shall be convened not earlier than 30 days and not later than 60 days +from service of this Order at a time and place to be fixed, and before an Administrative Law Judge +to be designated by further order as provided by Rule 110 of the Commission’s Rules of Practice, +17 C.F.R. § 201.110. + +IT IS FURTHER ORDERED that Respondents shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220 +of the Commission’s Rules of Practice, 17 C.F.R. § 201.220. + +If Respondents fail to file the directed answer, or fail to appear at a hearing after being duly +notified, they may be deemed in default and the proceedings may be determined against them upon +consideration of this Order, the allegations of which may be deemed to be true as provided by Rules +155(a), 220(f), 221(f), and 310 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.155(a), +201.220(f), 201.221(f), and 201.310. + +This Order shall be served forthwith upon Respondents as provided for in the +Commission’s Rules of Practice. + +IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an initial +decision no later than 300 days from the date of service of this Order, pursuant to Rule 360(a)(2) of +the Commission’s Rules of Practice. + +12 + +In the absence of an appropriate waiver, no officer or employee of the Commission engaged +in the performance of investigative or prosecuting functions in this or any factually related +proceeding will be permitted to participate or advise in the decision of this matter, except as witness +or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule making” +within the meaning of Section 551 of the Administrative Procedure Act, it is not deemed subject to +the provisions of Section 553 delaying the effective date of any final Commission action. + + + By the Commission. + + + + Brent J. Fields + Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3640.txt b/raw/aaer/2015/AAER-3640.txt new file mode 100644 index 0000000000000000000000000000000000000000..c0f3ee3a89b80c1cfc09fa7c11a475986fcebed0 --- /dev/null +++ b/raw/aaer/2015/AAER-3640.txt @@ -0,0 +1,350 @@ + + + + + + UNITED STATES OF AMERICA +Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 74356 / February 24, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3640 / February 24, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16400 + + +In the Matter of + +THE GOODYEAR TIRE & +RUBBER COMPANY, + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS, PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) against The Goodyear Tire & Rubber Company +(“Goodyear” 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 Exchange Act, Making Findings, and +Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. This case involves violations of the books, records, and internal control provisions of +the Foreign Corrupt Practices Act (“FCPA”) by Goodyear. Goodyear, headquartered in Akron, +Ohio, is one of the world’s largest tire companies. From 2007 through 2011, Goodyear +subsidiaries in Kenya (Treadsetters Tyres Ltd., or “Treadsetters”) and Angola (Trentyre Angola +Lda., or “Trentyre”) routinely paid bribes to employees of government-owned entities and +private companies to obtain tire sales. These same subsidiaries also paid bribes to police, tax, +and other local authorities. In all, between 2007 and 2011, Goodyear subsidiaries in Kenya and +Angola made over $3.2 million in illicit payments. + +2. All of these bribery payments were falsely recorded as legitimate business expenses +in the books and records of these subsidiaries which were consolidated into Goodyear’s books and +records. Goodyear did not prevent or detect these improper payments because it failed to +implement adequate FCPA compliance controls at its subsidiaries in sub-Saharan Africa. + +Respondent + + 3. Goodyear, an Ohio corporation headquartered in Akron, Ohio, is one of the +world’s largest tire manufacturers. Goodyear has manufacturing facilities in 22 countries and sells +tires in most countries around the world. Goodyear’s common stock is registered with the +Commission pursuant to Section 12(b) of the Exchange Act and is listed on The NASDAQ Stock +Market. + +Other Relevant Entities + + 4. Magister Ltd. (“Magister”) is a wholly-owned subsidiary of Goodyear +incorporated in Mauritius, and headquartered in South Africa. Magister holds the shares and +oversees the operations of the Goodyear subsidiaries in sub-Saharan Africa. During the relevant +time period this included Treadsetters in Kenya and Trentyre in Angola. + + 5. Treadsetters is a retail tire distributor incorporated and located in Kenya. During +the relevant time period, Treadsetters was an indirect subsidiary of Goodyear, and had annual +revenues of approximately $20 million. Goodyear divested its ownership interest in Treadsetters +in 2013. + + 6. Trentyre is a retail tire distributor incorporated and located in Angola. Trentyre +is a wholly owned subsidiary of Goodyear. During the relevant time period, Trentyre had +annual revenues between $6 million and $20 million. + +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 +Improper Payments in Kenya + +7. Treadsetters is a retail tire distributor in Kenya. In 2002, Goodyear acquired a +minority ownership interest in Treadsetters. By 2006, Goodyear had acquired a majority ownership +interest in the company, though the day-to-day operations of Treadsetters continued to be run by +Treadsetters’ founders and the local general manager. During the relevant time period, Treadsetters +had annual revenues of approximately $20 million. + +8. From 2007 through 2011, Treadsetters’ management regularly authorized and paid +bribes to employees of government-owned or affiliated entities, and private companies, to obtain +business. The practice was routine and appears to have been in place prior to Goodyear’s +acquisition of Treadsetters. The bribes generally were paid in cash and falsely recorded on +Treadsetters’ books as expenses for promotional products. + + 9. Treadsetters’ general manager and finance director were at the center of the +scheme. They approved payments for phony promotional products, and then directed the finance +assistant to write-out the checks to cash. Treadsetters’ staff then cashed the checks and used the +money to make improper payments to employees of customers, which included both government- +owned entities and private companies. + + 10. Between 2007 and 2011, Treadsetters paid over $1.5 million in bribes in connection +with the sale of tires. This included improper payments to employees of government-owned or +affiliated entities including the Kenya Ports Authority, the Armed Forces Canteen Organization, +the Nzoia Sugar Company, the Kenyan Air Force, the Ministry of Roads, the Ministry of State for +Defense, the East African Portland Cement Co., and Telkom Kenya Ltd. During that same time +period, Treadsetters also made approximately $14,457 in improper payments to local government +officials in Kenya, including city council employees, police, and building inspectors. + + 11. Goodyear did not detect or prevent these improper payments because it failed to +conduct adequate due diligence when it acquired Treadsetters, and failed to implement adequate +FCPA compliance training and controls after the acquisition. + +Improper Payments in Angola + + 12. Trentyre was incorporated in 2007, and is a wholly-owned subsidiary of Goodyear. +Trentyre is primarily engaged in selling new tires for mining equipment. During the relevant time +period, Trentyre had annual revenues between $6 million and $20 million. + + 13. From 2007 through 2011, Trentyre paid over $1.6 million in bribes to employees of +government-owned or affiliated entities, and private companies, to obtain tire sales. Trentyre paid +approximately $1.4 million of these bribes to employees of government-owned or affiliated +entities in Angola, including the Catoca Diamond Mine, UNICARGAS, Engevia Construction +and Public Works, the Electric Company of Luanda, National Service of Alfadega, and Sonangol. +A majority of these improper payments were paid to employees of Trentyre’s largest customer at +the time, the Catoca Diamond Mine, which is owned by a consortium of mining interests, +including Endiama E.P., Angola’s national mining company, and ALROSA, a Russian mining + 4 +company. During the same time period, Trentyre also made approximately $64,713 in improper +payments to local government officials in Angola, including police and tax authorities. + + 14. The bribery scheme was put in place by Trentyre’s former general manager. To +hide the scheme and generate funds for the improper payments, Trentyre falsely marked-up the +costs of its tires by adding to its invoice price phony freight and customs clearing costs. On a +monthly basis, as tires were sold, the phony freight and clearing costs were reclassified to a +balance sheet account. Trentyre made improper payments to employees of customers both in cash +and through wire transfers. As bribes were paid, the amounts were debited from the balance sheet +account, and falsely recorded as payments to vendors for freight and clearing costs. + + 15. Goodyear did not prevent or detect these improper payments because it failed to +implement adequate FCPA compliance training and controls at this subsidiary. + +Legal Standards and Violations + + 16. Under Section 21C(a) of the Exchange Act, the Commission may impose a cease- +and-desist order upon any person who is violating, has violated, or is about to violate any provision +of the Exchange Act or any rule or regulation thereunder, and upon any other person that is, was, or +would be a cause of the violation, due to an act or omission the person knew or should have known +would contribute to such violation. + + 17. Under Section 13(b)(2)(A) of the Exchange Act issuers are required to make and +keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the +transactions and disposition of the assets of the issuer. [15 U.S.C. §78m(b)(2)(A)]. + + 18. Under Section 13(b)(2)(B) of the Exchange Act issuers are required to devise and +maintain a system of internal accounting controls sufficient to provide reasonable assurances that +(i) transactions are executed in accordance with management’s general or specific authorization; +(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in +conformity with generally accepted accounting principles or any other criteria applicable to such +statements, and (II) to maintain accountability for assets; (iii) access to assets is permitted only in +accordance with management’s general or specific authorization; and (iv) the recorded +accountability for assets is compared with the existing assets at reasonable intervals and +appropriate action is taken with respect to any differences. [15 U.S.C. §78m(b)(2)(B)]. + + 19. As described above, Goodyear subsidiaries in Kenya and Angola made improper +payments to employees of government-owned entities and private companies to obtain business. +These improper payments were falsely recorded as legitimate business expenses in the books and +records of these subsidiaries which were consolidated into Goodyear’s books and records. +Accordingly, Goodyear violated Section 13(b)(2)(A) of the Exchange Act. As described above, +Goodyear also violated Section 13(b)(2)(B) of the Exchange Act by failing to devise and maintain +sufficient accounting controls to prevent and detect these improper payments. + + + + 5 +Goodyear’s Cooperation and Remedial Efforts + + 20. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded the Commission staff. After +receiving information about the bribes, Goodyear promptly halted the improper payments and +reported the matter to Commission staff. Goodyear also provided significant cooperation with the +Commission’s investigation. This included voluntarily producing documents and reports and other +information from the company’s internal investigation, and promptly responding to Commission +staff’s requests for information and documents. These efforts assisted the Commission in efficiently +collecting evidence including information that may not have been otherwise available to the staff. + + 21. Goodyear also has undertaken remedial efforts. In Kenya, Goodyear divested its +ownership interest in Treadsetters, and ceased all business dealings with the company. In Angola, +after Goodyear halted the improper payments its subsidiary lost its largest customer. Goodyear is +now in the process of divesting this subsidiary. + + 22. Goodyear also undertook disciplinary action against certain employees, including +executives of its Europe, Middle East and Africa region who had oversight responsibility, for +failing to ensure adequate FCPA compliance training and controls were in place at the company’s +subsidiaries in sub-Saharan Africa. + + 23. Goodyear also implemented improvements to its compliance program, both specific +to its operations in sub-Saharan Africa, and globally. In Africa, the improvements include +expanded on-line and in-person anti-corruption training for subsidiary management, sales, and +finance personnel; regular audits, by internal audit, specifically focused on corruption risks; +quarterly self-assessment questionnaires required of each subsidiary regarding business with +government-affiliated customers; quarterly management certifications from every subsidiary that +cover among other things controls over financial reporting; and annual testing of internal controls +at each subsidiary. To increase oversight, Goodyear also put in place a new regional management +structure, and added new compliance, accounting, and audit positions. Goodyear is also making +technology improvements, where possible, to electronically link subsidiaries in sub-Saharan +Africa to its global network. At the parent company, Goodyear created a new senior position of +Vice President of Compliance and Ethics, which further elevated the compliance function within +the company. Goodyear has also expanded on-line and in-person anti-corruption and ethics +training at its other subsidiaries, and implemented a new Integrity Hotline Web Portal, which +enhanced users’ ability to file anonymous online reports to its hotline system. With that system, +Goodyear is also implementing a new case management system for legal, compliance and internal +audit to document and track complaints, investigations and remediation. Goodyear also has +updated its policies governing third-party agents and vendors, and is in the process of +implementing a new third-party due diligence software tool. + + + + + + + 6 +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in the Respondent Goodyear’s Offer. + +Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent Goodyear cease and + desist from committing or causing any violations and any future violations of + Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. + +B. Respondent shall, within 10 days of the entry of this Order, pay disgorgement of + $14,122,525 and prejudgment interest of $2,105,540 to the United States Treasury. + If timely payment is not made, additional interest shall accrue pursuant to SEC Rule + of Practice 600. Payments must be made in one of the following ways: + +1) Respondent may transmit payment electronically to the Commission, which + shall provide detailed ACH transfer/Fedwire instructions upon request; + +2) Respondent may make direct payment from a bank account via Pay.gov + through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +3) Respondent may pay by certified check, bank cashier’s check, or United + States postal money order, payable to the Securities and Exchange + Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Goodyear 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 Brian O. Quinn, Assistant Director, +Division of Enforcement, Securities and Exchange Commission, 100 F Street, N.E., Washington, +DC 20549. + +C. Respondent shall report to the Commission staff periodically, at no less than twelve- + month intervals during a three-year term, the status of its remediation and + implementation of compliance measures. Should respondent discover credible + evidence, not already reported to the Commission staff, that questionable or corrupt + payments or questionable or corrupt transfers of property or interests may have been + offered, promised, paid, or authorized by Respondent entity or person, or any entity + or person while working directly for Respondent, or that related false books and + records have been maintained, Respondent shall promptly report such conduct to the + 7 + Commission staff. During this three-year period, Respondent shall: (1) conduct an + initial review and submit an initial report, and (2) conduct and prepare at least two + (2) follow-up reviews and reports, as described below: + +1) Respondent shall submit to the Commission staff a written report within one +(1) year of the entry of this Order setting forth a complete description of its +FCPA and anti-corruption related remediation efforts to date, its proposals +reasonably designed to improve the policies and procedures of Respondent +for ensuring compliance with the FCPA and other applicable anti-corruption +laws, and the parameters of the subsequent reviews (the “Initial Report”). +The Initial Report shall be transmitted to Brian O. Quinn, Assistant Director, +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. + +2) Respondent shall undertake at least two (2) 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”). + +3) The first Follow-up Report shall be completed by no later than one (1) year +after the Initial Report. The second Follow-up Report shall be completed by +no later than one (1) year after the completion of the first Follow-up Report. +Respondent may extend the time period for issuance of the Follow-up +Reports with prior written approval of the Commission staff. + +4) The periodic reviews and reports submitted by Respondent will likely +include proprietary, financial, confidential, and competitive business +information. Public disclosure of the reports could discourage cooperation, +impede pending or potential government investigations or undermine the +objectives of the reporting requirement. For these reasons, among others, the +reports and the contents thereof are intended to remain and shall remain non- +public, except (1) pursuant to court order, (2) as agreed by the parties in +writing, (3) to the extent that the Commission staff 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. + +D. Respondent acknowledges that the Commission is not imposing a civil penalty + based upon its cooperation in a Commission investigation and related + enforcement action. If at any time following the entry of the Order, the Division + of Enforcement (“Division”) obtains information indicating that Respondent + knowingly provided materially false or misleading information or materials to the + Commission or in a related proceeding, the Division may, at its sole discretion + 8 + and with prior notice to the Respondent, petition the Commission to reopen this + matter and seek an order directing that the Respondent pay a civil money penalty. + Respondent may contest by way of defense in any resulting administrative + proceeding whether it knowingly provided materially false or misleading + information, but may not: (1) contest the findings in the Order; or (2) assert any + defense to liability or remedy, including, but not limited to any statute of + limitations defense. + + By the Commission + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3641.txt b/raw/aaer/2015/AAER-3641.txt new file mode 100644 index 0000000000000000000000000000000000000000..1a827add795bd62e0102474f31af5930cecce781 --- /dev/null +++ b/raw/aaer/2015/AAER-3641.txt @@ -0,0 +1,200 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 74401 / March 2, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3641 / March 2, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16413 + + +In the Matter of + +ROBERT W. ELLIOT + +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 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 Robert W. Elliot +(“Respondent” or “Elliot”). + +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: + +Respondent + + 1. Respondent, 51 years old, is a resident of Delmar, MD. From August 2012 through +January 2014, Respondent was the vice president of finance at Michael’s Finer Meats, LLC +(“MFM”), a wholly owned subsidiary of The Chefs’ Warehouse, Inc. (“Chefs”). Respondent is not, +and has never been, a certified public accountant. Respondent is currently employed as a credit +manager at a private company in Seaford, Delaware. + +Relevant Entities + + 2. The Chefs’ Warehouse, Inc., a Delaware corporation with principal offices in +Ridgefield, Connecticut, is a distributor of specialty food products. The company has securities +registered under Section 12(b) of the Exchange Act, which trade on the Nasdaq Global Select +Market. + + 3. Michael’s Finer Meats, LLC was a private company headquartered in Columbus, +Ohio, specializing in the sale of frozen meat and seafood. On or around August 13, 2012, Chefs +acquired MFM. MFM is now a wholly-owned subsidiary of Chefs. + +Background + +4. From May 2008 to August 2012, Elliot was the chief financial officer (“CFO”) of +MFM. As the CFO, Elliot had primary responsibility for all accounting functions at MFM, +including accounting for the company’s inventory and cost of goods sold. + +5. In August 2012, Chefs acquired MFM, and MFM became a wholly-owned +subsidiary of Chefs. Elliot remained with MFM after the acquisition in the role of vice president of +finance, and continued to have primary responsibility for MFM’s accounting functions, including +accounting for the company’s inventory and cost of goods sold. As a wholly-owned subsidiary of +Chefs, MFM’s books, records, and accounts were incorporated and reported in Chefs’ consolidated +financial statements. + +6. Both before and after the acquisition, MFM conducted manual counts of its +inventory at the end of every quarter. MFM employees recorded the inventory of products on +“count sheets,” which were then provided to Elliot. Elliot input the information from those count +sheets into a spreadsheet that he maintained and controlled. Both before and after the acquisition, +Elliot used the information in this spreadsheet to calculate certain financial results for MFM, +including inventory values, cost of goods sold, and profit margins. + + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person +or entity in this or any other proceeding. + 3 +7. At the end of each quarter, after inputting the inventory information from the count +sheets into the spreadsheet, Elliot would compare current profit margins to historical margins. If a +particular product’s profit margin deviated significantly from historical margins, Elliot normally +worked with warehouse employees who conducted the inventory counts to determine whether an +error had been made. At times, errors were discovered, and Elliot adjusted the inventory +information in the spreadsheet. Elliot failed to prepare any documentation supporting these +adjustments. + +8. At other times, Elliot did not investigate or otherwise was unable to identify +inventory count errors that explained why profit margins were lower than historical margins. In +these instances, Elliot improperly increased the inventory amounts recorded in the spreadsheet to +lower cost of goods sold, and increase profit margins, to a range consistent with historical margins. +Elliot knew that these unsupported accounting adjustments were improper. + +9. These improper accounting entries resulted in Chefs reporting inaccurate financial +statements in its quarterly report filed on Form 10-Q for the third quarter of 2012, its annual report +filed on Form 10-K for 2012, its quarterly report filed on Form 10-Q for the first quarter of 2013, +its quarterly report filed on Form 10-Q for the second quarter of 2013, and its quarterly report filed +on Form 10-Q for the third quarter of 2013. + +10. Chefs terminated Elliot in January 2014. + +11. On January 27, 2014, Chefs filed a Form 8-K disclosing that unsupported +accounting adjustments made by an employee of its MFM subsidiary had resulted in an aggregate +overstatement of inventory, and understatement of cost of goods sold, of approximately $905,000. +The company further reported that it did not believe the impact of the improper adjustments was +material to the company’s consolidated financial statements for any one reporting period, and that +it corrected the misstatements by recording a non-cash charge in the fourth quarter of 2013. + +Violations + +12. As a result of the conduct described above, Elliot violated Section 13(b)(5) of the +Exchange Act, which provides that no person shall knowingly circumvent or knowingly fail to +implement a system of internal accounting controls or knowingly falsify any book, record, or +account, and Rule 13b2-1, which provides that no person shall, directly or indirectly, falsify or +cause to be falsified, any book, record or account, and caused a violation of Section 13(b)(2)(A) of +the Exchange Act, which requires that every issuer of securities registered pursuant to Section 12 +of the Exchange Act 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. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Elliot’s Offer. + + 4 + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Elliot cease and desist +from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and +13(b)(5) of the Exchange Act, and Rule 13b2-1 thereunder. + + B. Respondent shall, within seven days of the entry of this Order, pay a civil money +penalty in the amount of $25,000 to the Securities and Exchange Commission. If timely payment +is not made, additional interest shall accrue pursuant to 31 U.S.C. 3717. 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 +Robert W. Elliot as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Scott W. Friestad, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549-5010. + + + + + + + + + + 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. + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3643.txt b/raw/aaer/2015/AAER-3643.txt new file mode 100644 index 0000000000000000000000000000000000000000..4a2687680df6aa332f1f0dcc12a85be1f9840639 --- /dev/null +++ b/raw/aaer/2015/AAER-3643.txt @@ -0,0 +1,96 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 74552 / March 20, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3643 / March 20, 2015 + +ADMINISTRATIVE PROCEEDING +File Nos. 3-14872, 3-15116 + + + +In the Matter of + +BDO CHINA DAHUA CPA CO., LTD., +ERNST & YOUNG HUA MING LLP, KPMG +HUAZHEN (SPECIAL GENERAL +PARTNERSHIP), DELOITTE TOUCHE +TOHMATSU CERTIFIED PUBLIC +ACCOUNTANTS LTD., and +PRICEWATERHOUSECOOPERS ZHONG +TIAN CPAS LIMITED + + +ORDER GRANTING THE +DIVISION OF ENFORCEMENT'S +UNOPPOSED MOTION TO +WITHDRAW ITS PETITION FOR +REVIEW AS TO DAHUA CPA, +LTD. AND NOTICE THAT INITIAL +DECISION HAS BECOME FINAL +AS TO DAHUA CPA, LTD. + + +These administrative proceedings were instituted pursuant to Rule of Practice +102(e)(1)(iii).1 The law judge's initial decision denied the privilege of appearing or practicing +before the Commission to four of the five respondents for a period of six months and it censured +the remaining respondent, Dahua CPA, Ltd. (Dahua).2 The Division of Enforcement +("Division") sought review of, among other things, "that portion of the Initial Decision" +regarding the remedies imposed on Dahua. Dahua did not file a petition for review. We granted +the Division's petition for review and also determined, on our own initiative, to review what +sanctions, if any, were appropriate.3 +The Division has filed an unopposed motion to withdraw its petition for review as to +Dahua, which is accompanied by a Joint Stipulation of Dismissal of Appeal as to Dahua entered +into by the Division and by a representative partner of Dahua. The motion seeks "dismissal of +all issues relating specifically to Dahua that have been raised on appeal from the Initial Decision +by the Division and/or the Commission ('Dahua-Related Appeal Issues')." The Division states + +1 17 C.F.R. § 201.102(e)(1)(iii). +2 BDO China Dahua CPA Co., Initial Decision Release No. 553, 2014 WL 242879, at *84 +(Jan. 22, 2014). Dahua was formerly affiliated with BDO International Limited and did business +as BDO China Dahua CPA Co., Ltd., the entity that appears in the caption. +3 BDO China Dahua CPA Co., Exchange Act Release No. 72134, 2014 WL 1871077 (May +9, 2014). +2 + +that it does not seek dismissal of any other aspect of the Division's petition for review, including, +in particular, issues relating to remedies imposed on the other respondents. +The Division argues that the Dahua-Related Appeal Issues should be dismissed because +subsequent events, including the Commission's February 6, 2015 settlement with the other four +respondents,4 have substantially mitigated the concerns underlying its petition for review as it +relates to Dahua. It further states that, because of the Commission's recent settlement with the +other respondents, it is not currently the case that the initial decision's absence of a practice bar +against Dahua would risk undermining the remedies imposed on the other respondents. The +Division also asserts that Dahua, at present, is performing little or no audit work for U.S. issuers, +thereby minimizing the risk of future harm to the Commission's processes. Finally, the Division +believes that, if future cooperation regarding Dahua's audit work papers becomes necessary, it +can seek such cooperation from Dahua and the China Securities Regulatory Commission +following the procedures set forth in the settlement order. For all of these reasons, the Division +contends that the changed circumstances weigh against imposition of any additional remedy +against Dahua at the current time. +The relief sought by the Division appears to be appropriate. + +Accordingly, it is ORDERED that the Division's unopposed motion is GRANTED. The +Commission has determined to dismiss the Division's petition for review as it relates to Dahua +and dismiss its own review of remedies as it relates to Dahua. It is further ORDERED that +notice is hereby given that the initial decision of the administrative law judge is reinstated and +has become the final decision of the Commission as to Dahua. The order contained in that +decision is hereby declared effective as to Dahua. The initial decision censured Dahua pursuant +to Rule 102(e)(1)(iii) of the Commission's Rules of Practice. + +It is further ORDERED that the remainder of the Division's petition for review and the +Commission's review of sanctions remain stayed in accordance with the Commission's February +6 settlement order. + +By the Commission. + + + Brent M. Fields + Secretary + +4 BDO China Dahua CPA Co., Exchange Act Release No. 74217, 2014 WL 7777230 (Feb. +6, 2015). \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3647.txt b/raw/aaer/2015/AAER-3647.txt new file mode 100644 index 0000000000000000000000000000000000000000..97243c73680b62e122b55e2a9beafd378531d457 --- /dev/null +++ b/raw/aaer/2015/AAER-3647.txt @@ -0,0 +1,226 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 74624 / April 1, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3647 / April 1, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16469 + +In the Matter of + +MARC J. MIZE, + +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 Marc J. Mize (“Mize” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Cease-And-Desist Proceedings, Pursuant to Section 21C Of +The Securities Exchange Act of 1934, Making Findings, And Imposing A Cease-And-Desist Order +(“Order”), as set forth below. + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that +Summary + +1. This case involves a fraudulent scheme by the owner (the “CEO”) of four private +telecommunications companies (collectively, “TelWorx”) to inflate the value of assets that the +companies sold to PCTEL, Inc. (“PCTEL”), a public company, and its wholly owned subsidiary +PCTelWorx, Inc. (“PCTelWorx”). The scheme had two main components: first, to inflate the value +of inventory and to prematurely recognize revenue prior to the sale in order to fraudulently inflate +the sale price; and second, to conceal these facts from PCTEL by prematurely recognizing revenue +after the asset purchase. Mize, an employee of TelWorx who joined PCTelWorx after the +acquisition, participated in one of the fraudulent transactions – premature revenue recognition to +meet a target revenue forecast – that was part of the scheme. +Respondent + +2. Marc J. Mize, age 43, is a resident of High Point, North Carolina. From July 2012, +until January 2013, he was the Senior Vice President of Sales and Tech Services of PCTelWorx. +Other Relevant Entities And Individuals + +3. PCTEL, Inc. is a Delaware corporation with its principal place of business in +Bloomingdale, Illinois. The company provides products and services for wireless communication +networks. Its stock is traded on the NASDAQ (ticker symbol PCTI). +4. PCTelWorx, Inc. was a wholly owned subsidiary of PCTEL. PCTEL merged +PCTelWorx into PCTEL on June 30, 2014. +5. The CEO was the owner and CEO of one of the TelWorx companies. After July +2012, the CEO was the general manager of PCTelWorx, whose responsibilities included its day-to- +day operations and providing its quarterly revenue forecasts to PCTEL. +Background + +6. In July of 2012, PCTEL and PCTelWorx acquired the assets of TelWorx. After the +acquisition, the CEO ran PCTelWorx. Thereafter, PCTelWorx operated similarly to TelWorx. + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + + + 3 +7. Prior to the acquisition, Mize was a TelWorx employee. After the acquisition, he +became an employee of PCTelWorx. +8. In the third and fourth quarter of 2012, PCTEL’s publicly filed, consolidated +financial statements included PCTelWorx’s financial results. +Revenue Forecasts +9. Prior to the acquisition, the CEO provided PCTEL and PCTelWorx with TelWorx’s +revenue forecasts for the second quarter of 2012. Shortly before the acquisition, PCTEL learned +that TelWorx did not meet the second quarter 2012 revenue forecast. This revenue shortfall was +due, in part, to a large order that a customer (“Customer A”) had postponed until the third quarter of +2012. +10. After the acquisition, PCTEL received PCTelWorx’s revenue forecasts from the +CEO on a quarterly basis. PCTelWorx employees, including Mize, knew that it was important to +PCTEL’s business that PCTelWorx meet or exceed the quarterly revenue forecasts it provided to +PCTEL. +PCTelWorx Creates A False Order In The Third Quarter To Conceal Revenue Shortfall +11. Towards the end of the third quarter of 2012, PCTelWorx still had not received the +large order from Customer A that the CEO forecasted for the third quarter, and the CEO realized +that PCTelWorx would not meet its quarterly revenue forecast. +12. The CEO decided to improperly use an intermediate purchaser for Customer A’s +anticipated order to conceal the revenue forecast shortfall. The CEO proposed that the intermediate +purchaser eventually would resell the products to Customer A at a profit. The CEO planned to offer +the intermediate purchaser extended payment terms so that it could collect the full purchase price +from Customer A before having to pay PCTelWorx’s invoice. The CEO identified a vendor that +provided services to – but that had not previously purchased a large order from – PCTelWorx (the +“Vendor”) as a potential intermediate purchaser. +13. Mize knew that the purpose of this false transaction was to artificially meet +PCTelWorx’s forecasted third quarter revenue. At the CEO’s direction, Mize spoke to the Vendor +about the CEO’s proposal and obtained a purchase order with the same terms as the order that +PCTelWorx expected eventually to receive from Customer A. +14. Using the purchase order obtained by Mize, the CEO instructed a PCTelWorx +employee (“the Employee”) to record the Vendor’s order in PCTelWorx’s books and records and to +indicate that the order had been shipped to the Vendor and that the Vendor had been invoiced. +These actions resulted in improper, premature revenue recognition in PCTelWorx’s books and +records during the third quarter. + + 4 +15. However, PCTelWorx never shipped the products listed on the false order to the +Vendor, nor did it send the invoice for the false order to the Vendor. PCTelWorx’s books and +records indicated that the Vendor’s payment for the products was due and unpaid. +PCTelWorx Conceals Premature Revenue Recognition By Removing +A Legitimate Customer Order From Its Books And Records In the Fourth Quarter +16. Midway through the fourth quarter, Customer A still had not placed the order with +PCTelWorx expected by the CEO. In addition, the payment for the false order by the Vendor was +overdue. The CEO became concerned that PCTEL would attempt to collect on the overdue invoice +to the Vendor, detect the false order in its books and records and determine that PCTelWorx had +recognized revenue prematurely in the third quarter. +17. The CEO decided to conceal from PCTEL the false third quarter order from Vendor +B by reversing it from PCTelWorx’s books and records and recording a new false transaction that +matched an actual purchase order from another PCTelWorx customer (“Customer B”). According +to the CEO’s plan, Customer B’s order would be cancelled on PCTelWorx’s books, but Customer B +would pay for the order placed by Vendor B. +18. At the CEO’s instruction, Mize contacted the Vendor and obtained a revised, false +purchase order that was identical to the order that PCTelWorx had received from Customer B. +Mize knew that the purpose of this transaction was to conceal from PCTEL the false third quarter +transaction with the Vendor by removing the false transaction from the third quarter from +PCTelWorx’s books and records and replacing it with a false transaction that would be paid for by +Customer B in the fourth quarter. +19. The CEO and Mize, at the CEO’s direction, then instructed the Employee to cancel +Customer B’s order and to reverse Vendor A’s false order from the third quarter in PCTelWorx’s +books and records. The CEO and Mize, at the CEO’s direction, also instructed the Employee to +enter the Vendor’s revised, false purchase order into PCTelWorx’s books and records. Ultimately, +the items supposedly ordered by the Vendor pursuant to the revised, false purchase order were +shipped to – and paid for – by Customer B. +20. PCTEL discovered the false entries in PCTelWorx’s books and records. PCTEL +issued a Form 8-K/A on March 13, 2013, disclosing these irregularities but did not restate any +financial information it previously reported. +Violations +21. As a result of the conduct described above, Mize violated Section 13(b)(5) of the +Securities Act which prohibits the knowing falsification of any book, record, or account or +circumvention of internal controls. +22. As a result of the conduct described above, Mize caused PCTEL’s violation of +Section 13(b)(2)(A) of the Exchange Act, which requires Section 12 registrants to make and keep + + 5 +books, records, and accounts that accurately and fairly reflect the transactions and dispositions of +their assets. +23. As a result of the conduct described above, Mize violated Rule 13b2-1 of the +Exchange Act, which prohibits the direct or indirect falsification of any book, record or account +subject to Section 13(b)(2)(A) of the Exchange Act. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Mize cease and desist from +committing or causing any violations and any future violations of Sections 13(b)(2)(A) and 13(b)(5) +of the Exchange Act and Rule 13b2-1 promulgated thereunder. +B. Mize shall pay civil penalties of $25,000 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury in accordance with +Exchange Act Section 21F(g)(3). Payment shall be made in $5,000 installments within 10, 90, 180, +270, and 360 days of the entry of this order. If any payment is not made by the date the payment is +required by this Order, the entire outstanding balance of civil penalties, plus any additional interest +accrued pursuant to 31 U.S.C. 3717, shall be due and payable immediately, without further +application. Payment must be made in one of the following ways: +(1) Respondent may 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 +Marc J. Mize as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to: Paul Montoya, Assistant + + 6 +Regional Director, Chicago Regional Office, Securities and Exchange Commission, 175 W. +Jackson Blvd., Suite 900, Chicago, Illinois 60604. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3651.txt b/raw/aaer/2015/AAER-3651.txt new file mode 100644 index 0000000000000000000000000000000000000000..aa9f0c635264218fa969d583fa28ab11e10ee650 --- /dev/null +++ b/raw/aaer/2015/AAER-3651.txt @@ -0,0 +1,145 @@ + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9745 / April 9, 2015 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 74698 / April 9, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3651 / April 9, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16484 + + + +In the Matter of + + MICHAEL M. COHEN + +Respondent. + + +ORDER INSTITUTING +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO RULE 102(e) OF +THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL +SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Michael +M. Cohen (“Cohen” or “Respondent”) 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 . . . [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 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent consents to the 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. Cohen, age 49, is a resident of West Orange, New Jersey. Beginning in +September 2006, Cohen served as the President, Chief Executive Officer (“CEO”), and Chairman +of the Board of Directors of Proteonomix, Inc. (“Proteonomix” or the “company”). In September +2010, Cohen also took over the positions of Chief Financial Officer (“CFO”) and Chief Operating +Officer. Cohen has never been licensed as a certified public accountant. In his capacity as +Proteonomix’s CEO and CFO, Cohen signed and certified the accuracy of the company’s reports +and financial statements filed with the Commission until, as described below, the company +terminated the registration of its common stock with the Commission. + +2. Proteonomix is a Delaware corporation with its principal place of business in +Paramus, New Jersey. Proteonomix is a biotechnology company engaged in, among other things, +the discovery and development of stem cell therapeutics and cosmeceutical products. On August 4, +2009, Proteonomix filed a Form 10 with the Commission to register a class of common stock +pursuant to Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § +78l(g)]. Proteonomix filed its first Form 10-Q quarterly report with the Commission on September +11, 2009. The company’s stock traded initially on the OTC Pink Sheets market and, subsequently, +on the OTCBB under the symbol “PROT.” On November 13, 2012, the company filed a Form 15, +terminating the registration of its common stock with the Commission. + +3. Respondent has entered into a written agreement to plead guilty to criminal +conduct relating to the findings in the Order. Specifically, in United States v. Michael Cohen, +Crim. No. 2:15-cr-00091-MCA-1 (D.N.J.), Respondent agreed to plead guilty to a one-count +information, which charges him with knowingly certifying false financial statements in violation of +18 U.S.C. § 1350. + +4. On February 19, 2015, the Commission filed a complaint against Cohen in +SEC v. Michael M. Cohen, et al., Case No. 2:15-cv-01292-MCA-JBC (D.N.J.). On March 6, 2015, +the court entered a judgment permanently enjoining Cohen, by consent, from future violations of +Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. §§ 77e(a), +77e(c), and 77q(a)]; Sections 10(b) and 13(b)(5) of the Exchange Act [15 U.S.C. §§ 78j(b) and +78m(b)(5)]; Exchange Act Rules 10b-5, 13a-14, and 13b2-1 [17 C.F.R. §§ 240.10b-5, 240.13a-14, +and 240.13b2-1]; and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and + 3 +13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A), and 78m(b)(2)(B)], and +Exchange Act Rules 12b-20, 13a-1, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1, and +240.13a-13]. The judgment also, by consent, permanently barred Cohen, pursuant to Section 20(e) +of the Securities Act [15 U.S.C. § 77t(e)] and Section 21(d)(2) of the Exchange Act [15 U.S.C. § +78u(d)(2)], from serving as an officer or director of any issuer that has a class of securities +registered pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l] or that is required to file +reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. 78o(d)]; and permanently barred +Cohen, pursuant to Section 20(g) of the Securities Act [15 U.S.C. § 77t(g)] and Section 21(d)(6) of +the Exchange Act [15 U.S.C. § 78u(d)(6)], from participating in any offering of a penny stock, +including engaging in activities with a broker, dealer, or issuer for purposes of issuing, trading, or +inducing or attempting to induce the purchase or sale of any penny stock. In addition, by consent, +the judgment provided that the court will order disgorgement, prejudgment interest, and a civil +penalty pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d)(3) of +the Exchange Act [15 U.S.C. § 78u(d)(3)] upon motion of the Commission. + +5. The Commission’s complaint alleged, among other things: that +Proteonomix and Cohen fraudulently issued and transferred millions of Proteonomix shares to +entities that Cohen secretly controlled; that Cohen directed the issuance and transfer of +Proteonomix shares, and the subsequent sale of those shares into the open market, to generate +undisclosed proceeds for his own benefit; that Proteonomix and Cohen falsely recorded share +issuances and transfers on Proteonomix’s accounting books and records as repayments of loans +that did not exist or payments for consulting services that were not performed; that Proteonomix +and Cohen failed to disclose related party transactions in filings with the Commission, as required +by Generally Accepted Accounting Principles; that Cohen directed the transfer of shares of +Proteonomix stock without restrictive legends under circumstances where the transactions were not +registered with the Commission and no exemption from the registration provisions applied; and +that Cohen falsely certified the accuracy of reports and statements that Proteonomix filed 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’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: Cohen is suspended +from appearing or practicing before the Commission as an accountant. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3652.pdf b/raw/aaer/2015/AAER-3652.pdf new file mode 100644 index 0000000000000000000000000000000000000000..afdc285d90e2730cd93805cf4f5294655fa94f2e Binary files /dev/null and b/raw/aaer/2015/AAER-3652.pdf differ diff --git a/raw/aaer/2015/AAER-3653.txt b/raw/aaer/2015/AAER-3653.txt new file mode 100644 index 0000000000000000000000000000000000000000..62c51b2fc137d7d9cc33ea258dd6d70dd9a3df55 --- /dev/null +++ b/raw/aaer/2015/AAER-3653.txt @@ -0,0 +1,1373 @@ + + + + + + + + + + + + + + + + SEC.gov | Robert Asti + + + + + + + + !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\/516761","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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Robert Asti , Civil Action No. 03-CV-1417 (LDW)(EDNY) + + Former Symbol Technologies Executive Settles SEC Action Thus Concluding a Long-Running 14-Defendant Accounting Litigation + + + The Honorable Leonard D. Wexler, United States District Judge for the Eastern District of New York, has entered a final consent judgment against Robert Asti, a former executive of Symbol Technologies, Inc. ("Symbol") and the last remaining defendant in the SEC's multiple enforcement actions involving the widespread accounting fraud at Symbol. + + The Commission's complaint against Asti alleges that from 1999 through March 2001, Asti participated in fraudulent revenue recognition practices, including quarter-end "stuffing" of Symbol's distribution channel to help meet revenue and earnings targets imposed by Symbol's CEO. The final judgment, to which Asti consented, permanently enjoins him from violating Sections 10(b) and 13b(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13b2-1, and from aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13, and it permanently bars him from serving as an officer or director of a public company. The judgment also requires Asti to pay disgorgement and prejudgment interest of $90,952, and it forgoes imposition of a civil monetary penalty based on Asti's early and substantial cooperation with the Commission staff and the criminal authorities, as well as his guilty plea and sentence to three years' probation in a parallel criminal action brought by the United States Attorney's Office for the Eastern District of New York ("USAO"). + + The Commission has now obtained final judgments against all thirteen former Symbol executives named as defendants in three separate actions filed in connection with the Symbol accounting fraud, including Symbol's chief executive officer, chief financial officer, two chief accounting officers, the company's general counsel and its head of sales. Symbol also entered into a final consent judgment, pursuant to which the company paid a $37 million civil penalty that was distributed to the victims of the fraud. SEC v. Symbol Technologies, Inc., et al., 04 CV 2276 (SJF)(EDNY). The fourteen final judgments obtained by the Commission in the Symbol litigation imposed, in addition to non-monetary sanctions, a total of approximately $131 million in disgorgement, prejudgment interest and civil penalties. The Commission is now pursuing collection of the final judgment imposed against Symbol's former CEO, Tomo Razmilovic, who remains a fugitive living in Sweden and under indictment by the USAO. The judgment against Razmilovic, in addition to imposing non-monetary sanctions, requires him to pay disgorgement, prejudgment interest and civil penalties totaling approximately $90 million. The judgment was affirmed on appeal in nearly all respects by the U.S. Court of Appeals for the Second Circuit, and the Supreme Court denied Razmilovic's petition for a writ of certiorari. + + The Commission acknowledges the assistance and cooperation of the USAO and the U.S. Postal Inspection Service in this matter. + + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2015/AAER-3656.txt b/raw/aaer/2015/AAER-3656.txt new file mode 100644 index 0000000000000000000000000000000000000000..7180ef71e8c7a70e11a958f7ce0e90290b882350 --- /dev/null +++ b/raw/aaer/2015/AAER-3656.txt @@ -0,0 +1,411 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + + + +SECURITIES ACT OF 1933 +Release No. 9772 / May 15, 2015 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 74976 / May 15, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3656 / May 15, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-15945 + + + +In the Matter of + +THOMAS A. NEELY, JR. + +Respondent. +ORDER MAKING FINDINGS AND +IMPOSING REMEDIAL SANCTIONS, +CEASE-AND-DESIST ORDER, AND +PENALTIES PURSUANT TO +SECTION 8A OF THE SECURITIES ACT OF +1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 + +I. + +On June 25, 2014, the Securities and Exchange Commission (“Commission”) instituted +proceedings pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”) and Section +21C of the Securities Exchange Act of 1934 (“Exchange Act”) against Thomas A. Neely, Jr. +(“Neely” or “Respondent”). +II. + +Respondent has submitted an Offer of Settlement (the “Offer”) which the Commission has +determined to accept. Solely for the purpose of these proceedings and any other proceedings +brought by or on behalf of the Commission, or to which the Commission is a party and without +admitting or denying the findings herein, except as to the Commission's jurisdiction over him and +the subject matter of these proceedings, which are admitted, Respondent consents to the entry of +this Order Making Findings and Imposing Remedial Sanctions, Cease-and-Desist Order and +Penalties Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities +Exchange Act of 1934, as set forth below. +2 + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +SUMMARY + +This proceeding arises from the misconduct of Thomas A. Neely, Jr., (“Neely”) and others +while employed by Regions Bank and its parent holding corporation, Regions Financial Corporation +(“Regions”). During the quarter ended March 31, 2009, in accordance with Regions’ policies and +procedures, personnel within Regions Bank’s Special Asset Department (“SAD”) initiated the +procedures to place approximately $168 million of certain commercial loans (the “Loans”) into non- +accrual status. In March 2009, Neely and others, without adequate justification and supporting +documentation, took steps to keep the Loans in accrual status. Such steps by Neely and others to +evade existing policies and procedures prevented Regions from appropriately measuring impairment +in accordance with Generally Accepted Accounting Principles (“GAAP”), rendered Regions’ +financial statements for the quarter ended March 31, 2009 materially misstated and not prepared in +conformity with GAAP, and evidenced a failure by Regions to maintain a system of internal +accounting controls sufficient to provide reasonable assurances that the Loans were recorded as +necessary to permit the preparation of financial statements in conformity with GAAP. + +RESPONDENT + +1. Thomas A. Neely, Jr., 54, was formerly an Executive Vice President for Regions’ +Risk Management Credit Division where he reported to the Chief Credit Officer. Beginning in +July 2009, Neely also oversaw Regions’ Risk Analytics Group. Together with the titular head of +SAD, Neely functionally controlled Regions’ SAD. Neely’s employment with Regions concluded +on November 30, 2010. + +RELATED ENTITY + +2. Regions Financial Corporation is a Delaware financial holding corporation +headquartered in Birmingham, Alabama. Regions conducts its banking operations through its +subsidiary Regions Bank, which is a member of the Federal Reserve System. Regions’ common +stock is registered with the Commission pursuant to Section 12(b) of the Securities Act and trades +on the New York Stock Exchange under the symbol “RF.” As of December 31, 2013, Regions had +approximately $117 billion in assets. + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on +any other person or entity in this or any other proceeding. + +3 + + +FACTS + +Regions’ Tracking of Non-Accrual Loans + +3. Throughout the relevant time-period, including the quarter ended March 31, 2009, +Regions tracked and recorded its non-performing loans (“NPLs”) as part of both internal +performance metrics and its regular financial reporting. NPLs at Regions primarily consisted of +loans in a non-accrual status.2 + +4. Regions’ policies and procedures required that loans be placed on non-accrual status +when it was determined that payment of all contractual principal and interest was in doubt, or the +loan was past due 90 days or more as to principal and interest, unless the loan was well-secured and +in the process of collection. When a loan was placed in non-accrual status, uncollected interest +accrued during the current year would be reversed and reduce Regions’ interest income. In addition, +placing a loan on non-accrual status served as a trigger for Regions to consider whether the specific +loan was impaired and thus how to determine an allowance for loan and lease losses in accordance +with GAAP. + +5. Regions’ policies and procedures provided that the decision to recommend a loan for +non-accrual status was to be made by Relationship Managers (“RMs”) within SAD. RMs were +responsible for reviewing loan file details, monitoring payments, and communicating with +borrowers. Under Regions’ policies and procedures, RMs typically had the greatest degree of +knowledge within SAD of the relevant loan status and a borrower’s ability to make payments of +principal and interest. + +6. Regions’ policies and procedures required that when RMs initiated an action to +place a loan on non-accrual status, they would submit a supporting form to their regional manager +that showed their conclusion and justified how they determined a loan should be placed in non- +accrual status. Regions’ policies and procedures then provided for the regional manager to conduct a +detailed review of the loan with the responsible RM, after which, if appropriate, the approval was +granted by the regional manager. + +7. Once approval for non-accrual classification was granted by the regional manager, +Regions’ policies and procedures specified that any subsequent exception to classifying the loan in +non-accrual status was required to be fully documented and justified on an approved +“Recommendation to Continue Accrual Status” form. + +8. Once the RM and the regional manager recommended that a loan should be moved +to non-accrual status, it was then listed by SAD managers in the Asset Quality Forecast report +(“AQF”). The AQF identified which loans had been recommended by the RM and the regional +manager for being placed on non-accrual status, and it forecasted charge-offs and non-performing +assets for the quarter. + + +2 GAAP does not provide guidance regarding placing loans on a non-accrual status. +4 + +9. The AQF was a principal forecasting tool of SAD that was prepared under the +direction of the Respondent and others. The AQF was discussed weekly at meetings regularly +conducted and attended by the Respondent, the head of SAD, and the Chief Credit Officer. +Respondent and others also regularly discussed the NPL forecast in presentations to Regions’ +Executive Council, which consisted of, among others, Regions’ Chief Executive Officer (“CEO”) +and Chief Financial Officer (“CFO”), in discussing current trends in NPLs. + +10. SAD, under the control of Respondent and others, had authority over the preparation, +content, and dissemination of the AQF. Once a loan recommended for non-accrual status by the +RMs and regional managers was included on the AQF, the responsible RMs would complete +information required for a processing list and submit it to Regions’ Risk Analytics Group. The +processing list was designed as an electronic record documenting the specific actions for individual +loans to be formally taken by Regions and reflected in Regions’ accounting systems. Following +Neely’s approval, his subordinates would submit the processing list for the identified loans to be +recorded as non-accrual in Regions’ accounting systems. + +Respondent’s Misclassification of Loans and Evasion +of Regions’ Policies and Procedures during the Quarter Ended March 31, 2009 + +11. As of the beginning of March 2009, Regions’ AQF identified NPLs of +approximately $1.6 billion. Neely and others had discussed between themselves the then current +AQF and NPLs. The AQF and related NPLs tracking for the quarter were made available to +Regions’ CEO and CFO. + +12. On or about March 13, 2009, Neely and others in senior management were +informed by a subordinate that an error had resulted in an underreporting of NPLs by an amount +approximating $200 million, or 13% of the quarter end NPL target that had been communicated to +Regions’ CEO and CFO. + +13. On or about March 17, 2009, the Chief Credit Officer was actively tracking and +calculating how NPLs could be decreased by approximately $200 million so as to more closely +approach the previously identified NPL target. + +14. On or about March 17, 2009, Neely suggested to the Chief Credit Officer and the +head of SAD that a $6.8 million commercial loan be recorded as an accruing loan despite being +recommended for non-accrual status by the assigned RM and regional manager. This loan was +prevented by Neely, without objection from the head of SAD and the Chief Credit Officer, from +being placed on the AQF or a processing list and was classified by Regions as being in accrual status +as of March 31, 2009. Contrary to Regions’ policies and procedures, Neely and others prevented the +subject loan from being classified as non-accrual without any documentation or justification. + +15. On or about March 18, 2009, Neely and others instructed subordinates to take +specific actions to remove from the AQF approximately $150 million of commercial loans that had +been recommended by the assigned RMs and regional managers, in accordance with Regions’ +policies and procedures, as being classified as non-accrual. Neely and others issued such +instructions to their subordinates without any documentation or justification supporting the +5 + +removal of these loans from the AQF. The head of SAD thereafter was made aware of and did not +object to this action by Neely and others. The ultimate effect of these instructions was the +improper classification of the Loans, representing approximately $168 million, as being in accrual +status. Had Regions classified the relevant loans on non-accrual status in accordance with its +policies, it would have prompted a determination that the identified loans were impaired in +accordance with GAAP. That determination would have resulted in Regions recording a higher +allowance for loan and lease losses. + +16. On or about March 23, 2009, the Chief Credit Officer and Neely attended a meeting +at which they provided inaccurate information regarding NPLs for the quarter to certain senior +executives, including Regions’ CFO. + +17. In taking the undocumented and unjustified steps above, Neely and others +collectively circumvented Regions’ policies and procedures regarding the classification of loans +into non-accrual status. The actions by Neely and others directly resulted in the improper +classification of the Loans pursuant to Regions’ policies, and further prevented Regions from +appropriately determining those Loans were impaired in accordance with GAAP at the quarter +ended March 31, 2009. + +18. In accordance with Regions’ policies and procedures, the Loans were required to +have been classified in non-accrual status at the quarter ended March 31, 2009. Had Regions +classified the Loans in non-accrual status in compliance with its policies, it would have prompted a +determination that the Loans were impaired in accordance with Statement of Financial Accounting +Standard No. 114, Accounting by Creditors for Impairment of a Loan (“SFAS No. 114”).3 + +Impact of Respondent’s Misconduct on Regions’ Financial Statements + +19. Respondent circumvented Regions’ internal accounting controls through his +recording and reporting of the Loans in a manner that was not in accordance with Regions’ policies +and procedures. As a result, Regions failed to maintain a system of internal accounting controls +sufficient to provide reasonable assurances that the Loans were recorded as necessary to permit +preparation of financial statements in conformity with GAAP. + +20. Respondent’s misconduct resulted in Regions’ failing to make and keep books, +records and accounts in reasonable detail, which accurately and fairly reflected the Loans. Further, +Regions’ accounts were made inaccurate through the misconduct of the Respondent. + +21. The books, records and accounts reflecting the Loans were incorporated into +Regions’ consolidated financial statements for the quarter ended March 31, 2009. As a result of +failing to properly account for the Loans in accordance with GAAP, for the quarter ended March +31, 2009, Regions’ income before income taxes was overstated by $16 million, its net income +applicable to common shareholders was overstated by approximately $11 million, and its earnings + +3 See SFAS No. 114, which states that “a loan is impaired when, based on current information and +events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms +of the loan agreement” and it requires lenders to measure impairment based on the present value of expected +cash flows or an observable fair value of the collateral (i.e., an appraisal) if the loan is collateral dependent. +6 + +per common share was overstated by approximately $.02 per share. + +22. The above misstatements were included in Regions’ April 21, 2009 press release +included in its Form 8-K dated April 21, 2009 and filed with the Commission on April 21, 2009, in +its exhibits to its Form 8-K dated May 20, 2009 and filed with the Commission on May 20, 2009, +in its March 31, 2009 Form 10-Q filed May 11, 2009, and two subsequent amendments to its +March 31, 2009 Form 10-Q filed on May 13, 2009 and June 9, 2009, in a Form S-4 filed on May +20, 2009 and in three subsequent amendments to this registration statement on May 22, 2009, June +4, 2009, and June 9, 2009, and in a Form S-8 filed on August 28, 2009 (collectively, the “Public +Filings”). + + 23. The Public Filings did not include other information as was necessary to ensure that +the statements made in the Public Filings were not, under the circumstances, materially misleading. + + 24. The Respondent, in a sub-certification letter signed in April 2009 in connection with +the preparation of the reports on Form 10-Q above, misled Regions’ Controller and Chief Accounting +Officer and its Director of Internal Audit, both accountants, regarding Regions’ books, records, +accounts, and internal controls. + +VIOLATIONS + +25. Section 17(a) of the Securities Act prohibits any person, in the offer or sale of any +security, from using the means and instrumentalities of interstate commerce and of the mails, directly +or indirectly, to: (a) employ any device, scheme, or artifice to defraud; (b) obtain money or property +by means of any untrue statement of a material fact or any omission to state a material fact +necessary in order to make the statements made, in light of the circumstances under which they +were made, not misleading; or (c) engage in any transaction, practice, or course of business which +operates or would operate as a fraud or deceit upon the purchaser. + +26. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit fraudulent +conduct in connection with the purchase or sale of securities. + +27. Section 20(b) of the Exchange Act makes it unlawful for any person, directly or +indirectly, to do any act or thing which it would be unlawful for such person to do under the +Exchange Act or any rule or regulation thereunder through or by means of any other person. + +28. Section 13(a) of the Exchange Act and Rules 13a-11, 13a-13 and 12b-20 thereunder, +requires every issuer of a security registered pursuant to Section 12 of the Exchange Act to file +with the Commission information, documents, and current and quarterly reports as the +Commission may require, and mandate that current and periodic reports contain such further +material information as may be necessary to make the required statements not misleading. + +29. Section 13(b)(2)(A) of the Exchange A ct requires reporting companies to make and +keep b ooks, recor ds and accounts which, in reasonable detail, accurately and fairly reflect their +transactions and dispositions of their assets. + +7 + +30. Section 13(b)(2)(B) of the Exchange Act requires all reporting companies to devise +and maintain a system of internal accounting controls sufficient to provide reasonable assurances +that transactions are recorded as necessary to permit preparation of financial statements in +accordance with GAAP. + +31. Section 13(b)(5) of the Exchange Act prohibits any person from knowingly +circumventing or knowingly failing to implement a system of internal accounting controls, and from +knowingly falsifying any book, record, or account, required under Section 13(b)(2) of the Exchange +Act. + +32. Rule 13b2-1 of the Exchange Act prohibits any person from directly or indirectly +falsifying or causing to be falsified any book, record or account subject to Section 13(b)(2)(A) of +the Exchange Act. + +33. Rule 13b2-2 of the Exchange Act prohibits, among other things, officers of issuers +from directly or indirectly making or causing to be made a materially false or misleading +statement, or omitting to state any material fact necessary in order to make statements made, in +light of the circumstances under which such statements were made, not misleading to an +accountant in connection with any quarterly review or the preparation or filing of any document or +report required to be filed with the Commission. + +34. As a result of the Respondent’s misclassification of Loans as in accrual status as of +the quarter ended March 31, 2009, the Respondent violated Section 17(a) of the Securities Act, +which prohibits fraudulent conduct in the offer or sale of securities, and Exchange Act Section +10(b) and Rule 10b-5 thereunder, which prohibits fraudulent conduct in connection with the +purchase or sale of securities. + +35. As a result of the conduct described above, the Respondent acted through Regions to +make material misrepresentations in the Public Filings, and as a result, violated Sections 20(b) and +10(b) of the Exchange Act, and Rule 10b-5 thereunder. + +36. As a result of the conduct described above, the Respondent caused Regions to +violate Section 13(a) of the Exchange Act and Rules 13a-11, 13a-13 and 12b-20 thereunder +because its financial statements for the quarter ended March 31, 2009, included in current and +quarterly reports, failed to record the Loans in conformity with GAAP. + +37. As a result of the conduct described above, the Respondent caused Regions to +violate Section 13(b)(2)(A) of the Exchange Act because it did not keep books, records or accounts +that accurately reflected the Loans. + +38. As a result of the conduct described above, the Respondent caused Regions to +violate Section 13(b)(2)(B) of the Exchange Act because it failed to maintain a system of internal +accounting controls sufficient to provide reasonable assurances that the Loans were recorded as +necessary to permit preparation of its financial statements in accordance with GAAP. + +8 + + 39. As a result of the conduct described above, the Respondent violated Section +13(b)(5) of the Exchange Act when he knowingly circumvented Regions’ system of internal +accounting controls and knowingly falsified Regions’ books, records, and accounts related to the +Loans. + + 40. As a result of the conduct described above, the Respondent violated Rule 13b2-1 of +the Exchange Act by directly or indirectly falsifying or causing to be falsified Regions’ books, +records and accounts relating to the Loans, which were subject to Section 13(b)(2)(A) of the +Exchange Act. + +41. As a result of the conduct described above, the Respondent violated Rule 13b2-2 of +the Exchange Act when he directly or indirectly made or caused to be made materially false or +misleading statements, or omitted to state material facts necessary in order to make statements +made, in light of the circumstances under which such statements were made, not misleading to +accountants in connection with the preparation or filing of documents and reports which were +required to be filed with the Commission. + +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 that: + +A. Respondent Neely cease and desist from committing or causing any violations and +any future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, including +committing or causing any such violations directly or indirectly through or by means of any other +person, as prohibited by Section 20(b) of the Exchange Act, and cease and desist from committing +or causing any violations and any future violations of Section 17(a) of the Securities Act and +Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 12b-20, 13a- +11, 13a-13, 13b2-1, and 13b2-2 thereunder. + +B. Respondent Neely be, and hereby is prohibited for a period of five (5) years from +entry of this Order, from acting as an officer or director of any issuer that has a class of securities +registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to +Section 15(d) of the Exchange Act. + +C. Respondent Neely shall pay a civil money penalty in the amount of $100,000 to the +Securities and Exchange Commission. Payment shall be made in the following installments: +$10,000 is due on the first of the month following entry of this Order, followed by $5,000 within the +next 60 day, $5,000 within an additional 60 days, $5,000 within an additional 60 days, and the +remaining $75,000 within one year from the issuance of this Order. If any payment is not made by +the date the payment is required by this Order, the entire outstanding balance, plus any additional +interest accrued pursuant to 31 U.S.C. § 3717, shall be due and payable immediately, without +further application. Payment must be made in one of the following ways: + +9 + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Thomas A. Neely, Jr. 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 M. Graham +Loomis, Division of Enforcement, Securities and Exchange Commission, 950 East Paces Ferry +Road, N.E., Atlanta, GA 30326-1382. + + +By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3657.txt b/raw/aaer/2015/AAER-3657.txt new file mode 100644 index 0000000000000000000000000000000000000000..c628ea1bd4d0ccbeecdbf9cebb2ffde4e08bfed1 --- /dev/null +++ b/raw/aaer/2015/AAER-3657.txt @@ -0,0 +1,160 @@ + + + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75014 / May 20, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3657 / May 20, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16550 + + : + : CORRECTED +In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + RENRUI TANG, : 102(e) OF THE COMMISSION’S RULES OF + : PRACTICE, MAKING FINDINGS, AND + Respondent. : IMPOSING REMEDIAL SANCTIONS + : + : +____________________________________ : + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Renrui +Tang (“Respondent” or “Tang”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice.1 + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III(3) below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 1. Tang, age 41, is a Chinese national residing in the People’s Republic of +China (“China”). Tang has served as Chief Financial Officer (“CFO”) for China Valves +Technology, Inc. (“CVVT”) since June 2013. Tang served as CVVT’s Financial Controller from +December 2010 through June 2013; interim CFO between February 2009 and July 2009 and +between May 2010 and December 2010; CFO from December 2007 through March 2009; and +Director from December 2007 through November 2008. Tang held himself out and acted as CFO +and Treasurer of CVVT from at least August 2010 to at least November 2010. Tang also held a +variety of positions related to finance and accounting with CVVT’s subsidiaries between 1994 and +2008. Tang holds himself out as an “International Certified Public Accountant.” + + 2. CVVT was, at all relevant times, a Nevada corporation with its principal +place of business in China. CVVT purports to develop, manufacture, supply, and provide services +related to water flow management products. At all relevant times, CVVT’s common stock was +registered with the Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 +(“Exchange Act”). CVVT’s securities traded on the NASDAQ Global Market until September 21, +2012. + + 3. On September 29, 2014, the Commission filed a complaint against Tang in +SEC v. China Valves Technology, Inc., Civil Action No. 1:14-cv-01630 (D.D.C.). On May 13, +2015, the court entered an order permanently enjoining Tang, by consent, from future violations of +Section 10(b) of the Exchange Act and Rules 10b-5(b) and 13a-14 thereunder, and aiding and +abetting violations of Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act and Rules 10b- +5(b), 12b-20, and 13a-13 thereunder. Tang was also ordered to pay a $40,000 civil money penalty. + + 4. The Commission’s complaint alleged, among other things, that Tang +signed and certified CVVT’s Form 10-Q filing for the third quarter of 2010, which contained +material misstatements and omissions related to CVVT’s acquisition of Watts Valve Changsha +Co., Ltd. (“Changsha Valve”). According to the complaint, the filing misrepresented the nature +of the Changsha Valve transaction and related payments, and failed to disclose the role of related + 3 +parties and the existence of an investigation into potential violations of the Foreign Corrupt +Practices Act. The complaint alleged that Tang knew, or was reckless in not knowing, that the +Form 10-Q was inaccurate because he had received information alerting him to the true nature of +the transaction. Further, as CFO and Treasurer of CVVT, he had access to CVVT’s finances and +was responsible for the accuracy of CVVT’s 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’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Pursuant to Rule 102(e) of the Commission’s Rules of Practice, Tang is suspended +from appearing or practicing before the Commission as an accountant. + + B. After three years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify any criticisms +of or potential defects in the respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, including, but not limited to, all + 4 +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 as an accountant provided that he is in +possession of an accounting license in good standing and he has resolved any disciplinary +issues with any applicable licensing authority. +However, if the resolution of any disciplinary +action by a licensing authority is dependent on reinstatement by the Commission, the +Commission will consider an application on its other merits. The Commission’s review may +include consideration of, in addition to the matters referenced above, any other matters relating to +Respondent’s character, integrity, professional conduct, or qualifications to appear or practice +before the Commission. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3659.txt b/raw/aaer/2015/AAER-3659.txt new file mode 100644 index 0000000000000000000000000000000000000000..aa9100324856a06fc491e85a690428e353a905fc --- /dev/null +++ b/raw/aaer/2015/AAER-3659.txt @@ -0,0 +1,453 @@ +1 + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9799 / June 1, 2015 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75088 / June 1, 2015 + +ACCOUNTING AND AUDITING +ENFORCEMENT +Release No. 3659 / June 1, 2015 + +ADMINISTRATIVE +PROCEEDING File No. 3-15815 + +ORDER MAKING FINDINGS AND +In the Matter of IMPOSING REMEDIAL SANCTIONS AND A + CEASE-AND-DESIST ORDER PURSUANT + DICKSON LEE, CPA TO SECTION 8A OF THE SECURITIES ACT + OF 1933, SECTIONS 4C AND 21C OF THE +Respondent. SECURITIES EXCHANGE ACT OF 1934, + AND RULE 102(e) OF THE COMMISSION’S + RULES OF PRACTICE + + +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate +to enter this Order Making Findings and Imposing Remedial Sanctions and a Cease-and- +Desist Order 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 Practice2 against Dickson Lee (“Lee” or + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character +or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the securities +laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(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 +2 + + + +“Respondent”). + II. +Following the institution of these proceedings on March 27, 2014, Respondent has +submitted an Offer of Settlement (the “Offer”) which the Commission has determined to accept. +Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of +the Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over him and the subject matter of these proceedings, and consents to the entry of this +Order Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant +to 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 (“Order”), as set forth below. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds3: + +SUMMARY + +This action arises out of a fraudulent scheme by L&L Energy and Dickson Lee to create +the appearance that L&L was run by a professional management team and conceal Lee’s control +of the company. L&L Energy is a Tukwila, Washington-headquartered coal company with all of +its operations in China and Taiwan. At all relevant times, it was led by Dickson Lee, its former +Chairman of the Board and Chief Executive Officer. From approximately August 2008 to June +2009, L&L and Lee repeatedly and fraudulently misrepresented to the public that it had certain +persons serving in critical executive management roles at the company when, in reality, those +persons served in no such roles. + +First, in its Form 10-K for the fiscal year 2008, L&L falsely represented that Lee’s +brother served as the company’s CEO when, in reality, Lee’s brother held the title of CEO in +name only while Lee ran the day to day operations of the company. In that same filing, L&L +represented that a former company employee (“the purported Acting CFO”) had served as the +company’s Acting Chief Financial Officer when, in reality, the purported Acting CFO had +emailed Lee prior to the 2008 Form 10-K and rejected the Acting CFO position. In the +company’s next three quarterly report filings for 2009, L&L and Lee continued to misrepresent +that the purported Acting CFO was in fact the company’s Acting CFO. For example, L&L’s +public filings contained certifications required under the Sarbanes-Oxley Act of 2002 +(“Sarbanes-Oxley) that ostensibly bore the purported Acting CFO’s electronic signature when, +in reality, the purported Acting CFO had not signed any L&L public filings during this period; +did not provide authorization for her signature to be placed on any L&L public filings; and did +not perform any of the reviews necessary to have a basis for any of the attestations contained on + +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 Sarbanes-Oxley certifications. + + +In approximately May 2009, the purported Acting CFO learned that L&L had been falsely +representing her as the company’s Acting CFO and confronted Lee and the chair of L&L’s Audit +Committee. In response, Lee separately admitted to the purported Acting CFO and the Audit +Committee Chair that the purported Acting CFO had not performed the duties of L&L’s Acting +CFO, and then directed the Audit Committee Chair to conceal this fact from both the company’s +Board and the public. Lee maintained his fraudulent scheme by continuing to falsely represent to +L&L’s Board of Directors that the purported Acting CFO had served as the Acting CFO. Lastly, +during the fall of 2009, in connection with an application for L&L to gain listing on NASDAQ, +Lee misled NASDAQ by informing it that the company had made all of the required Sarbanes- +Oxley certifications – including during the period of the purported Acting CFO’s ostensible +service. As a result, L&L became listed on the NASDAQ. + +RESPONDENT + +Dickson Lee, age 66, is the company’s founder and has been L&L’s Chairman of the +Board and Chief Executive Officer since August 2008. Lee previously served as CEO from 1995 +through July 2007 and Chairman at various periods. He previously held CPA licenses in +Washington and New York (both licenses have lapsed, with the Washington license lapsing in +June 2012) and previously audited public companies. Lee obtained his Series 7 license in 1998 +and his Series 24 and 27 licenses in 2000. Lee was an associated person with a number of broker +dealers until about 2005. + +OTHER RELEVANT ENTITIES + +L&L is a Tukwila, Washington headquartered coal company with all of its operations in +China and Taiwan. The company became public through a reverse merger in August 2001. +L&L’s common stock is registered with the Commission pursuant to Exchange Act Section +12(b). + +FACTS + +A. The Purported Acting CFO Rejects Acting CFO Position + +1. In August 2007, L&L publicly announced that Lee had resigned his position as +L&L’s Chairman of the Board and CEO. Lee resigned those positions shortly after he was +disciplined by the National Association of Securities Dealers, Inc. (“NASD”) and received a +one-year suspension of his license for conducting private placement offerings of L&L securities +in which the private placement memoranda contained false statements. Lee believed that, if he +was an L&L officer, his suspension would impede L&L from becoming listed on a stock +exchange. + +2. At that time, Lee convinced L&L’s Board to install his brother as the CEO of +L&L (hereinafter “Lee’s brother”). During the one-year period (August 2007 – August 2008) +in which Lee’s brother held the title of L&L’s CEO, however, Lee continued to run the +4 + + + +company as he had when he held the title of CEO. + + +3. In January 2008, L&L’s stock became quoted on the Over-The-Counter +Bulletin Board (“OTCBB”). In order to gain listing on a larger trading venue, such as +NASDAQ, Lee sought to hire a Chief Financial Officer (“CFO”). + +4. L&L hired a CFO in February 2008, but within two months that person resigned. +As L&L sought a replacement CFO, Lee proposed the name of a former employee and L&L +director (hereinafter, “the purported Acting CFO”) as a candidate for L&L’s Acting CFO +position during the search for a permanent replacement. + +5. In approximately June 2008, Lee discussed engaging a U.S.-based placement +agent (the “placement agent”) to assist L&L in raising money from investors. This placement +agent encouraged L&L to hire a CFO. In a June 18, 2008 email, Lee referred to the purported +Acting CFO as a member of the management team that had been requested by the placement +agent. In another June 2008 email, Lee wrote that the purported Acting CFO could become +L&L’s Acting CFO in order to meet the placement agent’s “requirement.” + +6. On June 23, 2008, members of L&L’s board and Lee held a meeting. At that +meeting, Lee communicated that the purported Acting CFO would be appointed as the +company’s Acting CFO because the placement agent “suggested that L&L needs to have [an] +Acting CFO (a Non-Officer position) as one of the conditions to move L&L’s funding forward.” + +7. On that same day, at Lee’s instruction, Lee’s assistant sent the purported +Acting CFO an email thanking her for becoming L&L’s Acting CFO. The purported Acting +CFO, however, had never accepted the Acting CFO position. + +8. On July 14, 2008, the purported Acting CFO forwarded to Lee the June 23, 2008 +email she received from his assistant regarding the Acting CFO position and informed Lee that +she was “unable to become L&L Acting CFO as I don’t have time to make any contribution to +L&L. I need to take care of my own job and my kids as well . . . I wish you could find a more +suitable CFO soon.” + +B. L&L Falsely Represents Lee’s Brother and the Purported Acting CFO as the +Company’s CEO and Acting CFO + +9. On August 12, 2008, L&L filed its Form 10-K with the Commission for its +fiscal year ended April 30, 2008 (the “2008 Form 10-K”). Lee reviewed the filing before it +was made public. + +10. L&L, in its 2008 Form 10-K, falsely represented that Lee’s brother had performed +the functions of the company’s CEO when, in reality, Lee continued to perform those functions. + +11. Moreover, in that same filing, L&L reported for the first time that the purported +Acting CFO had been named as the company’s Acting CFO, disclosing that “she is a CPA with +experience of both U.S. and China accounting practices. She was a senior auditing manager for +5 + + + +a New York CPA firm with PCAOB qualification, and conducted US GAAP audits for US +public listed companies.” These representations were false because the purported Acting CFO +had rejected the Acting CFO position. + +12. L&L’s 2008 Form 10-K contained certifications required under Sarbanes-Oxley +for the company’s principal executive officer and principal financial officer, namely, its CEO and +CFO. These certifications contained the electronic signatures of both Lee’s brother and the +purported Acting CFO by which each of them attested to, among other things, the fact that the +2008 Form 10-K contained no untrue statements of material fact. + +13. Neither Lee’s brother nor the purported Acting CFO, however, provided any +such attestation and neither Lee’s brother nor the purported Acting CFO provided any +authorization to have their electronic signatures placed on their respective Sarbanes-Oxley +certifications. + +14. L&L, in its 2008 Form 10-K, also falsely represented that it had – with the +participation of its CEO (Lee’s brother) and CFO (the purported Acting CFO) – evaluated the +effectiveness of the design and operation of its disclosure controls and procedures, and based +on such evaluation, the company, its CEO (Lee’s brother), and CFO (the purported Acting +CFO) concluded that the disclosure controls and procedures were effective. + +C. L&L and Lee Continue their Scheme to Falsely Represent the Purported Acting CFO +as the Acting CFO + +15. On August 25, 2008, after his one-year NASD suspension was over, Lee officially +returned to the position of L&L’s CEO and Chairman of the Board. + +16. On September 15, 2008, L&L filed with the Commission its Form 10-Q for the +period ended July 31, 2009 (the “First Quarter 2009 Form 10-Q”). Lee signed the filing. Like the +2008 Form 10-K, the First Quarter 2009 Form 10-Q contained a Sarbanes-Oxley certification that +was ostensibly electronically signed by the purported Acting CFO. Moreover, the First Quarter +2009 Form 10-Q also contained the representation that the CEO (Lee) and the purported Acting +CFO had evaluated the effectiveness of the design and operation of the company’s disclosure +controls and procedures and those controls and procedures were effective. + +17. The purported Acting CFO, however, did not serve as the company’s Acting CFO +in any capacity; did not authorize her electronic signature to be placed on the Sarbanes-Oxley +certifications; did not perform any of the reviews or functions enumerated on the Sarbanes-Oxley +certifications; and did not evaluate the effectiveness of the company’s disclosure controls and +procedures. + +18. The First Quarter 2009 Form 10-Q also contained a Sarbanes-Oxley certification +for Lee. In his Sarbanes-Oxley certification, Lee falsely certified that, to his knowledge, L&L’s +First Quarter 2009 Form 10-Q contained no untrue statements of material fact. + +19. In approximately December 2008, L&L retained a U.S.-based investment +research firm to write a research report concerning L&L. In late December 2008, the research +6 + + + +firm emailed Lee a draft research report for his review. The research report contained a +prominent section on L&L’s management team, listed the purported Acting CFO as the +company’s CFO and stated that the purported Acting CFO “coordinates all accounting for L&L.” +Lee caused a revised version of the research report to be sent to the research firm with some +“minor changes,” but did not correct the false statements regarding the purported Acting CFO. +This report was published in approximately April 2009 and included the false statements +regarding the role of the purported Acting CFO. + +20. On December 22, 2008, L&L filed with the Commission its Form 10-Q for the +period ended October 31, 2008, and on March 23, 2009, L&L filed with the Commission its +Form 10-Q for the period ended January 31, 2009. Lee signed both of these filings. These two +public filings again contained false, electronically signed, Sarbanes-Oxley certifications by the +purported Acting CFO. Moreover, these two filings contained the false statements concerning +the purported Acting CFO’s evaluation of the effectiveness of the company’s disclosure controls +and procedures. + +21. These two public filings also contained Lee’s own Sarbanes-Oxley certification +in which he again falsely certified that, to his knowledge, the Form 10-Qs contained no untrue +statements of material fact. + +22. As noted above, L&L placed electronic signatures on the public filings to reflect +that the purported Acting CFO had signed the requisite Sarbanes-Oxley certifications. The +Commission staff requested from L&L, but never received, the actual signature pages bearing the +purported Acting CFO’s signature for each of the requisite Sarbanes-Oxley certifications. + +23. On August 12, 2009, L&L filed its 2009 Form 10-K, which contained Lee’s +Sarbanes-Oxley certification that, based on his and the CFO’s most recent evaluation of the +company’s internal control over financial reporting, all fraud involving management had been +disclosed to the company’s auditors and to the company’s Audit Committee. This certification +was false because Lee had not disclosed to the company’s external auditors or the company’s +entire Audit Committee that the purported Acting CFO was misrepresented in L&L’s previous +filings as its Acting CFO. + +D. Lee Admits to Purported Acting CFO that She Did Not Perform the Work of the +Acting CFO + +24. In approximately May 2009, the purported Acting CFO became aware that L&L +had falsely represented her as the company’s Acting CFO in the company’s public filings and, on +May 6, 2009, sent Lee an email that included her July 14, 2008 email in which she rejected the +Acting CFO position. In the email, the purported Acting CFO wrote that she “clearly indicated that +[she] would not accept the offer of being the Acting CFO of L&L,” and asked Lee for an immediate +explanation. + +25. On May 13, 2009, Lee emailed the purported Acting CFO and wrote, “[t]here is a +misunderstanding of the Acting CFO role . . . Based on your input, your name is removed to +please you.” The purported Acting CFO replied that – just because she and Lee had known each +7 + + + +other for ten years – it did not mean “that you could use my name, without authorisation, to the +file 10K to the U.S. SEC.” In response, on May 19, 2009, Lee emailed the purported Acting CFO +and separately admitted, “[y]ou did not actually conduct the work as Acting [CFO].” + + +E. Lee Admits to L&L’s Audit Committee Chair That Purported Acting CFO Did Not +Serve as Acting CFO + +26. On May 21, 2009, the purported Acting CFO emailed Shirley Kiang, who was +then the Chair of L&L’s Audit Committee and member of its Board of Directors. In the email, +the purported Acting CFO told Kiang that she had a “serious and urgent” matter related to +L&L’s public information made without her knowledge and asked Kiang to investigate. + +27. Kiang subsequently contacted Lee and asked whether the purported Acting CFO +had actually served as the company’s Acting CFO. Lee initially informed Kiang that the +purported Acting CFO had served as the company’s Acting CFO and was making false +allegations in an attempt to obtain money from the company. + +28. Kiang asked Lee for evidence to support his assertion that the purported Acting +CFO had served as the company’s Acting CFO. In response, Lee provided Kiang with a letter that +appeared to be addressed to the purported Acting CFO, dated May 28, 2008, and purported to be +signed by Lee’s brother as the company’s CEO. The letter asked the purported Acting CFO to +confirm that she had agreed to accept the Acting CFO position and stated that if the company did +not receive a response to the letter within ten days, the company would treat her lack of response +as her acceptance of the position. + +29. This letter, however, was not created on May 28, 2008; was not signed by Lee’s +brother; and was never sent to the purported Acting CFO. Rather, this letter was created on May 26, +2009 – almost one year after the purported Acting CFO had rejected the Acting CFO position – and +was stored in Lee’s L&L computer network folder. + +30. On June 4, 2009 – after receiving no response from Kiang – the purported +Acting CFO emailed Kiang again. The purported Acting CFO again asked Kiang to investigate +her allegations, specifically that she was misrepresented in L&L’s filings as the company’s +Acting CFO, and included her July 14, 2008 email to Dickson Lee rejecting the Acting CFO +position. + +31. After receiving the June 4 email, Kiang again asked Dickson Lee for an +explanation. Lee then admitted to Kiang that the purported Acting CFO had not actually served as +the company’s Acting CFO and that he had used the purported Acting CFO’s name on L&L’s +public filings without the purported Acting CFO’s permission. Lee directed Kiang to not disclose +this information to anyone, including the company’s Board of Directors or the public, and told her +that if this information became publicly known, L&L’s stock price would drop. + +32. After this, Lee continued to falsely represent to the company’s Board of Directors +that the purported Acting CFO had served as the company’s Acting CFO. + +8 + + + +33. During the nearly one-year period in which the purported Acting CFO was +falsely represented as the company’s Acting CFO, L&L raised approximately $750,000 from +investors using stock purchase agreements in which L&L expressly attested to the accuracy of +its public filings and private placement documents that referred the investor to publicly +available additional information about the company. + +F. L&L Makes Materially False and Misleading Statements on NASDAQ Application to +Gain NASDAQ Listing + +34. In approximately September 2009, L&L completed an application to become listed +on the NASDAQ. As part of the application process, NASDAQ requested a variety of +information, including confirmation that the company had made all of the required Sarbanes- +Oxley certifications. + +35. L&L, in a communication from Lee, confirmed that the company had made all of +the required Sarbanes-Oxley certifications. L&L misled NASDAQ in this communication because +it did not inform NASDAQ that its required CFO Sarbanes-Oxley certifications for its 2008 Form +10-K or its three 2009 Form 10-Qs were false. As a result, L&L gained listing on NASDAQ in +February 2010 + +VIOLATIONS + +36. By engaging in the conduct described above, Lee willfully violated Section 10(b) +of the Exchange Act and Rule 10b-5 thereunder, which prohibits fraudulent conduct in +connection with the purchase or sale of securities. Also, by engaging in the conduct described +above, Lee willfully aided and abetted and caused violations of Section 10(b) of the Exchange +Act and Rule 10b-5(b) thereunder. + +37. By engaging in the conduct described above, Lee willfully violated Section 17(a) +of the Securities Act, which prohibits fraudulent conduct in the offer or sale of securities. + +38. By engaging in the conduct described above, Lee willfully aided and abetted and +caused violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder, +which require issuers of registered securities to file factually accurate annual and quarterly +reports. Also, Lee willfully aided and abetted and caused violations of Rule 12b-20 of the +Exchange Act, which requires the addition to such reports of further material information +necessary to make the required report statements not misleading. + +39. By engaging in the conduct described above, Lee willfully violated, and willfully +aided and abetted and caused violations of Rule 13a-14 of the Exchange Act, which requires, +among other things, that principal executive and financial officers certify that based on their +knowledge, the issuer’s financial statements are accurate, and that, based on the principal +executive and financial officer’s most recent evaluation of the company’s internal control over +financial reporting, they have disclosed all fraud, whether or not material, involving management +to the company’s auditors and Audit Committee. + + +9 + + + +40. By engaging in the conduct described above, Lee willfully aided and abetted and +caused violations of Rule 13a-15 of the Exchange Act, which requires each issuer’s management, +with the participation of the company’s principal executive officer and principal accounting +officer, or persons performing similar functions, to evaluate the effectiveness of the company’s +disclosure controls and procedures on a quarterly basis. + +41. By engaging in the conduct described above, Lee willfully aided and abetted and +caused violations of Section 302 of Regulation S-T of the Exchange Act, which requires that (i) +a signatory to an electronic filing actually sign the signature page before or at the time of the +electronic filing; (ii) the filer retain the original executed document for five years; and (iii) that +the filer provide the Commission staff with a copy of the document upon request. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the +sanctions agreed to in Respondent Lee’s Offer. + +Accordingly, pursuant to Section 8A of the Securities Act, Sections 4C and 21C of +the Exchange Act, and Rule 102(e) of the Commission’s Rules of Practice, it is hereby +ORDERED that: + +A. Respondent Lee 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 13(a) of the Exchange Act and Rules 12b-20, +13a-1 and 13a-13 thereunder, Rules 13a-14 and 13a-15 of the Exchange Act, and +Section 302 of Regulation S-T of the Exchange Act. + +B. Respondent Lee be, and hereby is: + +a. barred 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. + +b. denied the privilege of appearing or practicing before the Commission pursuant +to Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + +By the Commission. + + + + +Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3660.txt b/raw/aaer/2015/AAER-3660.txt new file mode 100644 index 0000000000000000000000000000000000000000..bafe5ee2236d0846450c2b9c7509b59750c758b4 --- /dev/null +++ b/raw/aaer/2015/AAER-3660.txt @@ -0,0 +1,376 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75086 / June 1, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3660 / June 1, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16569 + + +In the Matter of + +FIRST BANCORP, ANNA +HOLLERS, AND TERESA +NIXON + +Respondents. + + + + +CORRECTED ORDER INSTITUTING +CEASE-AND-DESIST PROCEEDINGS +PURSUANT TO SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission deems it appropriate that cease-and-desist +proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act +of 1934 against First Bancorp, Anna Hollers and Teresa Nixon (“Respondents”). + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over them and the subject matter of +these proceedings, which are admitted, and except as provided herein in Section V, Respondents +consent to the entry of this Order, as set forth below. + + + +2 + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds1: + +Summary + + Over a three year period, First Bancorp failed to disclose related party transactions involving +family members of the company’s former Chief Operating Officer Anna Hollers, former Chief Loan +Officer Teresa Nixon, and a member of its Board of Directors – specifically, Ms. Hollers’ husband, +Ms. Nixon’s daughter and son-in-law, and the Board member’s brother. By failing to make these +disclosures in its Forms 10-K for fiscal years 2009, 2010 and 2011, First Bancorp violated SEC +disclosure rules requiring public companies to disclose such relationships if the amounts involved +exceeded $120,000. First Bancorp also failed to have controls and procedures designed to ensure +the company disclosed related party transactions as required. + + Hollers caused certain of First Bancorp’s violations. As COO, she oversaw the process for +identifying related party transactions. First Bancorp used a Director and Officer Questionnaire +(“D&O Questionnaire”) as part of its related party disclosure process that required directors and +executive officers to report transactions with family members in which the amounts involved +exceeded $120,000 during the prior fiscal year. Hollers was responsible for reviewing the D&O +Questionnaires and informing the company’s Chief Financial Officer of issues that may require +disclosure. Hollers was also a member of First Bancorp’s Disclosure Committee. Despite her +disclosure responsibilities, Hollers did not adequately familiarize herself with the disclosure rules +regarding related party transactions sufficient to ensure that First Bancorp met its disclosure +obligations. Moreover, though First Bancorp had paid her husband’s law firm over $200,000 in +fiscal year 2009 and over $400,000 in fiscal year 2010, Hollers failed to disclose these facts, either +in her D&O Questionnaire or otherwise, in connection with the company’s preparation of its Forms +10-K for those periods. + + Nixon, who was also a member of First Bancorp’s Disclosure Committee, caused certain of +First Bancorp’s reporting violations. Though she knew about company transactions involving her +daughter and son-in-law, she failed to report these on her D&O Questionnaires or otherwise +disclose them in connection with the company’s preparation of its periodic filings. + +Respondents + +1. First Bancorp, a bank holding company, is incorporated in North Carolina and +trades on the Nasdaq Global Select Market. First Bancorp owns and operates First Bank, a state- +chartered bank with its main office in Southern Pines, North Carolina. + + +1 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +3 +2. Anna Hollers, age 64, resides in Candor, North Carolina. From 2005 until she +retired from First Bancorp in April 2014, Hollers was the Chief Operating Officer of First +Bancorp and First Bank. Hollers served as Corporate Secretary of both entities from 1987 until +she retired in 2014. During the relevant period, Hollers was a member of First Bancorp’s +Disclosure Committee. + +3. Teresa Nixon, age 57, resides in Sanford, North Carolina. From 1997 until she +left First Bancorp in March 2012, Nixon was First Bancorp’s Chief Loan Officer. Among other +responsibilities, Nixon oversaw the process for the sale, management, and disposition of +foreclosed properties acquired from the FDIC through First Bancorp’s acquisition of failed +banks’ assets. During the relevant time period, Nixon was a member of First Bancorp’s +Disclosure Committee. + +FACTS + +First Bancorp’s Related Party Transaction Disclosure Process + +4. Item 404(a) of Regulation S-K requires issuers to describe in their Forms 10-K any +transaction exceeding $120,000 in which the registrant was or is to be a participant and in which +any related person had or will have a direct or indirect material interest. The instructions to Item +404(a) define related person to include any director or executive officer of a registrant and any +immediate family members of a director or executive officer, such as spouses, children, certain in- +laws, and siblings. + +5. Similarly, Accounting Standards Codification (“ASC”) Topic 850, Related Party +Disclosures, requires companies to include in their financial statements disclosures of material +related party transactions. ASC Topic 850-10-05-3 provides that related party transactions include +transactions between an entity and its management or members of their immediate families. + +6. During the relevant period, First Bancorp directors and executive officers reported +related party transactions either by disclosing the transactions to the company’s Board of +Directors or through the company’s annual D&O Questionnaire. Among other things, the D&O +Questionnaire asked First Bancorp directors and executive officers to: + +Describe any transaction, or series of transactions … or any currently proposed +transaction or series of similar transactions, to which the Company … was, or is, +to be a participant in which the amount involved exceeds $120,000 and in which +you or any member of your Immediate Family had, or will have, a direct or +indirect interest.2 + + +2 Emphasis in original. The D&O Questionnaire also had an appendix of definitions that defined “Immediate +Family” to include “your spouse, parents, stepparents, children, stepchildren, siblings, mothers and fathers -in-law, +sons and daughters-in-law, brothers and sisters-in-law and any other person sharing your household (other tenants or +employees).” + + +4 +7. Hollers oversaw the process for identifying related party transactions. She +distributed the D&O Questionnaires to the company’s directors and executive officers. After the +directors and executive officers completed the D&O Questionnaires, they sent them to Hollers, +who was responsible for reviewing them to assess whether there were any notable conflicts, +issues or transactions. If so, she was responsible for reporting them to First Bancorp’s CFO. +First Bancorp’s CFO would then prepare any required disclosures of related party transactions +that Hollers had identified for the company’s filings with the Commission. + +8. Although First Bancorp relied on Hollers to identify related party transactions, +Hollers did not adequately familiarize herself with the disclosure rules regarding related party +transactions sufficient to ensure that First Bancorp met its disclosure obligations in its filings with +the Securities and Exchange Commission. No one other than Hollers at First Bancorp reviewed +the D&O Questionnaires to determine whether the company needed to make related party +disclosures. First Bancorp’s CFO relied on Hollers to inform him of related party transactions +that may have required disclosure so that he could ensure the company complied with its +disclosure obligations. + +First Bancorp Failed to Report Six Related Party Transactions in +its Forms 10-K for Fiscal Years 2009, 2010 and 2011 + +A. First Bancorp Failed to Disclose Payments to the Law Firm of Hollers’ Husband + +9. Hollers’ husband was a partner at a law firm that had performed legal work for +First Bancorp for over thirty years. First Bancorp typically paid the firm less than $15,000 in +fees annually for this work. Each year, First Bancorp’s Board approved the company’s hiring of +the law firm. The Board knew Hollers was married to a partner in the firm. + +10. In 2008, First Bancorp began to pay the law firm larger amounts for an increased +amount of legal work and trustee work related to foreclosure proceedings. These amounts +included reimbursed costs related to the trustee work. In fiscal year 2009, First Bancorp paid the +law firm a total of $214,754, consisting of $109,745 in fees and $105,009 in reimbursed costs. +In fiscal year 2010, First Bancorp paid the firm $407,087, consisting of $195,030 in fees and +$212,057 in reimbursed costs. + +11. Though Hollers disclosed on her D&O Questionnaires for fiscal years 2009 and +2010 that her husband’s law firm did work for First Bancorp, she did not disclose the amount it +had received in fees and reimbursed costs, nor did she otherwise inform First Bancorp’s Board or +CFO that the combined amounts exceeded $120,000. No one other than Hollers reviewed her +D&O Questionnaires for the years in question. As a consequence, First Bancorp did not disclose +the related party transactions involving Hollers in its Forms 10-K for fiscal years 2009 and 2010 +as required by Regulation S-K Item 404(a). + + + + + +5 + + +B. First Bancorp’s Failures to Disclose Related Party Transactions Involving Nixon + +First Bancorp Failed to Disclose Payments to +Nixon’s Daughter and Son-in-Law for Landscaping Services + +12. During fiscal year 2010, First Bancorp paid Southland Landscaping, a company +owned and operated by Nixon’s daughter and son-in-law, $225,970 for landscaping services on +First Bancorp’s foreclosed properties. Nixon, who knew that her daughter and son-in-law owned +Southland and that it was performing services for First Bancorp, did not disclose this relationship +in her D&O Questionnaire or otherwise. Accordingly, First Bancorp did not disclose this related +party transaction in its Form 10-K for fiscal year 2010 as required by Regulation S-K Item +404(a). + +First Bancorp Failed to Disclose a Home +Sale Agreement with Nixon’s Daughter and Son-in-Law + +13. In its fiscal year 2010 Form 10-K, First Bancorp failed to disclose that it had +agreed to sell property to Nixon’s daughter and son-in-law. In November 2010, Nixon approved +a sales agreement between First Bancorp and her daughter and son-in-law whereby the company +contracted to sell them a foreclosed property for $250,000. Nixon did not disclose this +agreement in her D&O Questionnaire for fiscal year 2010 or otherwise. Accordingly, First +Bancorp did not disclose this related party transaction in its Form 10-K for that year as required +by Regulation S-K Item 404(a). + +First Bancorp Failed to Disclose a +Loan to Nixon’s Daughter and Son-in-Law + +14. To finance the home purchase described above, First Bancorp loaned $241,000 to +Nixon’s daughter and son-in-law in May 2011. This loan was required to be separately disclosed +as a related-party transaction because it was not made on the same terms as those available to the +general public. The loan documents reflected an inaccurate loan-to-value percentage, which, +under First Bancorp’s policy at the time, should have been based on the property’s sale price. +The loan underwriting documentation instead used the property’s appraisal price. In addition, +the loan underwriting documentation failed to disclose the family’s prior bankruptcy. The First +Bank Regional Executive who approved the loan would not have done so if the loan documents +had been factually correct. Nixon did not disclose this loan in her D&O Questionnaire for fiscal +year 2011 or otherwise. Although other First Bancorp management learned of the loan to +Nixon’s daughter and son-in-law as part of its own internal investigation prior to filing its Proxy +Statement for fiscal year 2011, the company treated the loan as one in the ordinary course of +business and thus failed to adequately disclose this related party transaction in its Form 10-K for +fiscal year 2011 as required by Regulation S-K Item 404(a). + + + +6 + + +C. First Bancorp Failed to Disclose Payments Made to the Brother of One of its Directors + +15. First Bancorp also failed to disclose in its Form 10-K for fiscal year 2010 that it +had paid a brother of one of First Bancorp’s Directors (the “Director”) over $120,000. + +16. In September 2009, First Bancorp hired the Director’s brother as the real estate +agent and property manager for a portfolio of foreclosed properties that First Bancorp obtained +as a result of its FDIC acquisition of Cooperative Bank’s assets in June 2009. In fiscal year +2010, First Bancorp paid the Director’s brother $317,686 in commissions for property sales +services and reimbursed him $389,000 for out-of-pocket expenses for property management +services. At 4.7% of First Bancorp’s net income in fiscal year 2010, these combined payments +to the Director’s brother, which were legitimate business expenses, were material. The +payments made to the Director’s brother in fiscal year 2010 were required to be disclosed in First +Bancorp’s Form 10-K because of the sibling relationship between the two individuals. + +17. Though he did not know the amounts involved, the Director disclosed that his +brother had a relationship with the company in his D&O Questionnaire for fiscal year 2010, and +First Bancorp’s Board discussed that the Director’s brother was performing work for the +company during a February 2011 Board meeting. However, First Bancorp did not determine the +amounts it paid the Director’s brother before it filed its Form 10-K for fiscal year 2010. First +Bancorp did not disclose this related party transaction in this filing as required by Regulation S- +K Item 404(a) and ASC 850. + +Violations + +18. As a result of the conduct described above, First Bancorp violated and Nixon and +Hollers caused First Bancorp’s violations of Exchange Act Section 13(a) and Rule 13a-1 +thereunder, which require that issuers of securities registered pursuant to Exchange Act Section +12 file with the Commission, among other things, current and accurate information in annual +reports. + +19. As a result of the conduct described above, First Bancorp violated and Hollers +caused First Bancorp’s violation of Exchange Act Rule 13a-15(a), which provides that every +issuer of a security registered pursuant to Exchange Act Section 12 must maintain disclosure +controls and procedures.3 + +3 Rule 13a-15(e) defines “disclosure controls and procedures” as “controls and other procedures of an issuer +that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or +submits under the [Exchange] Act … is recorded, processed, summarized and reported, within the time periods +specified in the Commission’s rules and forms. Disclosure controls and procedures include, without l imitation, +controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that +it files or submits under the [Exchange] Act is accumulated and communicated to the issuer’s management, +including its principal executive and principal financial officers, or persons performing similar functions, as +appropriate to allow timely decisions regarding required disclosures.” + +7 + +20. As a result of the conduct described above, First Bancorp violated Exchange Act +Section 13(b)(2)(B), which requires all reporting companies to devise and maintain a system of +internal accounting controls sufficient to provide reasonable assurances that transactions are +recorded as necessary to permit preparation of financial statements in accordance with GAAP. + +First Bancorp’s Remedial Efforts +In determining to accept First Bancorp’s Offer, the Commission considered remedial acts +promptly undertaken by First Bancorp 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, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + +A. First Bancorp cease and desist from committing or causing any violations +and any future violations of Sections 13(a) and 13(b)(2)(B) of the Exchange Act and Rules 13a-1 +and 13a-15 thereunder. + +B. Anna Hollers 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-15 +thereunder. + +C. Teresa Nixon 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. + +D. Within seven days of entry of this Order, First Bancorp shall pay a civil +money penalty of $275,000; Hollers shall pay a civil monetary penalty of $15,000; and Nixon shall +pay a civil monetary penalty of $20,000 to the Securities and Exchange Commission for transfer to +the general fund of the United States Treasury in accordance with Exchange Act Section 21F(g)(3). +If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §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: + +8 + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying the +Respondent in these proceedings, and the file number of these proceedings; a copy of the cover +letter and check or money order must be sent to Stephen L. Cohen, Associate Director, Division +of Enforcement, Securities and Exchange Commission, 100 F St., NE, 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, Respondents agree that in any Related Investor +Action, they shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of +any award of compensatory damages by the amount of any part of Respondents’ payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondents agree that they shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of +the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against any of the Respondents by or on behalf of one or +more investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + +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 violations by Respondents of the federal securities laws or any regulation or order issued +under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3664.pdf b/raw/aaer/2015/AAER-3664.pdf new file mode 100644 index 0000000000000000000000000000000000000000..00605747c72a3deaf546c5e5441e66c4b841a7ce Binary files /dev/null and b/raw/aaer/2015/AAER-3664.pdf differ diff --git a/raw/aaer/2015/AAER-3664.txt b/raw/aaer/2015/AAER-3664.txt new file mode 100644 index 0000000000000000000000000000000000000000..913e6d8a855d670bd374643a168485c832a26d08 --- /dev/null +++ b/raw/aaer/2015/AAER-3664.txt @@ -0,0 +1,93 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 4120 / June 17, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3664 / June 17, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16600 + + +In the Matter of + +GEORGE JOSEPH +PALATHINKAL, CPA + +Respondent. + +ORDER INSTITUTING +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 203(f) OF THE +INVESTMENT ADVISERS ACT OF 1940, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted pursuant to +Section 203(f) of the Investment Advisers Act of 1940 (“Advisers Act”) against George Joseph +Palathinkal (“Respondent”). +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over him and the subject matter of these proceedings , and the findings contained in +Sections III.2 below, and consents to the entry of this Order Instituting Administrative Proceedings +Pursuant to Section 203(f) of the Investment Advisers Act of 1940, Making Findings, and Imposing +Remedial Sanctions (“Order”), as set forth below. + + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that + +1. Palathinkal, 53 years old, is a citizen of Singapore. Palathinkal was, from March 1, +2013 through approximately June 1, 2014, a General Partner, Chief Financial Officer, and Chief +Compliance Officer of Aphelion Fund Management, LLC (“Aphelion”), an unregistered investment +adviser. + +2. On March 13, 2015, Palathinkal pled guilty to one count of perjury in violation of +Title 18 United States Code, Section 1621 before the United States District Court for the District of +Columbia, in United States v. George Palathinkal, Crim. Information No. 1:15-cr-00024-RMC. + + 3. The criminal information to which Palathinkal pled guilty alleged that in March +2014, he took an oath that he would testify truthfully in investigative testimony before the +Commission, and that during such testimony, he gave false testimony that earlier versions or drafts +of a certain promissory note between Palathinkal and Aphelion existed, when in fact there were no +earlier versions or drafts. In May 2014, the Commission filed a lawsuit against Palathinkal and +others. In July and August 2014, Palathinkal voluntarily met with Commission attorneys and +acknowledged the false testimony he had previously provided. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Palathinkal’s Offer. + + Accordingly, it is hereby ORDERED pursuant to Section 203(f) of the Advisers Act, that +Respondent Palathinkal be, and hereby is barred from association with any broker, dealer, +investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally +recognized statistical rating organization. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3665.txt b/raw/aaer/2015/AAER-3665.txt new file mode 100644 index 0000000000000000000000000000000000000000..1a98da94d9b1c979ef2d517b4f534727dde015ba --- /dev/null +++ b/raw/aaer/2015/AAER-3665.txt @@ -0,0 +1,682 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75298 / June 25, 2015 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 4130 / June 25, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3665 / June 25, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16652 + + + +In the Matter of + +MICHAEL S. WILSON, CPA +and COTTERMAN-WILSON +CPAs, INC., + +Respondents. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS +PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF 1934, +SECTION 203(k) OF THE INVESTMENT +ADVISERS ACT OF 1940, 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 S. +Wilson, CPA (“Wilson”) and Cotterman-Wilson CPAs, Inc. (the “Firm”) (collectively, + +2 + +“Respondents”) pursuant to Section 4C1 of the Securities Exchange Act of 1934 (“Exchange Act”), +Section 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”), and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice.2 + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which 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 4C of the Securities Exchange Act of 1934, Section 203(k) of the Investment +Advisers Act of 1940, and Rule 102(e) of the Commission’s Rules of Practice, Making Findings, +and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +SUMMARY + +1. This proceeding arises out of Respondents’ failure to complete surprise +examinations pursuant to Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder (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 . . . have engaged in . . . 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 . . . 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 + +“Custody Rule”) in 2009, 2010, and 2011.4 Professional Investment Management, Inc. (“PIM”), a +registered investment adviser, had custody of client assets held in three omnibus accounts at all +relevant times and was required by the Custody Rule to engage an independent public accountant +to conduct annual surprise examinations to verify those assets. PIM engaged the Firm to perform +these required annual surprise examinations from 1999 to 2011. Respondents completed the +surprise examinations on an annual basis from 1999 to 2008. However, Respondents failed to +complete the surprise examinations (i.e., conduct fieldwork, prepare and issue a surprise +examination report, and file Form ADV-E with the Commission) or withdraw from the surprise +examinations in 2009, 2010, and 2011, and, thus, caused PIM to violate the Prior Custody Rule or +the Custody Rule, as applicable, for each of those years. In addition, Wilson 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, in connection with the surprise examinations from 2009 +through 2011. + +RESPONDENTS + +2. Michael S. Wilson, age 61, has been a certified public accountant (“CPA”) +licensed by the Ohio Board of Accountancy since June 9, 1980. Wilson is a 50% shareholder of +the Firm, and, at all times relevant to this proceeding, was the engagement partner for the services +that the Firm performed for PIM, which included, as relevant to this proceeding, annual surprise +examinations required by the Prior Custody Rule and the Custody Rule. Wilson has never been +subjected to any disciplinary or regulatory proceedings. + +3. Cotterman-Wilson CPAs, Inc. is a Columbus, Ohio-based accounting firm +established in 1997 that has five full-time employees: two CPAs who each are 50% shareholders of +the Firm, a CPA who is not a shareholder of the Firm, and two administrative personnel. The Firm +primarily provides accounting and tax services to individuals and private entities. The Firm has +never been registered with the Public Company Accounting Oversight Board, and has never been +subjected to any disciplinary or regulatory proceedings. + +OTHER RELEVANT ENTITIES + +4. Professional Investment Management, Inc. is an Ohio corporation with its +principal place of business in Columbus, Ohio. At all times relevant to this proceeding, PIM was + +4 On December 30, 2009, the Commission adopted amendments to the Custody Rule, which became +effective March 12, 2010. See Custody of Funds or Securities of Clients by Investment Advisers, Release +No. IA-2968 (Dec. 30, 2009). Respondents’ conduct in 2009 was governed by the Custody Rule in effect +before the December 30, 2009 amendments (the “Prior Custody Rule”). See Custody of Funds or +Securities of Clients by Investment Advisers, Release No. IA-2176 (Sept. 25, 2003). The significant +differences between the Custody Rule and the Prior Custody Rule, as relevant to this specific proceeding, +are described below in Paragraph 11. + + +4 + +owned by Douglas E. Cowgill (“Cowgill”), Owner A, and Owner B. PIM was registered with the +Commission as an investment adviser from 1978 through September 30, 2013, and from June 24, +2014 to today. PIM provides third-party administration services and investment advisory services +to approximately fifteen retirement plan clients (which consist of approximately 325 participants +who, in turn, own approximately 425 individual retirement accounts that PIM advises), and also +provides investment advisory services to approximately twenty-five individual clients for their own +(non-retirement plan) accounts. PIM has approximately $120 million of regulatory assets under +management, and has custody of client assets through three omnibus accounts. PIM is the only +SEC registrant that the Firm or Wilson has ever had as a client. + +FACTS + +5. The Commission filed suit against Cowgill and PIM in the United States District +Court for the Southern District of Ohio on April 29, 2014 alleging that Cowgill and PIM violated +the antifraud provisions of the U.S. securities laws, and that PIM violated, and Cowgill aided and +abetted and caused PIM’s violations of, the registration provisions of the Advisers Act, the Prior +Custody Rule, and the Custody Rule. The Commission filed an Amended Complaint on August 7, +2014 that included additional counts against Cowgill and PIM, and the Court entered a Judgment +by Consent against Cowgill on August 21, 2014 as to all counts asserted in the Amended +Complaint. The Commission alleged that PIM and Cowgill hid a shortfall of more than $700,000 +in client assets by sending false account statements to clients. + +6. At all relevant times, PIM maintained client funds in an omnibus checking account +held on an agency basis at Custodian 1, and client securities in two omnibus accounts held on an +agency basis at Custodian 2 and Custodian 3. All client funds were initially deposited into the +omnibus checking account held at Custodian 1, and then were transferred for investment to various +firms, including Custodians 2 and 3. + +7. PIM maintained records for the omnibus accounts held at Custodians 1, 2, and 3 on +a client level (i.e., PIM kept track of the assets in these accounts on a client-by-client basis), and +sent directly to its clients periodic (typically quarterly) account statements that it generated based +upon its own internal records. + +8. However, neither Custodian 1, Custodian 2, nor Custodian 3 maintained records for +the omnibus accounts on a client level (indeed, none of these custodians was privy to PIM’s client +information), and neither Custodian 1, Custodian 2, nor Custodian 3 sent quarterly account +statements to any of PIM’s clients. + +9. The Custody Rule requires, and the Prior Custody Rule required, registered +investment advisers with custody of client funds or securities, like PIM, to implement certain +controls designed to protect those client assets from loss, misappropriation, misuse, or the adviser’s +insolvency. + + +5 + +10. Specifically, the Prior Custody Rule required registered investment advisers to +either: (i) have a reasonable basis for believing that a “qualified custodian,” such as a bank or +broker-dealer, was sending quarterly account statements to each of the clients for which they +maintained funds or securities; or (ii) send the quarterly account statements themselves and obtain +an annual surprise examination by an independent public accountant to verify all of the client funds +and securities. + +11. The Custody Rule amended the Prior Custody Rule by, among other things, +requiring all registered investment advisers with custody of client funds or securities to undergo an +annual surprise examination by an independent public accountant to verify all of the client funds +and securities, regardless of whether such advisers had a reasonable basis for believing that a +“qualified custodian,” such as a bank or broker-dealer, was sending quarterly account statements to +each of the clients for which they maintained funds or securities.5 + +12. PIM thus was obligated in 2009 under the Prior Custody Rule to have the client +assets held in omnibus accounts at Custodians 1, 2, and 3 verified through surprise examination +by an independent public accountant because none of these custodians sent quarterly account +statements directly to PIM’s clients (and PIM did not have a reasonable basis for believing that they +did so), and also was obligated in 2010 and 2011 under the Custody Rule to have the client assets +held in omnibus accounts at Custodians 1, 2, and 3 verified through surprise examination by an +independent public accountant because PIM had custody of those assets. + +PIM Engaged the Firm to Perform the +2009, 2010, and 2011 Surprise Examinations + +13. PIM engaged the Firm to complete PIM’s surprise examinations for the periods of +time ending April 30, 2009 (the “2009 Exam”), April 30, 2010 (the “2010 Exam”), and May 31, +2011 (the “2011 Exam”). + + +5 As reflected in Rule 206(4)-2(a)(4), the Custody Rule also amended the Prior Custody Rule to require +all surprise examinations be conducted pursuant to a written agreement between the adviser and the +accountant that explicitly requires the accountant to: (i) file Form ADV-E with the Commission within +120 days of the time chosen by the accountant stating that it has examined the client funds and securities +and describing the nature and extent of the examination; (ii) notify the Commission within one business +day of its finding any material discrepancies; and (iii) file Form ADV-E within four business days of +resignation or dismissal from, or other termination of the engagement, along with a statement that +includes, among other things, the date of such resignation, dismissal, removal, or other termination, and +an explanation of any problems that contributed to such resignation, dismissal, removal, or other +termination. The Custody Rule thus established a new contractual reporting obligation for accountants +regarding their resignation or dismissal from, or other termination of the engagement, and established a +120-day deadline by which surprise examinations must be completed. + +6 + +14. Owner A, on behalf of PIM, engaged the Firm on or about May 28, 2009 to +perform the 2009 Exam by signing a three-page letter in which the Firm represented, among other +things, that: + +We will examine management’s assertion, included in the +Management Statement Regarding Compliance with Certain +Provisions of the Investment Advisers Act of 1940 (the Act), that +Professional Investment Management, Inc. (the Company) +complied with certain provisions of rules 204-2(b) and 206(4)-2 of +the Investment Advisers Act of 1940 as of April 30, 2009 and +during the period June 1, 2008 to April 30, 2009. The Company is +responsible for compliance with the requirements of the [A]ct. +Our responsibility is to express an opinion on management’s +assertion about the Company’s compliance based on our +examination. + +Our examination will be conducted in accordance with attestation +standards established by the American Institute of Certified Public +Accountants [(“AICPA”)]. . . . .6 + +15. PIM also engaged the Firm to perform the 2010 and 2011 Exams. + +16. Wilson was the sole CPA on each of the 2009, 2010, and 2011 Exams, and was +solely responsible for completing the planning and fieldwork, supervising the two non-CPAs +who performed largely ministerial work on these exams, issuing a report or choosing to withdraw +from the engagement, and ensuring that Form ADV-E was filed with the Commission for each of +the years for which the Firm was engaged by PIM to perform a surprise examination. + +Respondents’ 2009 Exam Report Lacks Reasonable Basis + +17. Respondents performed field work in connection with the 2009 Exam. Indeed, the +Firm sent invoices to PIM reflecting the work it had performed, and PIM paid each of these +invoices in full. + + +6 The AICPA attestation standards applicable to surprise examinations performed pursuant to the Prior +Custody Rule and the Custody Rule are set forth in AT Section 101, “Attest Engagements” and AT +Section 601, “Compliance Attestation.” See, e.g., Commission Guidance Regarding Independent Public +Accountant Engagements Performed Pursuant to Rule 206(4)-2 Under the Investment Advisers Act of +1940, Release No. IA-2969 (Dec. 30, 2009). This December 30, 2009 interpretative guidance had not +been published at the time that PIM engaged the Firm to perform the 2009 Exam, but was published prior +to both the date that the Firm issued its report for the 2009 Exam and the dates that PIM engaged the Firm +to perform the 2010 and 2011 Exams. + +7 + +18. Respondents signed a final report for the 2009 Exam on or about July 27, 2010, +which provides the following opinion: + +We have examined management’s assertion, included in the +accompanying Management Statement Regarding Compliance with +Certain Provisions of the Investment Advisers Act of 1940, that [PIM] +complied with certain provisions of rules 204-2(b) and 206(4)-2 of the +Investment Advisers Act of 1940 as of and during the period ended April +30, 2009. + +* * * + +In our opinion, management’s assertion that [PIM] complied with the +requirement of subparagraphs (1) of rule 206(4)-2(a) under the Investment +Advisers Act of 1940 as of April 30, 2009, and has complied with rule +204-2(b) and the requirements of subparagraphs (2) and (3) of rule 206(4)- +2(a) under the Investment Advisers Act of 1940 as of and during the +period from June 1, 2008 through April 30, 2009, is fairly stated, in all +material respects. + +19. Respondents’ opinion lacks reasonable basis for two reasons: + +a. First, AT Section 601.11 requires an accountant to obtain a written assertion as +part of engagement performance. Respondents, however, did not obtain a +management assertion upon which their opinion is purportedly based. Wilson +knew that AT Section 101 requires a conclusion that a scope limitation exists +if the accountant fails to obtain a written assertion, 7and necessitates a +decision to provide a qualified opinion, to disclaim an opinion, or to +withdraw.8 + +b. Second, Respondents identified material variances, as of April 30, 2009, in the +records of certain of PIM’s client securities-holding accounts. Wilson sent a +fax to Cowgill on May 12, 2010 that identified these variances and directed +Cowgill to call Wilson to discuss, but Respondents’ workpapers do not show +that Respondents obtained evidence to explain these variances or otherwise +reconcile these variances. Respondents thus lacked sufficient evidence to +provide a reasonable basis for issuing a report containing an opinion that + +7 See AT Section 101.58 (“When the practitioner’s client is the responsible party, a failure to obtain a +written assertion should result in the practitioner concluding that a scope limitation exists.”). + +8 See AT Section 101.73-74. + +8 + +management’s assertion that PIM complied with the Prior Custody Rule was +fairly stated, in all material respects. See AT Section 101.51. + +Respondents Failed To File Form ADV-E With The Commission +In Connection With The 2009 Exam + +20. Respondents failed to file Form ADV-E with the Commission in connection with +the 2009 Exam. The Prior Custody Rule obligated the adviser to require the accountant to file with +the Commission Form ADV-E within 30 days of completing the surprise examination in order for +the adviser to comply with the Prior Custody Rule. Respondents never filed Form ADV-E in +connection with the 2009 Exam. + +Respondents Failed To Complete The 2010 and 2011 Exams, +Did Not Timely Withdraw From These Engagements, and +Never Filed Form ADV-E With The Commission In Connection With These Exams + +21. Respondents were aware at the time that PIM engaged them to perform the 2010 +Exam that the Prior Custody Rule had been amended by the Custody Rule, and understood that +the Custody Rule obligated the adviser to require the accountant to file Form ADV-E with the +Commission within 120 days from the date that the accountant had begun the surprise +examination in order for the adviser to comply with the Custody Rule. + +22. Respondents had never completed a surprise examination for PIM in less than 120 +days. For instance, the surprise examination reports prepared in 2005, 2006, 2007, 2008, and +2009 were prepared 391, 414, 213, 247, and 453 days after the commencement of each +respective surprise examination. + +23. Nevertheless, Respondents accepted the engagement for the 2010 Exam. + +24. By all accounts, Respondents performed field work in connection with the 2010 +Exam. PIM did not cooperate with Respondents’ requests for information in connection with the +2010 Exam, but Respondents did not terminate the engagement. Instead, Respondents sent +periodic invoices to PIM reflecting the work they had performed. PIM paid each of these +invoices in full. + +25. Sometime in 2011 Wilson informed at least one PIM owner that Respondents +would be unable to complete the 2010 Exam within 120 days from the date that they had begun +the 2010 Exam. In response, a PIM owner proposed that Respondents begin the 2011 Exam, +complete the fieldwork that was necessary to complete both the 2010 and 2011 Exams, and then +simultaneously file Form ADV-E with the Commission for the 2010 and 2011 Exams. + + +9 + +26. Respondents agreed to this proposal, accepted the engagement for the 2011 Exam, +and began simultaneously performing field work in connection with both the 2010 and 2011 +Exams. + +27. PIM did not cooperate with Respondents’ requests for information in connection +with the 2010 and 2011 Exams, but Respondents did not terminate the engagement for either of +these examinations. Instead, the Firm sent invoices to PIM reflecting the work it had performed +in connection with these examinations, sending the last of such invoices to PIM on or about +October 30, 2011. PIM paid each of these invoices in full. + +28. Respondents never issued a report for either the 2010 or 2011 Exam, did not +timely withdraw from the engagements to conduct these examinations and notify PIM of their +decision to withdraw, and never filed Form ADV-E with the Commission in connection with +either of these examinations. See AT Section 101.64 (“The practitioner who accepts an attest +engagement should issue a report on the subject matter or the assertion or withdraw from the attest +engagement.”); AT Section 101.39 (requiring accountant to exercise “due professional care” in the +planning and performance of the engagement and the preparation of the report); AT Section 601.38 +(requiring accountant to exercise “due care” in planning and performing an examination +engagement). + +29. It was not until January 11, 2013, more than 15 months after submitting their last +invoice to PIM in connection with the 2010 and 2011 Exams, that Respondents notified PIM that +they did not intend to perform any additional services for PIM. + +30. Months later, Owner A and Owner B asked Respondents to resume performing +surprise examinations for PIM. Respondents declined this request. + +Respondents Caused PIM’s Violations of the Custody Rule and the Prior Custody Rule + +31. Respondents caused PIM’s violation of Section 206(4) of the Advisers Act and +Rule 206(4)-2 thereunder. + +32. Wilson was the engagement partner for the 2009, 2010, and 2011 Exams, and was +the only CPA to perform work in connection with these exams. Respondents agreed to perform +the 2009, 2010, and 2011 Exams, and understood that PIM had engaged them to: (i) conduct the +2009, 2010, and 2011 Exams; (ii) verify funds and securities through actual examination; and +(iii) file with the Commission Form ADV-E within the time periods required by the Prior +Custody Rule and the Custody Rule. + + + + + + +10 + +33. With respect to the 2009 Exam, Respondents failed to: + +a. obtain a reasonable basis for issuing a report containing an opinion that +management’s assertion that PIM complied with the Prior Custody Rule was +fairly stated, in all material respects, because they failed to obtain: + +i. a management assertion; and + +ii. sufficient evidence to support such an opinion; and + +b. file Form ADV-E with the Commission. + +34. With respect to the 2010 Exam, Respondents failed to: + +a. complete the examination or withdraw from the engagement and notify PIM +of such withdrawal on a timely basis; and + +b. file Form ADV-E with the Commission. + +35. With respect to the 2011 Exam, Respondents failed to: + +a. complete the examination or withdraw from the engagement and notify PIM +of such withdrawal on a timely basis; and + +b. file Form ADV-E with the Commission. + +Respondents Engaged in Improper Professional Conduct + +36. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) provide that the +Commission may censure or temporarily or permanently deny an accountant the privilege of +appearing or practicing before it if it finds, after notice and opportunity for hearing, that the +accountant engaged in “improper professional conduct.” Rule 102(e)(1)(iv) and Section 4C(b) +define “improper professional conduct” to include: (1) “intentional or knowing conduct, +including reckless conduct, that results in a violation of applicable professional standards”9; or +(2) negligent conduct in the form of: (i) “a single instance of highly unreasonable conduct that +results in a violation of applicable professional standards in circumstances in which [an +accountant] knows, or should know, that heightened scrutiny is warranted”; or (ii) “repeated + +9 The Commission defines recklessness under Rule 102(e) to be the same as recklessness under the +antifraud provisions of the federal securities laws: conduct which is an extreme departure from the +standards of ordinary care. See Amendment to Rule 102(e) of the Commission’s Rules of Practice, 63 Fed. +Reg. 57164, 57167 (Oct. 26, 1998). + +11 + +instances of unreasonable conduct, each resulting in a violation of applicable professional +standards, that indicate a lack of competence to practice before the Commission.”10 + +37. During the 2009, 2010, and 2011 Exams, Respondents engaged in the following +improper professional conduct: + +a. Respondents failed to file Form ADV-E with the Commission in connection +with the 2009, 2010, and 2011 Exams. See AT Section 101.39 (requiring +accountant to exercise “due professional care” in performing engagement); +AT Section 601.38 (requiring accountant to exercise “due care” in performing +engagement). + +b. Respondents failed to complete the 2010 and 2011 Exams or withdraw from +these engagements and notify PIM of such withdrawals on a timely basis. See +AT Section 101.64 (“The practitioner who accepts an attest engagement +should issue a report . . . or withdraw from the attest engagement.”). + +c. Respondents issued a report containing an unqualified opinion in connection +with the 2009 Exam in contravention of AT Section 101’s and AT Section +601’s requirements that they obtain a management assertion from PIM in +order to do so. See AT Section 101.58 (“When the practitioner’s client is the +responsible party, a failure to obtain a written assertion should result in the +practitioner concluding that a scope limitation exists.”); AT Section 601.11 +(“[T]he practitioner should obtain from the responsible party a written +assertion . . . .”). + +d. Respondents lacked a reasonable basis to conclude in their 2009 Exam report +that management’s assertion that PIM complied with the Prior Custody Rule +was fairly stated, in all material respects, because they identified material +variances in the records of certain of PIM’s client securities-holding accounts, +but did not obtain evidence to explain these variances or otherwise reconcile +these variances. See AT Section 101.51. + +38. Findings + + a. Based on the foregoing, the Commission finds that Respondents caused +violations of Section 206(4) of the Advisers Act and Rule 206(4)-2 +thereunder by Professional Investment Management, Inc. + +10 Rule 102(e)(1)(iv) describes improper professional conduct with respect to persons licensed as +accountants; Section 4C(b) describes improper professional conduct with respect to any registered public +accounting firm or associated person. + +12 + + + b. Based on the foregoing, the Commission finds that Respondents engaged in +improper professional conduct pursuant to Section 4C(a)(2) of the +Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED pursuant to Section 4C of the Exchange Act, Section +203(k) of the Advisers Act, and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice effective +immediately, that: + A. Respondents shall cease and desist from committing or causing any violations and +any future violations of Section 206(4) of the Advisers Act and Rule 206(4)-2 promulgated +thereunder. + + Wilson + + B. Respondent Wilson is denied the privilege of appearing or practicing before the +Commission as an accountant. + + C. Respondent Wilson 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 . 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 Wilson may transmit payment electronically to the +Commission, which will provide detailed ACH transfer/Fedwire +instructions upon request; + + (2) Respondent Wilson 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 Wilson may pay by certified check, bank cashier’s check, or +United States postal money order, made payable to the Securities and +Exchange Commission and hand-delivered or mailed to: + + Enterprise Services Center + Accounts Receivable Branch + HQ Bldg., Room 181, AMZ-341 + +13 + + 6500 South MacArthur Boulevard + Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Respondent Wilson as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Paul Montoya, +Associate Director, Division of Enforcement, Securities and Exchange Commission, Chicago +Regional Office, 175 West Jackson Boulevard, Suite 900, Chicago, IL 60604-2908. + + The Firm + + D. Respondent Firm is denied the privilege of appearing or practicing before the +Commission as an accountant. + + E. After three years from the date of this order, Respondent Firm may request that +the Commission consider its reinstatement by submitting an application (attention: Office of +the Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission. Such an application must satisfy the Commission that +Respondent Firm’s work in its practice before the Commission will be +reviewed either by the independent audit committee of the public company +for which it works or in some other acceptable manner, as long as it +practices before the Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent Firm, or the public accounting firm with which it 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 Firm, or the registered public accounting firm with +which it 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 + +14 + +imposed by the Board (other than reinstatement by the +Commission); and + + (d) Respondent acknowledges his/her responsibility, as long as +Respondent appears or practices before the Commission as an +independent accountant, to comply with all requirements of the +Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring +partner reviews and quality control standards. + +F. The Commission will consider an application by Respondent Firm to resume +appearing or practicing before the Commission provided that its state CPA license is current and +it has resolved all other disciplinary issues with the applicable state boards of accountancy. +However, if state licensure is dependent on reinstatement by the Commission, the Commission +will consider an application on its other merits. The Commission’s review may include +consideration of, in addition to the matters referenced above, any other matters relating to +Respondent Firm’s character, integrity, professional conduct, or qualifications to appear or +practice before the Commission. + + G. Respondent Firm shall, within ten (10) days of the entry of this Order, pay to the +Securities and Exchange Commission: (i) a civil money penalty in the amount of $ 25,000; (ii) +disgorgement in the amount of $10,868, which represents profits gained as a result of the conduct +described herein ; and (iii) prejudgment interest of $ 1,029. If timely payment is not made, +additional interest shall accrue pursuant to 31 U.S.C. § 3717 and 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 + + +15 + +Payments by check or money order must be accompanied by a cover letter identifying +Respondent Firm as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Paul Montoya, Associate +Director, Division of Enforcement, Securities and Exchange Commission, Chicago Regional +Office, 175 West Jackson Boulevard, Suite 900, Chicago, IL 60604-2908. + + I. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for the disgorgement, interest and penalties referenced in paragraphs IV.C and +IV.G, 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 this proceeding. For +purposes of this paragraph, a “Related Investor Action” means a private damages action brought +against any or both of the Respondents by or on behalf of one or more investors based on +substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by +Respondents, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondents under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondents of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19). + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3669.txt b/raw/aaer/2015/AAER-3669.txt new file mode 100644 index 0000000000000000000000000000000000000000..3c2c7815a344cca2c9fd6fb28a9114a274cc52e3 --- /dev/null +++ b/raw/aaer/2015/AAER-3669.txt @@ -0,0 +1,118 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75382 / July 7, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3669 / July 7, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-15877 + + + + +In the Matter of + +BRYCE WALKER, CA and +SPENCE WALKER, CA, CPA + +Respondents. + + + + +ORDER AMENDING +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. + + On May 20, 2014, the Securities and Exchange Commission (“Commission”) issued an +order instituting public administrative and cease-and-desist proceedings pursuant to Sections 4C +and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice (the “2014 Order”) against Bryce Walker, CA, and Spence +Walker, CA, CPA (“Respondents”). + +II. + + Respondents consented to the entry of the 2014 Order. Among other things, the 2014 +Order required Respondents to pay, jointly and severally, $128,000 in disgorgement and +prejudgment interest of $10,954. + + + 2 +III. + + Respondents have submitted an Amended Offer of Settlement (the “Offer”) proposing to +amend the sum of disgorgement ordered paid in the 2014 Order. Solely for the purpose of these +proceedings, and any other proceedings brought by or on behalf of the Commission, and to +which the Commission is a party, and without admitting or denying the findings in the 2014 +Order, 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 Amending +Order Instituting Public Administrative Cease-and-Desist Proceedings pursuant to Sections 4C +and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order, as set forth below. + +IV. + + The Commission deems it appropriate and in the public interest to amend the 2014 Order +as agreed to in Respondent’s Offer. + + Accordingly, IT IS HEREBY ORDERED that: + +A. Section IV.H. of the 2014 Order is amended as follows to order: + +Respondents Bryce Walker and Spence Walker, jointly and severally, shall, within sixty +(60) days of the entry of this Order, pay disgorgement of $93,135.16 and prejudgment +interest of $11,233.05 to the Securities and Exchange Commission. If timely payment is +not made, additional interest shall accrue pursuant to SEC Rule of Practice 600. Payment +must be made in one of the following ways: + + (1) 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 + + 3 + Payments by check or money order must be accompanied by a cover letter identifying +Spence Walker or Bryce Walker as a Respondent in these proceedings, and the file number of +these proceedings; a copy of the cover letter and check or money order must be sent to John T. +Dugan, Division of Enforcement, Securities and Exchange Commission, 33 Arch Street, 23rd +Floor, Boston, MA 02110. + +B. All other provisions of the 2014 Order remain in effect: + + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3670.txt b/raw/aaer/2015/AAER-3670.txt new file mode 100644 index 0000000000000000000000000000000000000000..f0f98532f725838ebd57b960ca5b43456f4d4512 --- /dev/null +++ b/raw/aaer/2015/AAER-3670.txt @@ -0,0 +1,871 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75401 / July 8, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3670 / July 8, 2015 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 4138 / July 8, 2015 + +INVESTMENT COMPANY ACT OF 1940 +Release No. 31710 / July 8, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16328 + + +In the Matter of + +VERO CAPITAL +MANAGEMENT, LLC, +ROBERT GEIGER, +GEORGE BARBARESI, ESQ, +and STEVEN DOWNEY, CPA + +Respondents. + + + + +ORDER MAKING FINDINGS AND +IMPOSING REMEDIAL SANCTIONS +AND A CEASE-AND-DESIST ORDER +PURSUANT TO SECTIONS 203(e), +203(f), AND 203(k) OF THE +INVESTMENT ADVISERS ACT OF +1940, SECTION 9(b) OF THE +INVESTMENT COMPANY ACT OF +1940 AS TO ALL RESPONDENTS, +AND PURSUANT TO RULE 102(e) OF +THE COMMISSION’S RULES OF +PRACTICE AS TO STEVEN +DOWNEY, AND INSTITUTING +PUBLIC ADMINISTRATIVE +PROCEEDINGS, MAKING FINDINGS, +AND IMPOSING SANCTIONS +PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF +1934 AND RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE AS TO GEORGE +BARBARESI + +I. + + On December 29, 2014, the Securities and Exchange Commission (“Commission”) +instituted public administrative and cease-and-desist proceedings against VERO Capital + 2 +Management, LLC (“VERO Capital”), Robert Geiger (“Geiger”), George Barbaresi +(“Barbaresi”), and Steven Downey (“Downey,” and collectively, “Respondents”) pursuant +to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940 (“Advisers +Act”) and Section 9(b) of the Investment Company Act of 1940 (“Investment Company +Act”) and against Downey pursuant to Rule 102(e)(1) of the Commission’s Rules of +Practice (“Rules of Practice”). In addition, the Commission deems it appropriate that +public administrative and cease-and-desist proceedings be, and hereby are, instituted +against Barbaresi pursuant to Section 4C1 of the Securities Exchange Act of 1934 +(“Exchange Act”) and Rule 102(e)(1)(iii) of the Rules of Practice.2 + +II. + + In response to the institution of these proceedings, Respondents have submitted +Offers of Settlement (“Offers”), which the Commission has determined to accept. Solely for +the purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over them and the subject matter +of these proceedings, which are admitted, and except as provided herein in Section V, +Respondents consent to the entry of this Order Making Findings and Imposing Remedial +Sanctions and a Cease-and-Desist Order Pursuant to Sections 203(e), 203(f), and 203(k) of +the Investment Advisers Act of 1940, Section 9(b) of the Investment Company Act of 1940 +as to all Respondents, and Pursuant to Rule 102(e) of the Commission’s Rules of Practice +as to Steven Downey, and Instituting Public Administrative Proceedings, Making Findings, +and Imposing Sanctions Pursuant to Section 4C of the Securities Exchange Act of 1934 and +Rule 102(e) of the Commission’s Rules of Practice as to George Barbaresi (“Order”), as set +forth below. + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or +permanently, to any person the privilege of appearing or practicing before +the Commission in any way, if that person is found . . . (1) not to possess +the requisite qualifications to represent others . . . (2) to be lacking in +character or integrity, or to have engaged in unethical or improper +professional conduct; or (3) to have willfully violated, or willfully aided +and abetted the violation of, any provision of the securities laws or the +rules and regulations thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege +of appearing or practicing before it . . . to any person who is found…to +have willfully violated, or willfully aided and abetted the violation of any +provision of the Federal securities laws or the rules and regulations +thereunder. + + 3 + +III. + +On the basis of this Order and Respondents’ Offers, the Commission finds that: + + A. SUMMARY + +1. These proceedings arise out of Respondents’ investment management +activities on behalf of VERO Capital’s advisory clients, the VERO Distressed ABS +Opportunity Fund, B.V. (“Distressed Fund”) and the VERO Distressed ABS Opportunity +Master Fund, B.V. (the “Master Fund” and, collectively with the Distressed Fund, the +“Funds”). + +2. Between late 2010 and 2011, Respondents caused the Funds to purchase +three notes, with a total principal value of $7 million, from VERO Asset Management, +LLC (“VERO Asset”), an affiliate of VERO Capital. Because the Funds were purchasing +the notes from a VERO Capital affiliate, the transactions constituted principal transactions +under Section 206(3) of the Advisers Act, which require written notice and consent of the +client before the completion of the transaction. The client’s consent was not obtained +before the completion of each individual transaction. + +3. Thereafter, from 2012 to 2013, Respondents improperly diverted +approximately $2.8 million from the Funds for VERO Capital’s wholly-owned subsidiary +(the “VERO affiliate”), by causing the Funds to make a series of undocumented, +undisclosed bridge loans to the VERO affiliate. At the same time Respondents were +transferring the Funds’ assets to the VERO affiliate, they were telling the Distressed Fund’s +investors and the Funds’ director that they were winding down the Funds and actively +working to liquidate their remaining investments for redemption. None of the Respondents +disclosed the bridge loans to the Funds or any of their investors. + + B. RESPONDENTS + +4. VERO Capital is a Delaware limited liability company formed in 2003 +with its principal place of business in New York, New York. It has been registered with +the Commission as an investment adviser since 2008. VERO Capital is the investment +manager to the Distressed Fund. Respondents Geiger, Downey, and Barbaresi are part +owners of, and are associated with,3 VERO Capital.. VERO Capital has several wholly- +owned subsidiaries, which included the VERO affiliate at all times relevant to the activities +detailed herein. + + +3 A “person associated with” an investment adviser means “any partner, officer, or +director of such investment adviser (or any person performing similar functions), or any +person directly or indirectly controlling or controlled by such investment adviser, +including any employee of such investment adviser . . . .” See Advisers Act § 202(a)(17). + 4 +5. Geiger, age 55, resides in Wainscott, New York. Geiger is a co-owner of +VERO Capital, and through it, the VERO affiliate, and has served as VERO Capital’s +managing member since 2003. From at least 2010 through December 2013 (the “Relevant +Period”), Geiger served on VERO Capital’s Investment Committee. Geiger was the VERO +affiliate’s managing member at all times relevant to the activities detailed herein as well. +Geiger has previously held Series 3, 7, and 63 licenses, but he is not currently registered +with the Commission in any capacity. + +6. Barbaresi, age 59, resides in Dayton, Ohio. Barbaresi is a co-owner of +VERO Capital, and through it, the VERO affiliate, and has served as VERO Capital’s +general counsel since December 2003. During the Relevant Period, Barbaresi served on +VERO Capital’s Investment Committee. Barbaresi is the VERO affiliate’s general counsel +as well. Barbaresi is an attorney in good standing licensed to practice in New York, +Connecticut, and the District of Columbia + +7. Downey, age 57, resides in Prospect, Kentucky. Downey is a co-owner of +VERO Capital, and through it, the VERO affiliate, and has served as VERO Capital’s chief +financial officer since August 2004. During the Relevant Period, Downey served on +VERO Capital’s Investment Committee. Downey is the VERO affiliate’s chief financial +officer as well. Downey has been a certified public accountant licensed to practice in +Florida and Alabama, although his license is not currently active in any jurisdiction and he +does not hold himself out as a CPA. + + C. OTHER RELEVANT ENTITIES + +8. The VERO affiliate is a Delaware limited liability company formed in +2008 with its principal place of business in New York, New York. During the Relevant +Period, the VERO affiliate was a wholly-owned subsidiary of VERO Capital. The VERO +affiliate’s officers and its marketing materials describe the company as a risk analytics +business. +9. The Distressed Fund is a private company with limited liability +incorporated under the laws of the Netherlands in 2008. The Distressed Fund is 100% +owned by Stichting VERO Distressed ABS Opportunity Fund, a foundation established +under the laws of the Netherlands, and incorporated by TMF Management, B.V. (“TMF +Management”), a Dutch corporate services provider. The Distressed Fund aimed to +achieve returns by investing in the affiliated Master Fund, which made investments in +various securities. +10. The Master Fund is a private company with limited liability incorporated +under the laws of the Netherlands in 2007. The Master Fund is 100% owned by Stichting +VERO Distressed ABS Opportunity Master Fund, a foundation established under the laws +of the Netherlands, and incorporated by TMF Management. The Master Fund’s primary +stated investment objective was to maximize returns by investing in a diverse portfolio of +mortgage-related structured finance securities, whole mortgage loans and other fixed- +income instruments. + 5 +11. VERO Asset is a Delaware limited liability company formed in 2003 with +its principal place of business in New York, New York. During the Relevant Period, +VERO Asset was a wholly-owned subsidiary of VERO Capital that made certain loans, +including one to Cayden Holdings, LLC (“Cayden”), a VERO Capital affiliate, that the +Funds later purchased. +12. VERO Realty Advisors, LLC (“VERO Realty”) is a Delaware limited +liability company formed in 2012 with its principal place of business in New York, New +York. During the Relevant Period, VERO Realty was a wholly-owned subsidiary of +VERO Capital. Certain funds that VERO Capital diverted from the Funds to the VERO +affiliate in 2013 were initially transferred to a bank account held in the name of VERO +Realty. +13. Cayden is a Delaware limited liability company formed in 2007 with its +principal place of business in Baltimore, Maryland. During the Relevant Period, Cayden +was a wholly-owned subsidiary of VERO Asset. The Funds purchased a note from VERO +Asset in November 2010 that evidenced a $3 million loan that VERO Asset had made to +Cayden (the “Cayden Note”). VERO Capital ultimately diverted to the VERO affiliate a +portion of the money that was due to the Funds to repay the $3 million loan. +14. TMF Management is a Dutch private company with limited liability +headquartered in Amsterdam, The Netherlands. TMF Management served as director for +the Distressed Fund and the Master Fund and provided management, corporate and +administrative services to the Funds, with the exception of investment management +services, which VERO Capital provided. +D. FACTS +Background +15. The Distressed Fund and the Master Fund are structured in a master-feeder +relationship. The Distressed Fund is the feeder fund and aimed to generate returns by +investing substantially all of its cash (raised from issuing notes to investors) in notes issued +by the Master Fund. The Master Fund then used those proceeds to invest in mortgage- +related finance securities and other distressed investments, as described below. Both the +Distressed and Master Funds are Dutch companies each of whose shares are entirely owned +by separate Dutch foundations, or “stichtings.” The stichtings were incorporated by TMF +Management, a Dutch corporate services provider, which serves as the director for both +Funds. The stichtings are legal entities without shareholders whose object is to hold the +shares of the Funds and have overall control over the Funds’ management. However, the +Funds, through TMF Management, delegated to VERO Capital the exclusive power and +authority to manage the Funds’ investments on a discretionary basis. +16. VERO Capital marketed the Distressed Fund to three foreign investors in +2008, raising approximately $75 million by selling them participating notes issued by the +Fund, with the vast majority coming from two of the three investors. According to the +Distressed Fund’s private placement memorandum (“PPM”), its principal investment + 6 +objective was to achieve returns by investing through the Master Fund in a diverse +portfolio of mortgage-related finance securities, whole mortgage loans and other fixed +income instruments, including rated or unrated and performing or distressed securities +issued by issuers of collateralized debt obligations, and special situation investments. The +Distressed Fund could invest in a broad array of assets, but the Distressed Fund’s PPM +stated that “[i]t is intended that the portfolio will consist of approximately 80% U.S. RMBS +Securities and there will be no . . . corporate credit risk.” The Distressed Fund’s two +biggest investors understood that the Fund’s primary purpose was to invest in mortgage- +backed securities. +17. With respect to transactions involving affiliates of VERO Capital, the PPM +stated that VERO Capital may purchase loans originated or syndicated by any affiliate of +VERO Capital or otherwise engage in affiliated transactions on behalf of the Fund. +However, to do so, VERO Capital was required to obtain the prior written consent of a +committee comprised of VERO Capital’s investment professionals (the “Investment +Committee”). At all times relevant to this action, Geiger, Barbaresi, and Downey were +members of the Investment Committee. No person independent of VERO Capital served +on the Investment Committee. +Purchase of the Cayden Note +18. After their inception, the Funds invested primarily in residential and then +commercial mortgage-backed securities (“RMBS” and “CMBS”). They undertook other +investments as well. Specifically, in November 2010, the Investment Committee, on which +Geiger, Downey, and Barbaresi sat, approved a transaction in which the Distressed Fund +was to purchase the $3 million Cayden Note from VERO Asset.4 Under the terms of the +Cayden Note, VERO Asset loaned $3 million to another VERO Capital affiliate, Cayden. +The Cayden Note paid 15% interest per annum due in monthly installments, with the entire +principal due on December 1, 2013. The interest rate increased to 19% per annum in the +event of a default. The Cayden Note also provided that its holder could accelerate the +payment of the Note’s principal in the event of a default. +19. This affiliated investment was documented by a written authorization by the +Investment Committee; however, the investment was not disclosed prior to its completion +to TMF Management or to any Distressed Fund investor; nor was consent for the +investment obtained from any party outside VERO Capital. +20. The consent authorizing the purchase of the Cayden Note made clear that +the purpose for the loan was for Cayden to make certain trades involving Government + +4 In fact, the Master Fund purchased the Cayden Note according to the 2010 audited +financial statements. The PPM disclosed that the Distressed Fund and the Master Fund +would be treated interchangeably: “Unless specified otherwise, references herein to the +Fund’s investments and investment program include references to the Master Fund’s +investments and investment program, to the extent that the Fund invests through the +Master Fund.” Geiger, Downey and Barbaresi made little effort to distinguish among +them. + 7 +National Mortgage Association (“GNMA”) mortgage-backed securities. Cayden’s +business plan was to enter into agreements to fund Federal Housing Administration backed +fixed-rate construction loan commitments. Draws funded under the loan commitments +were guaranteed as to the principal by GNMA, and therefore once the loans were made, +they were securitized and Cayden sold the GNMA securities into the aftermarket (the +“GNMA trading strategy”). The GNMA trading strategy generated profits for Cayden +through 2011 and 2012. +21. VERO Capital disclosed the Master Fund’s purchase of the Cayden Note +and Cayden’s GNMA trading strategy in the notes to the Master Fund’s year-end 2010 +audited financial statements, which were sent to the Distressed Fund’s investors in April +2011. Cayden made interest payments on the Cayden Note to the Master Fund until +February 2013 at which point Cayden defaulted. Although Cayden’s failure to pay interest +when due permitted the Master Fund to accelerate the maturity of the Cayden Note, VERO +Capital made no effort to collect on the Cayden Note on the Funds’ behalf, as described +below. +Purchase of the Envo and Tallas Notes +22. In December 2011, the Investment Committee approved the Distressed +Fund’s purchase of two additional promissory notes from VERO Asset.5 Under the terms +of the notes, VERO Asset loaned $2 million each to two unaffiliated issuers, Envo +Properties, LLC (“Envo”) and Tallas Properties, LLC (“Tallas”). The loans’ purpose was +for Envo and Tallas to make real-estate related investments. The notes (hereinafter the +“Envo and Tallas Notes”) paid 12% interest per annum. The Envo and Tallas Notes were +guaranteed by an individual and were due to mature January 31, 2013. +23. On December 12, 2011, approximately one week after VERO Asset +originated the Envo and Tallas Notes and the Master Fund purchased them, the +Commission charged the guarantor and others with operating a Ponzi scheme. See SEC v. +Management Solutions, Inc., No. 2:11-cv-01165-BSJ (D. Utah). Simultaneously with the +filing of its lawsuit, the Commission obtained a court order freezing the guarantor’s assets +and the assets of entities under his control. Like the purchase of the Cayden Note, the +Investment Committee approved the purchase of the Envo and Tallas Notes, but the +investments were not disclosed prior to their being completed to TMF Management or to +any Distressed Fund investor; nor was consent for the investments obtained from any party +outside VERO Capital. +24. In early 2012, Barbaresi and Downey took steps to recoup the principal on +the Envo and Tallas Notes. As a result of those efforts, in July 2012, VERO Capital +recouped approximately $2.1 million of the principal on the Envo and Tallas Notes. Of this +amount, VERO Capital returned $1.5 million to the Master Fund in September 2012. As + +5 As was true with the purchase of the Cayden Note, the 2011 audited financial +statements indicate that it was the Master Fund, not the Distressed Fund, that purchased +the Envo and Tallas Notes. + 8 +described further below, VERO Capital diverted the remaining approximately $600,000 for +the VERO affiliate, which drew down on it over time. +25. VERO Capital disclosed the purchase of the Envo and Tallas Notes in the +notes to the Funds’ audited financial statements for year-end 2011. In addition, in April +2012, VERO Capital sent a letter to the Distressed Fund’s investors, enclosing the audited +2011 financial statements for the Funds, that described the situation with the Envo and +Tallas Notes. In the letter, VERO Capital stated that it was placing the Envo and Tallas +loans on “non-accrual status” and “after much deliberation” was adjusting the fair value of +the notes to approximately $1.8 million for each note to “reflect a liquidity discount.” +Respondents Communicate that the Funds Are Winding Down and +Investors Will Be Redeemed +26. By the fall of 2011, VERO Capital began returning principal to the +Distressed Fund’s investors. In a June 2012 email, a representative of one of the investors +sought information from Geiger about the timing of the wind down and return of +investment: “My understanding was the [sic] VERO should have been redeemed in full by +now. As it’s not, do you have a liquidity schedule for the remaining part?” Geiger +responded that VERO Capital had been returning principal “since last Fall” and that VERO +Capital was “seeking to make three more distributions before the end of the year, returning +the remainder by year end, with a potential tail in January” 2013. After the same investor +representative asked for an update at the beginning of September 2012, Downey drafted an +email response ultimately sent by Barbaresi stating that VERO Capital remained +committed to making another distribution in October 2012. Barbaresi added: “As we +continue to sell assets and raise cash, we will be able to obtain greater clarity around the +liquidity in the market. We should know by early December if the third distribution will be +in December or later as we continue to gain clarity and finish the wind up of the fund.” +27. In 2013, the Distressed Fund’s two major investors continued to ask about +the status of the Fund’s wind-down and the return of their principal. For example, in April +2013, a representative of one of these investors asked for another update on the Distressed +Fund’s wind-down, noting that “[b]ack in Jun/12 the fund was estimated to be fully +distributed before end of 2012, with a potential tail into Jan/13.” Barbaresi responded later +in the month: “We have been actively liquidating the fund’s assets and the remaining +assets are very illiquid. . . . We hope to have the remaining assets sold by the second half of +the year and will keep you updated on ongoing asset sales and distributions.” +Subsequently, in May, Barbaresi told another investor representative that “[w]e really can’t +accurately predict when the final liquidation of the fund will occur, as we discussed, we are +looking at options to put the last of the illiquid assets into a structure that will not incur +administrative fees.” +28. In June 2013, Downey, in response to questions by TMF Management +about when it could expect the Funds’ 2012 audit reports, notified TMF Management that +VERO Capital had begun to wind down the Fund, and that an audit would be conducted +together with the wind-down audit. Prior to that time, none of the Respondents notified +TMF Management of VERO Capital’s intentions to liquidate the Funds, and the only notice + 9 +TMF Management received of the Funds’ return of principal to investors was a line item in +the 2011 audited financial statements that TMF Management received some time in or after +April 2012. +The Undisclosed Loans from the Funds to Finance the VERO Affiliate +29. Beginning in at least 2008, while it was serving as investment manager to +the Funds, VERO Capital was also developing the VERO affiliate as a risk management +business or financial services technology company. The VERO affiliate’s business plan +was to provide large financial institutions with a platform to assist them with modeling the +valuation of various pieces of their portfolios in different economic scenarios. VERO +Capital anticipated that the demand for this type of service would increase following the +financial crisis in 2008 and the passage of the Dodd-Frank Act, with its requirements that +large financial institutions perform “stress tests” on their portfolios. +30. During all times relevant to this action, the VERO affiliate was a wholly- +owned subsidiary of VERO Capital. Because they were co-owners of VERO Capital, +Geiger, Barbaresi, and Downey were also co-owners of the VERO affiliate. In +approximately 2010, Downey began treating the VERO affiliate as a separate entity for +accounting purposes, booking revenues and expenses of the VERO affiliate separately from +VERO Capital. Beginning in 2010, most VERO Capital employees became employees of +the VERO affiliate. +31. Beginning in at least February 2012 and continuing through October 2013, +when Commission examination staff commenced an examination of VERO Capital, +Geiger, Barbaresi, and Downey, through VERO Capital, improperly diverted +approximately $2.8 million in assets of the Funds for purposes of financing the VERO +affiliate’s operations. While informing the Distressed Fund’s investors that the Funds were +being wound down, Respondents at the same time transferred the money from the Funds +through purported bridge loans to the VERO affiliate. These loans were never +documented, nor were any of them disclosed to the Funds or their investors until after the +Division of Enforcement (“Division”) had commenced its investigation. In making the +bridge loans to the VERO affiliate, Geiger, Barbaresi, and Downey did not follow the +procedures for affiliated transactions set forth in the PPM. Nor were any of the bridge +loans to the VERO affiliate reduced to writing, although they were recorded in the Master +Fund’s general ledger. +32. VERO Capital accomplished the transfers from the Funds to the VERO +affiliate in multiple transactions. First, as the money invested through the Cayden Note in +the GNMA trades was returned to Cayden as those trades were closed out throughout 2012, +Geiger, Downey, and Barbaresi used at least $1.4 million to benefit the VERO affiliate, +rather than returning it to the Funds. Downey arranged the transfer of the $1.4 million over +time from accounts associated with Cayden to accounts associated with VERO Capital, +VERO Asset, or the VERO affiliate, ultimately for the VERO affiliate’s benefit. None of +the Respondents prepared any documentation concerning the transfers to indicate whether +they were loans or investments by Cayden in the VERO affiliate. + 10 +33. Second, in July 2012, VERO Capital secured the return of $2.1 million of +the Envo and Tallas Notes’ principal. While VERO Capital transferred $1.5 million of that +amount back to the Funds, Geiger, Barbaresi, and Downey used the remaining $600,000 +for the benefit of the VERO affiliate from December 2012 through February 2013. As +VERO Capital and the VERO affiliate’s CFO, Downey was primarily responsible for +disbursing money on their behalf, and Geiger and Barbaresi were aware, or should have +been aware, that Downey was using returned Envo and Tallas Note principal to benefit the +VERO affiliate. +34. Finally, in August and September 2013, as the VERO affiliate’s bank +account was nearly depleted, and after VERO Capital had notified TMF Management that +the Funds were being liquidated, Downey orchestrated two transfers, of $500,000 and +$300,000, respectively, from the Master Fund’s custodial bank account for the benefit of +the VERO affiliate. Downey directed the August and September 2013 transfers from the +Master Fund’s account at U.S. Bank to VERO Realty, another VERO Capital affiliate. +35. Because U.S. Bank also served as the Funds’ administrator and therefore +maintained their books and records, Downey had to provide a reason to U.S. Bank for the +two disbursements so that U.S. Bank could document what the money was being used for. +36. In an August 1, 2013 email to U.S. Bank, Downey, copying Barbaresi, +advised the bank that VERO Capital (through its affiliate, VERO Realty) would invest the +$500,000 that he requested in a property related to the Master Fund’s Tallas Note in order +to recoup additional principal on the Tallas Note. Downey and Barbaresi were aware, or +should have been aware, that the $500,000 would not be used to invest in a property related +to the Tallas Note, but would instead be transferred to pay VERO Capital’s and the VERO +affiliate’s expenses. + +37. The same day, U.S. Bank wired $500,000 to the VERO Realty account. +Immediately thereafter, also on August 1, Downey transferred $80,000 of the $500,000 +from the VERO Realty account to a VERO Capital account and used the money to pay for +the VERO affiliate’s expenses. On August 2, Downey made two transfers of $50,000 and +$20,000 from the VERO Realty account to the VERO Capital account, and then +subsequently transferred that money to a VERO affiliate account. + +38. By September 12, 2013, Downey had transferred all of the $500,000 from +the VERO Realty account for the benefit of the VERO affiliate. Geiger was aware, or +should have been aware, that Downey and Barbaresi obtained the $500,000 from the +Master Fund’s account and used the money for the VERO affiliate. +39. Again, on September 26, 2013, Downey emailed U.S. Bank, this time +copying Barbaresi and Geiger, requesting another transfer to VERO Realty for expenses +related to the Tallas properties, again ostensibly for the purposes of recouping additional +principal related to the Tallas Note. As part of his September 26, 2013 email, Downey +forwarded the previous request for $500,000 that he made on August 1. Downey, +Barbaresi, and Geiger were aware, or should have been aware, that the September 26, 2013 + 11 +transfer from the Master Fund account would not be used for expenses related to the Tallas +properties. +40. U.S. Bank wired $300,000 to the VERO Realty account on September 26, +and Downey began drawing down the account the next day. By October 23, 2013, +Downey had used the entirety of the $300,000 for the benefit of the VERO affiliate. +41. The $500,000 and $300,000 transferred from the Master Fund account on +August 1, 2013 and September 26, 2013, respectively, were not approved or documented +by the Fund’s Investment Committee. Neither Downey, Barbaresi nor Geiger ever advised +TMF Management, U.S. Bank, or Distressed Fund investors that the Master Fund’s money +had been used for the benefit of the VERO affiliate until after the commencement of the +Division’s investigation. + + Respondents’ Nondisclosure of the Transfers to the VERO Affiliate + +42. The Respondents took no action to disclose the transfers from the Funds to +the VERO affiliate. The Funds’ bridge loans to the VERO affiliate were not timely +disclosed to the Distressed Fund’s investors or TMF Management. During the period when +the Funds’ assets were being used to finance the VERO affiliate, Downey, Geiger and +Barbaresi each prepared and/or reviewed periodic (monthly, then quarterly) newsletters to +the Distressed Fund’s investors in which the nature and amount of the Fund’s investments +were purportedly described to them. None of those newsletters disclosed the existence of +the transfers to the VERO affiliate. None of the loans to the VERO affiliate was properly +documented in any loan agreements. Downey only directed that they be recorded as entries +in VERO Capital’s general ledger. At no time did anyone prepare any promissory note or +other document evidencing the VERO affiliate’s debt to the Funds as a result of the +approximately $2.8 million in ostensible loans that the Funds provided. + +43. Cayden first defaulted on interest payments due to the Funds under the +Cayden Note in February 2013. Cayden defaulted on the interest payments even though +Cayden’s original investment strategy, the GNMA trading strategy, had been profitable. +When Cayden stopped paying interest, under the terms of the Cayden Note, the Funds +could have called the loan and accelerated the due date for the return of the principal +(which was December 1, 2013). No one associated with VERO Capital took any action to +call the loan on the Funds’ behalf. + +44. In addition, Downey, who was responsible for valuation of certain of the +Funds’ assets, did not mark down the value of the Cayden Note on either Fund’s balance +sheet after Cayden defaulted on its interest payments on the Note. This stood in sharp +contrast to his decision to mark down the Envo and Tallas Notes in April 2012. Nor did +Downey or anyone else at VERO Capital inform U.S. Bank, the Funds’ administrator, that +Cayden had defaulted on the Cayden Note until December 2013. As a result of +Respondents’ failure to mark down the value of the Cayden Note, the Funds’ assets under +management were overstated and their losses understated in quarterly investor statements +issued in March 2013 and later. + + 12 + Geiger, Barbaresi, and Downey Benefit from the Transfers to the VERO Affiliate + +45. Geiger, Barbaresi, and Downey benefited from the transfers from the Funds. +For example, from August to October 2013, when the $800,000 from the Master Fund +account was the primary source of money for VERO Capital, Downey paid himself more +than $125,000 in purported salary and expenses, purportedly earned as a result of work he +had performed for the VERO affiliate. Downey also directed $48,000 to Geiger to pay bills +on his behalf, including business expenses due from the VERO affiliate, and wired another +$40,000 to Barbaresi, all also representing purported compensation or reimbursement due +from the VERO affiliate. + +46. In addition, at the time the VERO affiliate was a wholly-owned subsidiary +of VERO Capital, which was co-owned by Geiger, Barbaresi, and Downey, among others. +The utilization of cash from the Funds to finance the VERO affiliate’s ongoing +development and operations in 2012 and 2013 thus inured to the benefit of Geiger, +Barbaresi, and Downey, as they stood to gain from any profits that the VERO affiliate +ultimately generated. + +VERO Capital Failed to Comply with the Custody Rule in 2012 and 2013 + +47. As investment adviser to the Funds, VERO Capital held custody of Fund +assets because it was authorized or permitted to withdraw money from the Master Fund’s +custodial account. Because VERO Capital had custody of client assets, Advisers Act Rule +206(4)-2 required VERO Capital to, among other things, provide notice to investors in the +Funds upon opening the account with U.S. Bank on their behalf, establish a reasonable +belief upon due inquiry that U.S. Bank was delivering account statements to investors in +the Fund at least quarterly, and undergo an annual surprise examination by an independent +public accountant. Alternatively, VERO Capital could have had the Funds audited +annually by an independent public accountant that was registered with and subject to +regular inspection by the Public Company Accounting Oversight Board and distribute +audited financial statements prepared in accordance with Generally Accepted Accounting +Principles to the investors in the Funds within 120 days of the Funds fiscal year end. +VERO Capital did neither in 2012 and 2013. + +E. VIOLATIONS + +48. As a result of the conduct described above, VERO Capital, Geiger, +Barbaresi, and Downey willfully6 violated Sections 206(2) and 206(4) of the Advisers Act +and Rule 206(4)-8 promulgated thereunder, which prohibit conduct by an investment +adviser that operates as a fraud. + + +6 A willful violation of the securities laws means merely “‘that the person charged with +the duty knows what he is doing.’” Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. +2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)). + 13 +49. As a result of the conduct described above, VERO Capital willfully violated +Section 206(3) of the Advisers Act, which prohibits an investment adviser from, directly or +indirectly, “acting as principal for his own account, knowingly to sell any security or to +purchase any security from a client . . . without disclosing to such client in writing before +the completion of such transaction the capacity in which he is acting and obtaining the +consent of the client to such transaction.” + +50. As a result of the conduct described above, VERO Capital willfully violated +Section 206(4) of the Advisers Act and Rule 206(4)-2 promulgated thereunder, which +requires that an investment adviser maintain each client’s funds in bank accounts +containing only those client funds, notify its clients about the place and manner in which +their funds are maintained, and have client funds and securities verified by an independent +public accountant at least once a year without prior notice to the investment adviser. + +51. As a result of the conduct described above, Geiger, Barbaresi, and Downey +willfully aided and abetted and caused VERO Capital’s violations of Sections 206(2), +206(3), and 206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-8 promulgated +thereunder. + +F. UNDERTAKINGS + + 52. Respondent VERO Capital has undertaken to cease investment advisory +operations and deregister as an investment adviser within 180 days of entry of this Order. +The 180 day limit shall not apply to VERO Capital’s role as a named plaintiff in the +lawsuits captioned VERO Distressed ABS Opportunity Fund, B.V. et al. v. BC Warner +Investments, L.C. et al., Civ. No. 149915059 (3rd Judicial Dist., Salt Lake Cty, Utah) and +VERO Distressed ABS Opportunity Fund, B.V. et al. v. Jacobson et al., (3rd Judicial Dist., +Salt Lake Cty, Utah (expected)) (collectively, the “Fund Lawsuits”). + +53. Respondent VERO Capital has undertaken to certify, in writing, compliance +with the undertaking set forth above. The certification shall identify the undertaking, +provide written evidence of compliance in the form of a narrative, and be supported by +exhibits sufficient to demonstrate compliance. The Commission staff may make +reasonable requests for further evidence of compliance, and VERO Capital agrees to +provide such evidence. The certification and supporting material shall be submitted to +Thomas P. Smith, Jr., Assistant Regional Director, with a copy to the Office of Chief +Counsel of the Enforcement Division, no later than sixty days from the date of the +completion of the undertakings. + +54. In determining whether to accept VERO Capital’s Offer, the Commission +has considered these undertakings. + + + + + 14 +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public +interest to impose the sanctions agreed to in the Offers of Respondents VERO Capital, +Geiger, Barbaresi, and Downey. + + Accordingly, pursuant to Section 4C of the Exchange Act, Sections 203(e), 203(f), +and 203(k) of the Advisers Act, Section 9(b) of the Investment Company Act, and Rule +102(e)(1) of the Rules of Practice, it is hereby ORDERED that: + +A. Respondents VERO Capital, Geiger, Barbaresi and Downey shall cease and +desist from committing or causing any violations and any future violations of +Sections 206(2), 206(3), and 206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-8 +thereunder. + +B. Respondents Geiger, Barbaresi, and Downey be, and hereby are: + +barred from association with any broker, dealer, investment adviser, municipal +securities dealer, municipal advisor, transfer agent, or nationally recognized +statistical rating organization; provided however, that for a period of up to 180 days +from the entry of this Order, Respondents Geiger, Barbaresi, and Downey may, +solely for the purposes of completing the wind down of the Funds, making final +payments and distributions to investors in those Funds, and preserving value for +those investors in the interim, (1) participate in advisory activities and (2) continue +to be associated with VERO Capital while VERO Capital acts as an investment +adviser. The 180 day limit shall not apply to Respondents’ supervision of the Fund +Lawsuits.; and + +prohibited from serving or acting as an employee, officer, director, member of an +advisory board, investment adviser or depositor of, or principal underwriter for, a +registered investment company or affiliated person of such investment adviser, +depositor, or principal underwriter; + +with the right to apply for reentry after three (3) years to the appropriate self- +regulatory organization, or if there is none, to the Commission. + +C. Any reapplication for association by any Respondent will be subject to the +applicable laws and regulations governing the reentry process, and reentry may be +conditioned upon a number of factors, including, but not limited to, the satisfaction of any +or all of the following: (a) any disgorgement ordered against the Respondent, whether or +not the Commission has fully or partially waived payment of such disgorgement; (b) any +arbitration award related to the conduct that served as the basis for the Commission order; +(c) any self-regulatory organization arbitration award to a customer, whether or not related +to the conduct that served as the basis for the Commission order; and (d) any restitution +order by a self-regulatory organization, whether or not related to the conduct that served as +the basis for the Commission order. + 15 + + D. Respondent VERO Capital is censured. + + E. Respondent Downey is denied the privilege of appearing or practicing +before the Commission as an accountant. + + F. After three years from the date of this Order, Respondent Downey may +request that the Commission consider his reinstatement by submitting an application +(attention: Office of the Chief Accountant) to resume appearing or practicing before +the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation +or review, of any public company’s financial statements that are +filed with the Commission. Such an application must satisfy the +Commission that Respondent’s work in his/her practice before the +Commission will be reviewed either by the independent audit +committee of the public company for which he works or in some +other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + a. Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company +Accounting Oversight Board (“Board”) in accordance with +the Sarbanes-Oxley Act of 2002, and such registration +continues to be effective; + + b. Respondent, or the registered public accounting firm with +which he is associated, has been inspected by the Board +and that inspection did not identify any criticisms of or +potential defects in the respondent’s or the firm’s quality +control system that would indicate that the respondent will +not receive appropriate supervision; + c. Respondent has resolved all disciplinary issues with the +Board, and has complied with all terms and conditions of +any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + d. Respondent acknowledges his/her responsibility, as long as +Respondent appears or practices before the Commission as +an independent accountant, to comply with all requirements +of the Commission and the Board, including, but not +limited to, all requirements relating to registration, + 16 +inspections, concurring partner reviews and quality control +standards. + +G. The Commission will consider an application by Respondent Downey 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. + + H. Respondent Barbaresi is denied the privilege of appearing or practicing +before the Commission as an attorney for three years from the date of the Order. + + I. After three years from the date of the Order, Respondent Barbaresi may +request that the Commission consider his application to resume appearing and practicing +before the Commission as an attorney. The application should be sent to the attention of +the Office of the General Counsel. + +1. In support of such an application, Respondent must provide a +certificate of good standing from each state bar where Respondent is +a member. + +2. In support of such an application, Respondent must also submit an +affidavit truthfully stating, under penalty of perjury: + + a. that Respondent has complied with the Order; + + b. that Respondent: + + i. is not currently suspended or disbarred as an attorney + by a court of the United States (or any agency of the + United States) or the bar or court of any state, + territory, district, commonwealth, or possession; and + + ii. since the entry of the Order, has not been suspended + as an attorney for an offense involving moral + turpitude by a court of the United States (or any + agency of the United States) or the bar or court of + any state, territory, district, commonwealth, or + possession, except for any suspension concerning the + conduct that was the basis for the Order; + + c. that Respondent, since the entry of the Order, has not + been convicted of a felony or misdemeanor involving + 17 + moral turpitude as set forth in Rule 102(e)(2) of the + Commission’s Rules of Practice; and + + d. that Respondent, since the entry of the Order: + + i. has not been found by the Commission or a + court of the United States to have committed + a violation of the federal securities laws, + except for any finding concerning the + conduct that was the basis for the Order; + + ii. has not been charged by the Commission or + the United States with a violation of the + federal securities laws, except for any charge + concerning the conduct that was the basis for + the Order; + + iii. has not been found by a court of the United + States (or any agency of the United States) or + any state, territory, district, commonwealth, + or possession, or any bar thereof, to have + committed an offense involving moral + turpitude, except for any finding concerning + the conduct that was the basis for the Order; + and + + iv. has not been charged by the United States (or + any agency of the United States) or any state, + territory, district, commonwealth, or + possession, or any bar thereof, with having + committed an offense involving moral + turpitude, except for any charge concerning + the conduct that was the basis for the Order. + + J. If Respondent Barbaresi provides the documentation required in Paragraph +I, and the Commission determines that he truthfully attested to each of the items required in +his affidavit, he shall by Commission order be permitted to resume appearing and +practicing before the Commission as an attorney. + + K. If Respondent Barbaresi is not able to truthfully attest to the statements +required in Subparagraphs I(2)(b)(ii) or I(2)(d), Respondent shall provide an explanation as +to the facts and circumstances pertaining to the matter and the Commission may hold a +hearing to determine whether there is good cause to permit him to resume appearing and +practicing before the Commission as an attorney. + + 18 + L. Respondents VERO Capital, Geiger, Barbaresi, and Downey, jointly and +severally, shall pay disgorgement of $2,879,623, and prejudgment interest of $189,083.35, +for a total of $3,068,706.35, to the Securities and Exchange Commission. Payment shall be +made in the following installments: $1,534,353.18 within 180 days of the entry of the +Order; and $1,534,353.17 within 360 days of the entry of the Order. If any payment is not +made by the date the payment is required by this Order, the entire outstanding balance of +disgorgement, prejudgment interest, and civil penalties, plus any additional interest accrued +pursuant to SEC Rule of Practice 600 shall be due and payable immediately, without +further application. Payment must be made in one of the following ways: + + 1. 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 VERO Capital, Geiger, Barbaresi, or Downey as a Respondent in these +proceedings, and the file number of these proceedings; a copy of the cover letter and check +or money order must be sent to Amelia A. Cottrell, Division of Enforcement, Securities and +Exchange Commission, 200 Vesey Street, Suite 400, New York, NY 10281. + + M. Respondents VERO Capital, Geiger, Barbaresi, and Downey shall each pay +a civil money penalty in the amount of $300,000 to the Securities and Exchange +Commission. Payment shall be made in the following installments: each shall make a +payment of $150,000 within 180 days of the entry of the Order; and each shall make a +payment of $150,000 within 360 days of the entry of the Order. If any payment is not +made by the date the payment is required by this Order, the entire outstanding balance of +disgorgement, prejudgment interest, and civil penalties, plus any additional interest accrued +pursuant to SEC Rule of Practice 600 or pursuant to 31 U.S.C. 3717, shall be due and +payable immediately, without further application. Payment must be made in one of the +following ways: + + 19 + 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 VERO Capital, Geiger, Barbaresi, or Downey as a Respondent in these +proceedings, and the file number of these proceedings; a copy of the cover letter and check +or money order must be sent to Amelia A. Cottrell, Division of Enforcement, Securities and +Exchange Commission, 200 Vesey Street, Suite 400, New York, NY 10281. + +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 Geiger, Barbaresi, and Downey, and further, any debt for +disgorgement, prejudgment interest, civil penalty or other amounts due by Respondents +Geiger, Barbaresi, and Downey 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 Geiger, Barbaresi, and Downey of the federal securities +laws or any regulation or order issued under such laws, as set forth in Section 523(a)(19) of +the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + + Brent J. Fields + Secretary + + + + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3672.txt b/raw/aaer/2015/AAER-3672.txt new file mode 100644 index 0000000000000000000000000000000000000000..101614e89392653b28f1341bd76eb9d6c09f2458 --- /dev/null +++ b/raw/aaer/2015/AAER-3672.txt @@ -0,0 +1,158 @@ + + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75563 / July 30, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3672 / July 30, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16709 + + : + : + : +In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + Christopher Edwards, CA, : 102(e) OF THE COMMISSION’S RULES OF + : PRACTICE, MAKING FINDINGS, AND + Respondent. : IMPOSING REMEDIAL SANCTIONS + : + : +____________________________________ : + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against +Christopher Edwards (“Respondent” or “Edwards”) 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 . . . permanentl y +enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the +Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of +the rules and regulations thereunder. + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Christopher Edwards, 32, a citizen and resident of the United Kingdom, +was a Finance Manager in Computer Science Corporation’s Nordic region from December 2008 +to June 2010. He left the company in October 2010. Edwards is a Chartered Accountant in the +United Kingdom. + +2. Computer Sciences Corporation (“CSC”), a Nevada corporation +headquartered in Falls Church, Virginia, sells information technology services. At all relevant +times, CSC’s common stock traded on the New York Stock Exchange. + + 3. On June 5, 2015, the Commission filed a complaint in the United States +District Court for the Southern District of New York against Edwards in Securities and Exchange +Commission v. Christopher Edwards, Civil Action Number 15-cv-4339 (RA). On July 24, 2015, +the court entered an order permanently enjoining Edwards, by consent, from future violations of +Sections 17(a)(1) and (3) of the Securities Act of 1933 (“Securities Act”) and Sections 10(b) and +13(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5(a) and (c) and +13b2-1 promulgated thereunder, 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 13a-1 and 13a-13 promulgated +thereunder. Edwards was also barred from acting as an officer or director of any public company +pursuant to Section 20(e) of the Securities Act and Section 21(d)(2) of the Exchange Act for a +period of four years. + + 4. The Commission’s complaint alleged that Edwards fraudulently inflated +CSC’s earnings in its fiscal year 2010. Edwards recorded and maintained large amounts of +“prepaid assets” on CSC’s balance sheet that the company was instead required to record as +expenses on its income statement. By doing so, Edwards artificially and materially overstated +CSC’s earnings. As a Finance Manager, Edwards was responsible for ensuring that the company +recorded these expenses consistent with Generally Accepted Accounting Principles (“GAAP”). +Instead, Edwards’s actions resulted in CSC fraudulently overstating its consolidated operating + 3 +income by 5% for the first quarter of fiscal year 2010, and in the company materially overstating +the operating income of one of its reportable segments in each quarter of that fiscal year. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Edwards’ Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Edwards is suspended from appearing or practicing before the Commission as an +accountant. + + B. After four years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify any criticisms +of or potential defects in the respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring partner reviews and quality control +standards. + + 4 +C. The Commission will consider an application by Respondent to resume +appearing or practicing before the Commission provided that his practicing license is +current and he has resolved all other disciplinary issues with the Association of Certified +Chartered Accountants. 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 Respondent’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission. + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3674.txt b/raw/aaer/2015/AAER-3674.txt new file mode 100644 index 0000000000000000000000000000000000000000..b95c7064f84c0d7ca90aee70000909a1c97a4059 --- /dev/null +++ b/raw/aaer/2015/AAER-3674.txt @@ -0,0 +1,587 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75627 / August 6, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3674 / August 6, 2015 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 4162 / August 6, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16731 + + +In the Matter of + +WESLEY N. STARK, CPA and +STARKSCHENKEIN, LLP, + +Respondents. + + + + +ORDER INSTITUTING +ADMINISTRATIVE AND +CEASE-AND-DESIST +PROCEEDINGS PURSUANT +TO SECTION 4C OF THE +SECURITIES EXCHANGE +ACT OF 1934, SECTION +203(k) OF THE INVESTMENT +ADVISERS ACT OF 1940, +AND RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE, MAKING +FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS +AND A CEASE-AND-DESIST +ORDER + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to +Section 4C1 of the Securities Exchange Act of 1934 (“Exchange Act”), Section 203(k) 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 + + 2 +Investment Advisers Act of 1940 (“Advisers Act”), and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice,2 against Wesley N. Stark, CPA (“Stark”) and StarkSchenkein, LLP +(“StarkSchenkein”) (collectively, “Respondents”). +II. + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondents consent +to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to +Section 4C of the Securities Exchange Act of 1934, Section 203(k) of the Investment Advisers Act +of 1940, and Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing +Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. +III. +On the basis of this Order and Respondents’ Offers, the Commission finds3 that: +Summary +1. This matter involves violations by Respondents in failing to adequately +complete requisite surprise examinations pursuant to Section 206(4) of the Advisers Act and Rule +206(4)-2 thereunder. The Planning Group of Scottsdale, LLC (“TPGS”), a former registered +investment adviser, and its founder, sole owner, president, managing director, and chief +compliance officer, Reid S. Johnson (“Johnson”), had custody of client funds and securities and +was required by the Custody Rule to have an independent public accountant conduct annual +surprise examinations to verify those funds and securities. For 2010, 2011 and 2012, TPGS +retained StarkSchenkein LLP to perform the surprise examinations. Stark and StarkSchenkein +accepted the TPGS engagements despite lacking the necessary knowledge of, and experience with, + +engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct. + +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + 3 +the Custody Rule. By failing to complete the 2010 and 2011 surprise examinations adequately, +and by failing to complete the 2012 surprise examination or withdraw therefrom, Stark and +StarkSchenkein caused TPGS’s Custody Rule violations and 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. +Respondents +2. Wesley N. Stark, CPA (“Stark”), age 77, resides in Denver, Colorado. +Stark is a founding partner and former owner of public accounting firm StarkSchenkein, LLP. +Although Stark sold his 60% ownership interest effective July 1, 2012, he remained a partner of the +firm and continued to work part-time. Stark holds a Series 28 securities license. Stark has active +CPA licenses in Colorado and New Mexico and inactive CPA licenses in Washington, Idaho, +Missouri and New York. Stark was the engagement partner for the surprise examinations that +StarkSchenkein performed for TPGS for 2010, 2011, and 2012. +3. StarkSchenkein, LLP (“StarkSchenkein”) is a Colorado limited liability +partnership headquartered in Denver, Colorado. StarkSchenkein was a full service public +accounting firm that provided auditing and accounting, tax, business valuation and legal and +business consulting services to a variety of clients including broker-dealers and public companies. +StarkSchenkein had four partners, three of whom were CPAs, and Stark was one of two audit +partners. StarkSchenkein registered with the PCAOB in 2003. StarkSchenkein was engaged to +perform surprise examinations for TPGS for 2010, 2011 and 2012. +Other Relevant Entities +4. Reid S. Johnson resides in Scottsdale, Arizona. Johnson was the founder, +sole owner, president, and managing director of TPGS, and the president and sole owner of former +registered broker-dealer Meridian United Capital, LLC (“MUC”). Johnson also served as TPGS’s +chief compliance officer in 2010, 2011 (excluding a period of approximately seven months during +which another employee held this position) and 2012. Johnson holds Series 7, 24, 63 and 65 +licenses. In October 2013, Johnson received a 45-day suspension from FINRA in connection with +a private placement offering for which MUC acted as placement agent, where he was suspended +for withdrawing $300,000 from escrow before MUC had satisfied the minimum sales contingency +for the offering. +5. TPGS is an Arizona limited liability company with its principal place of +business at 8800 North Gainey Center Drive, Suite 176, Scottsdale, Arizona. It was founded by +and is 100% owned by Johnson. TPGS registered with the Commission as an investment adviser +in July 2006. In June 2012, Johnson sold TPGS’s investment advisory business with respect to +individual clients. TPGS filed a Form ADV-W to withdraw its registration with the Commission +on March 28, 2013. +6. MUC is an Arizona limited liability company with its principal place of +business at 8800 North Gainey Center Drive, Suite 176, Scottsdale, Arizona. MUC registered with +the Commission as a broker-dealer in July 2002 under a different name; Johnson and a partner +purchased the broker-dealer in June 2003 and renamed it MUC. Johnson became the sole owner of + 4 +MUC in December 2011. MUC withdrew its registration with the Commission effective +December 15, 2012. +7. Insured Private Equity I, LLC (“IPE”) was founded by Johnson to make +investments in microcap and start-up companies and to acquire certain single premium immediate +annuities and life insurance policies. IPE’s managing member is Oak Canyon Capital, Inc. +(“Oak Canyon”), which is solely owned by Johnson and operates out of the office at 8800 North +Gainey Center Drive. From approximately June 2010 to June 2011, units of IPE were sold by +MUC in a private placement offering. Fourteen of the fifteen investors in IPE – 93% – were TPGS +advisory clients. +8. Eagle Creek Fund, LLC (“Eagle Creek Fund”) was founded by Johnson to +acquire Series A Preferred Stock in another company located in India. Eagle Creek Fund’s +managing member is Eagle Creek Management, LLC (“Eagle Creek Management”), which is +owned by another entity, Strategic Global Partners, LLC, which is in turn co-owned and co- +controlled by Johnson and one other individual. Eagle Creek Management operates out of the +office at 8800 North Gainey Center Drive. From approximately July 2008 to January 2010, units +of Eagle Creek Fund were sold by MUC in a private placement offering. All 97 investors in Eagle +Creek Fund – 100% – were TPGS advisory clients. +9. The “Guaranteed Income Strategy” or “GIS3 Programs” were created by +Johnson, and employed an insurance arbitrage strategy involving the purchase of a single premium +immediate annuity (“SPIA”) and a life insurance policy. The GIS3 Programs were securitized so +that investors (besides the insured) could purchase units in an LLC pooled investment vehicle +holding the SPIA and life insurance policy. At least twelve of the GIS3 Programs were in turn +structured so that the LLC did not purchase the SPIA and life insurance policy directly, but +purchased 100% ownership in a family limited liability limited partnership (LLLP) that held the +SPIA and life insurance policy. The GIS3-LLLP Programs had as their managing member either +Oak Canyon or Meridian Services, LLC (“Meridian Services”), another entity owned solely by +Johnson that operates out of the office at 8800 North Gainey Center Drive. At least 118 of the 123 +investors in the GIS3-LLLP Programs – 96% – were TPGS advisory clients. +10. The Investor A Trust dated January 6, 2009 (the “Investor A Trust”) was a +family trust for a TPGS client. Johnson served as trustee of the Investor A Trust until at least +April 4, 2011. The Investor A Trust invested in Eagle Creek Fund and other pooled investment +vehicles as well as publicly-traded securities. +Background +11. TPGS had custody over funds and securities of its advisory clients, IPE, +Eagle Creek Fund, and the GIS3-LLLP Programs. +12. Paper stock certificates for some securities purchased by IPE were kept in a +lockbox, which was in turn kept for a time in a locked file cabinet set aside for IPE at the office at +8800 North Gainey Center Drive. In or around August 2012, Johnson moved the lockbox to his +personal residence. Johnson is the only person with a key to the lockbox. + 5 +13. The stock certificates Eagle Creek Fund received for its investments in an +Indian company were kept in a locked storage facility in Scottsdale, Arizona where office +documents for TPGS were stored. Johnson is the only person with a key to the storage facility. +14. The funds raised in each GIS3-LLLP Program were held in an account +specific to each Program at a bank. Johnson, in his capacity as owner and manager of Oak Canyon +or Meridian Services, had authority to obtain possession of the funds in each such account. These +funds were used to acquire the ownership interest of family partnership LLLPs that held SPIAs and +life insurance policies. +15. The Investor A Trust held funds and securities in a brokerage account at a +third party registered broker-dealer. The Investor A Trust was an advisory client of TPGS. +Johnson, in his capacity as trustee for the Investor A Trust, had authority to obtain possession of +the money and securities in the brokerage account. +16. As the engagement partner and accounting firm retained to perform TPGS’s +surprise examinations in 2010-2012, Stark and StarkSchenkein caused TPGS’s violations of the +Custody Rule. Stark and StarkSchenkein knew or should have known that their conduct would +contribute to TPGS’s violations of the Custody Rule. +Respondent Stark Failed to Complete the 2010, 2011 and 2012 Surprise Examinations in +Accordance with Applicable Standards +17. Stark’s conduct of TPGS’s 2010-2012 surprise examinations violated the +professional standards for certified public accountants set forth in AICPA’s Attestation Standards +Section 101 and Compliance Attest Procedures Section 601. +18. Prior to the 2010 surprise examination it performed for TPGS, +StarkSchenkein had never performed a surprise examination for a registered investment adviser. +19. The engagement team assigned to the 2010 surprise examination had no +prior experience performing surprise examinations for registered investment advisers, including +Stark, who served as engagement partner for all three surprise examinations and was responsible +for supervising the work performed in connection with those engagements. +20. Although the engagement letter for the 2010 surprise examination was dated +December 30, 2010, StarkSchenkein was not actually retained to perform that examination until +2011, and work on that surprise examination was performed in 2011 rather than 2010. +21. For both the 2010 and 2011 surprise examinations, StarkSchenkein filed a +Form ADV-E and Report of Independent Registered Accountant certifying that TPGS was in +compliance with paragraph (a)(4) of the Custody Rule when in fact it was not. The Form ADV-E +for the 2011 surprise examination was filed more than 120 days after the commencement of that +surprise examination. +22. For the 2012 surprise examination, StarkSchenkein did not complete its +work and never filed any report or other document relating to that examination; nor did it file a +Form ADV-E within four business days after termination of work on that surprise examination. + 6 +23. Stark deferred to TPGS’s determinations as to what securities it had custody +over and requested documents and information from TPGS in accordance with those +determinations. Neither Stark nor anyone from StarkSchenkein inspected the paper stock +certificates for the securities held by IPE or Eagle Creek Fund. +24. StarkSchenkein’s engagement letters for the 2010, 2011 and 2012 surprise +examinations, which were drafted by StarkSchenkein and reviewed and signed by Stark, lacked the +required language concerning StarkSchenkein’s obligation to file a Certificate on Form ADV-E +within 120 days of the commencement of the surprise examination, to notify the Commission +within one business day of any material discrepancies found during the surprise examination, and +to file a Form ADV-E and statement within four business days after termination of work on the +surprise examination. The engagement letters for the 2010 and 2011 surprise examinations also +improperly disclosed the date that StarkSchenkein intended to commence the surprise examination, +which the Custody Rule required to be chosen without prior notice or announcement to TPGS. +25. Stark allowed the 2010 surprise examination engagement letter to be dated +December 30, 2010, and allowed a Form ADV-E to be filed that stated that the 2010 surprise +examination commenced on December 31, 2010, even though StarkSchenkein was not actually +retained to perform the examination until 2011 and performed the work on that examination in +2011 rather than 2010. +26. Although StarkSchenkein’s written quality control procedures required +engagement quality control review for attest engagements, Stark failed to obtain any engagement +quality control review for the 2010 and 2011 surprise examinations. +27. Stark failed to obtain sufficient evidence to support the conclusion in the +surprise examination reports for the 2010 and 2011 surprise examinations that TPGS was in +compliance with the Custody Rule, because: (1) StarkSchenkein did not receive any documents +from sources other than TPGS in connection with the 2010 and 2011 surprise examinations; (2) +although the reports for the 2010 and 2011 surprise examinations state that confirmation +procedures were performed, the working papers for these surprise examinations do not include any +confirmations; (3) the working papers for the 2010 surprise examination indicate that no alternative +procedures were performed in lieu of confirmations for IPE, Eagle Creek Fund, or three of the +GIS3-LLLP Programs; (4) although the working papers for the 2010 surprise examination indicate +that alternative procedures were performed for nine of the GIS3-LLLP Programs, the working +papers show that these procedures relied exclusively upon bank statements provided by TPGS; and +(5) while the working papers for the 2011 surprise examination indicate that alternative procedures +were performed in lieu of confirmations for IPE, Eagle Creek Fund, and all of the GIS3-LLLP +Programs, the working papers lack documents, such as updated account statements, that would +have been required for the performance of alternative procedures. +28. Although Stark obtained a signed, written statement from TPGS entitled +“Management Statement Regarding Compliance With Certain Provisions of the Investment +Advisers Act of 1940” for both the 2010 and 2011 surprise examinations, these Management +Statements lacked representations that TPGS had made available all documentation related to +compliance with the Custody Rule. + 7 +29. Stark had no basis to opine that TPGS was in compliance with the Custody +Rule in the surprise examination reports for the 2010 and 2011 surprise examinations because (1) +he lacked the necessary knowledge and understanding of, and training and proficiency in, Custody +Rule compliance requirements; and (2) he failed to obtain sufficient evidence to support that +conclusion. +30. Stark failed to modify the surprise examination reports for the 2010 and +2011 surprise examinations, which state that confirmation procedures were performed even though +the working papers for these surprise examinations do not include any confirmations, and the +working papers for the 2010 surprise examinations further indicate that no alternative procedures +were performed in lieu of obtaining confirmations for IPE, Eagle Creek Fund, and at least three of +the GIS3-LLLP Programs. Stark also failed to modify the surprise examination reports for the +2010 and 2011 surprise examinations to reflect TPGS’s noncompliance with the Custody Rule. +31. For the 2010, 2011 and 2012 surprise examinations, Stark violated AICPA +Attestation Standards §§ 101.19-20 (practitioner must have adequate technical training and +proficiency), §§ 101.21-22 (practitioner must have adequate knowledge of the subject matter), and +Compliance Attest Procedure § 601.40 (practitioner should obtain an understanding of specified +compliance requirements). +32. For the 2010, 2011 and 2012 surprise examinations, Stark violated +Attestation Standards §§ 101.39-41 (practitioner must exercise due professional care in planning +and performance, which requires critical review at every level of supervision and judgment, +including preparation of report) and Compliance Attest Procedures §§ 601.38-39 (practitioner +should exercise due care in planning, performing, and evaluating the results of his or her +examination procedures and the proper degree of professional skepticism to achieve reasonable +assurance that material noncompliance will be detected). +33. For the 2010, 2011 and 2012 surprise examinations, Stark violated +Attestation Standards §§101.42-50 (practitioner must adequately plan the work and must properly +supervise any assistants, and should establish an understanding with the client regarding the +services to be performed for each engagement) and Compliance Attest Procedure §601.41 +(planning an engagement). +34. For the 2010 and 2011 surprise examinations, Stark violated Attestation +Standards §§101.51-58 (practitioner must obtain sufficient evidence to provide a reasonable basis +for the conclusion expressed in the report) and Compliance Attest Procedures §§601.48-49 +(practitioner should apply procedures to provide reasonable assurance of detecting material +noncompliance). +35. For the 2010 and 2011 surprise examinations, Stark violated Attestation +Standards §§101.59-62 and Compliance Attest Procedure §601.68 (practitioner should obtain from +the client or other responsible party certain written representations regarding compliance, including +representation that client has made available all documentation related to compliance with the +specified requirements). + 8 +36. For the 2010 and 2011 surprise examinations, Stark violated Attestation +Standards §§101.66-67 (practitioner should modify the report if there are material misstatements in +the same), §§101.71-77 (practitioner must state significant reservations about the engagement, the +subject matter, and, if applicable, the assertion related thereto in the report), and Compliance Attest +Procedures §§601.63-67 (practitioner should modify the standard report when examination +discloses material noncompliance or restriction on the scope of the engagement). +37. For the 2010 and 2011 surprise examinations, Stark violated Attestation +Standards §§101.100-103 (practitioner should prepare and maintain adequate attest +documentation). +38. For the 2012 surprise examination, Stark violated Attestation Standard +§101.64 (practitioner should issue a report or withdraw from the attest engagement). +Respondent StarkSchenkein Failed to Complete the 2010, 2011 and 2012 Surprise +Examinations in Accordance with Applicable Standards +39. StarkSchenkein’s conduct of TPGS’s 2010-2012 surprise examinations +further violated the professional quality control standards set forth in AICPA Quality Control +Standards Sections 10.27, 10.35-36, and 10.38-45 (formerly Sections 10.57, 10.60, 10.80-10.99).4 +40. From approximately March 2011 to December 2012, StarkSchenkein had in +place a quality control manual entitled “StarkSchenkein, LLP Quality Control Accounting and +Auditing Policies and Procedures Manual” (the “Quality Control Manual”). +41. Although StarkSchenkein’s Quality Control Manual had a section entitled +“Acceptance and Continuance of Clients and Specific Engagements,” this section lacked a specific +protocol for the firm to assess its competency and capacity for compliance in the context of a +specific engagement. +42. The Quality Control Manual failed to include any discussion regarding who +was responsible for determining that the firm was competent to perform an engagement, and +capable of complying with the relevant legal and ethical requirements; nor did the Quality Control +Manual include any discussion regarding how those determinations would be made. +43. StarkSchenkein accepted the engagements for TPGS’s surprise +examinations, even though StarkSchenkein lacked experience with surprise examinations for +registered investment advisers and Stark lacked the knowledge or understanding of, or training and +proficiency in, Custody Rule compliance requirements that would have enabled StarkSchenkein to +competently perform the engagements and comply with the applicable legal requirements. +44. StarkSchenkein’s Quality Control Manual included a subsection entitled +“Engagement Quality Control Review” that provided that engagement quality control review, also +described as “a concurring review by an independent partner,” was required on attest engagements, + +4 The AICPA Quality Control Standards (SQCS 7) were revised effective January 1, 2012 +(SQCS 8). The revision changed the numbering of some of the Standards. + 9 +and “must be completed before the report is released.” This subsection failed to provide any +mechanism for the assignment of engagement quality control reviewers with suitable experience. +45. The Quality Control Manual also failed to provide for any documentation or +other mechanism to ensure that engagement quality control review was actually performed and +completed for an attest engagement before the corresponding report was released. +46. StarkSchenkein failed to obtain engagement quality control review for the +completed 2010 and 2011 surprise examinations at any time before or after the reports for those +surprise examinations were issued. +Violations +47. As a result of the conduct described above, Stark and StarkSchenkein +caused TPGS’s violation of Section 206(4) of the Advisers Act and Rule 206(4)-2 promulgated +thereunder, which make it a fraudulent, deceptive or manipulative act for any registered investment +adviser to have custody of clients’ funds or securities unless the adviser: (1) maintains client funds +and securities with a qualified custodian; (2) notifies clients of certain information regarding the +qualified custodian and accounts; (3) has a reasonable basis, after due inquiry, for believing that a +qualified custodian is providing at least quarterly account statements to clients; and (4) obtains an +annual surprise examination.5 +48. As a result of the conduct described above, Stark and StarkSchenkein +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, pursuant to Section 4C of the Exchange Act, Section 203(k) of the Advisers +Act, and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice, it is hereby ORDERED, +effective immediately, that: + + A. Respondent Stark cease and desist from committing or causing any violations and +any future violations Section 206(4) of the Advisers Act and Rule 206(4)-2 promulgated thereunder. + +B. Respondent StarkSchenkein cease and desist from committing or causing any +violations and any future violations Section 206(4) of the Advisers Act and Rule 206(4)-2 +promulgated thereunder. + + +5 Proof of scienter is not required to establish a violation of Section 206(4) of the +Advisers Act and Rule 206(4)-2 thereunder; a showing of negligence is adequate. See SEC v. +Steadman, 967 F.2d 636, 647 (D.C. Cir. 1992). + 10 +C. Respondent Stark is denied the privilege of appearing or practicing before the +Commission as an accountant. + + D. After three years from the date of this Order, Respondent Stark may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the Chief +Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or review, + of any public company’s financial statements that are filed with the +Commission. Such an application must satisfy the Commission that +Respondent Stark’s work in his practice before the Commission will be +reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he +practices before the Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the + Commission that: + + (a) Respondent Stark, 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 Stark, 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 +his or the firm’s quality control system that would indicate that he +will not receive appropriate supervision; + + (c) Respondent Stark 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 Stark acknowledges his responsibility, as long as he +appears or practices before the Commission as an independent +accountant, to comply with all requirements of the Commission and +the Board, including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality +control standards. + +E. The Commission will consider an application by Respondent Stark 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 Stark’s + 11 +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission. + + F. Respondent StarkSchenkein is denied the privilege of appearing or practicing +before the Commission as an accountant. + + G. After one year from the date of this Order, Respondent StarkSchenkein may request +that the Commission consider its reinstatement by submitting an application (attention: Office of +the Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission. Such an application must satisfy the Commission that +Respondent StarkSchenkein’s work in its practice before the Commission +will be reviewed either by the independent audit committee of the public +company for which it works or in some other acceptable manner, as long as +it practices before the Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the + Commission that: + + (a) Respondent StarkSchenkein 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) Respondent StarkSchenkein has hired an independent CPA +consultant (“consultant”), who is not unacceptable to the staff of +the Commission and is affiliated with a public accounting firm +registered with the Board, that has conducted a review of +StarkSchenkein’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. StarkSchenkein 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 StarkSchenkein, 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 + 12 +not, without prior written consent of the staff, enter into any +employment, consultant, attorney-client, auditing or other +professional relationship with StarkSchenkein, or any of its present +or former affiliates, directors, officers, employees, or agents acting +in their capacity as such for the period of the review and for a +period of two years after the review; + + (c) Respondent StarkSchenkein 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 StarkSchenkein acknowledges its responsibility, as long +as it appears or practices before the Commission as an independent +accountant, to comply with all requirements of the Commission and +the Board, including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality +control standards. + + H. The Commission will consider an application by Respondent StarkSchenkein 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 +Respondent StarkSchenkein’s character, integrity, professional conduct, or qualifications to appear +or practice before the Commission. + +I. Respondent Stark shall pay a civil money penalty in the amount of $15,000 to the +Securities and Exchange Commission for transfer to the general fund of the United States +Treasury, subject to Exchange Act Section 21F(g)(3). Payment shall be made in the following +installments: (1) $3,000 within 10 days of entry of the Order; (2) $3,000 within 90 days of entry of +the Order; (3) $3,000 within 180 days of entry of the Order; (4) $3,000 within 270 days of entry of +the Order; and (5) $3,000 within 360 days of entry of the Order. If any payment is not made by the +date the payment is required by this Order, the entire outstanding balance of civil penalties, plus +any additional interest accrued pursuant to 31 U.S.C. 3717, shall be due and payable immediately, +without further application. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + 13 +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Stark 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 Victoria Levin, Assistant Regional Director, +Enforcement, Securities and Exchange Commission, Los Angeles Regional Office, 444 South +Flower St., Suite 900, Los Angeles, CA 90071. + + J. Respondent StarkSchenkein shall pay disgorgement of $12,750, which represents +profits gained as a result of the conduct described herein, prejudgment interest of $1,353 and +civil penalties of $15,000 to the Securities and Exchange Commission for transfer to the general +fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). Payment shall be +made in the following installments: (1) $5,820.60 within 10 days of entry of the Order; (2) +$5,820.60 within 90 days of entry of the Order; (3) $5,820.60 within 180 days of entry of the +Order; (4) $5,820.60 within 270 days of entry of the Order; and (5) $5,820.60 within 360 days of +entry of the Order. If any payment is not made by the date the payment is required by this Order, +the entire outstanding balance of disgorgement, prejudgment interest, and civil penalties, plus any +additional interest accrued pursuant to SEC Rule of Practice 600 or pursuant to 31 U.S.C. 3717, +shall be due and payable immediately, without further application. Payment must be made in one +of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(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 + + 14 +Payments by check or money order must be accompanied by a cover letter identifying +StarkSchenkein 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 Victoria Levin, Assistant +Regional Director, Enforcement, Securities and Exchange Commission, Los Angeles Regional +Office, 444 South Flower St., Suite 900, Los Angeles, CA 90071. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent Stark, and further, any debt for disgorgement, prejudgment interest, civil penalty or +other amounts due by Respondent Stark 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 Stark of the federal securities laws or any regulation or order issued under +such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3677.txt b/raw/aaer/2015/AAER-3677.txt new file mode 100644 index 0000000000000000000000000000000000000000..ef158f7e120f70c3fdd0115d2c3f68064432232c --- /dev/null +++ b/raw/aaer/2015/AAER-3677.txt @@ -0,0 +1,117 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75667 / August 11, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3677 / August 11, 2015 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 4167 / August 11, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16740 + + +In the Matter of + +VINEET KALUCHA, CA, + +Respondent. +ORDER INSTITUTING +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 203(f) OF THE +INVESTMENT ADVISERS ACT OF 1940, +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Vineet +Kalucha, CA (“Kalucha” or “Respondent”) pursuant to Section 203(f) of the Investment Advisers +Act of 1940 (“Advisers Act”) and Rule 102(e)(3)(i) of the Commission’s Rules of Practice.1 + +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 + +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 +these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over him and the subject matter of these proceedings and the +findings contained in Section III.3, below, which are admitted, Respondent consents to the entry of +this (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Kalucha, age 51, is a citizen of India and a permanent resident alien of the United +States residing in Washington, D.C. Kalucha was the founder, “Managing Partner,” and Chief +Investment Officer of Aphelion Fund Management, LLC (“Aphelion”), an unregistered investment +adviser. + +2. Kalucha is a Chartered Accountant licensed by the Institute of Chartered +Accountants of India, and has practiced as an accountant at the New Delhi, India office of a global +accounting firm whose accountants regularly appear and practice before the Commission. + +3. On July 30, 2015, a final judgment was entered by consent against Kalucha, +permanently restraining and enjoining him from future violations of Section 10(b) of the Securities +Exchange Act of 1934 and Rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933, and +Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder, in the civil +action entitled Securities and Exchange Commission v. Vineet Kalucha, et al., Civil Action +Number 1:14-cv-03247-RMB, in the United States District Court for the Southern District of New +York. +4. The Commission’s complaint alleged, among other things, that Kalucha +fraudulently altered an outside accounting firm’s report, that Kalucha distributed this altered report +to prospective investors in funds managed by Aphelion, and that Kalucha misused proceeds raised +from investors in Aphelion to pay for his personal expenses. +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 203(f) of the Advisers Act, Respondent Kalucha is barred from +association with any broker, dealer, investment adviser, municipal securities dealer, municipal +advisor, transfer agent, or nationally recognized statistical rating organization. + +B. Any reapplication for association by the Respondent Kalucha will be subject to the +applicable laws and regulations governing the reentry process, and reentry may be conditioned + 3 +upon a number of factors, including, but not limited to, the satisfaction of any or all of the +following: (a) any disgorgement ordered against the Respondent, whether or not the Commission +has fully or partially waived payment of such disgorgement; (b) any arbitration award related to the +conduct that served as the basis for the Commission order; (c) any self-regulatory organization +arbitration award to a customer, whether or not related to the conduct that served as the basis for +the Commission order; and (d) any restitution order by a self-regulatory organization, whether or +not related to the conduct that served as the basis for the Commission order. + +C. Pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of Practice, Respondent +Kalucha is suspended from appearing or practicing before the Commission as an accountant. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3680.txt b/raw/aaer/2015/AAER-3680.txt new file mode 100644 index 0000000000000000000000000000000000000000..c4f7bb06a23123baa6c7f7ae14b7a4eb7c82c797 --- /dev/null +++ b/raw/aaer/2015/AAER-3680.txt @@ -0,0 +1,655 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75795 / August 31, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3680 / August 31, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16773 + + + +In the Matter of + +JOHNSON LAMBERT LLP, and +BRADLEY SCOTT DIERICX, 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 Johnson Lambert LLP (“Johnson +Lambert”) and Bradley Scott Diericx, CPA (“Diericx”) (collectively, the “Respondents”), pursuant +to Sections 4C1 of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice.2 + + +1 Section 4C provides, in relevant part, that: +The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others . . . (2) to be lacking in character or integrity, or to have +engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted violations of, any provisions of the +securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in relevant part, that: +The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct. +2 +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Public +Administrative 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 +3 that: + +A. SUMMARY + +1. These proceedings arise out of Johnson Lambert’s and Diericx’s improper +professional conduct in their audits of the financial statements of Maven Assurance Limited +(“Maven Assurance”) and Maven Life International Limited (“Maven Life”) (collectively, the +“Maven Entities”) for the years ended December 31, 2009 and December 31, 2010. The audits +failed to comply with Generally Accepted Auditing Standards (“GAAS”) in many critical +respects, which resulted in the issuance of audit reports containing unqualified opinions that were +not supported by sufficient appropriate audit evidence. Specifically, Johnson Lambert and +Diericx failed to exercise due professional care, failed to adequately staff the Maven audits, +failed to obtain sufficient appropriate audit evidence regarding the existence and valuation of the +Maven Entities’ purported investments in hedge funds and alternative investments managed by +Nikolai Battoo, and failed to exercise professional skepticism by overlooking red flags and other +warnings. Due to these audit failures, Johnson Lambert and Diericx failed to detect that the +Maven Entities’ purported investments with Battoo either did not exist or had lost virtually all of +their value. + +2. Johnson Lambert and Diericx were aware that the Maven Entities’ prior auditor +had issued a qualified opinion in the prior year due to its inability to obtain sufficient audit +evidence regarding the existence and valuation of the investments with Battoo, which constituted +the majority of the Maven Entities’ assets. They were also aware that the Maven Entities did not +have processes in place to value the investments with Battoo. Nevertheless, Johnson Lambert +assembled an audit engagement team that lacked experience auditing alternative investments, +and the engagement team failed to perform adequate substantive procedures to address these +risks. + + +3 The findings 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. Johnson Lambert LLP is an accounting firm headquartered in Falls Church, +Virginia. Johnson Lambert provides services to public companies registered with the Commission +and has been registered with the Public Company Accounting Oversight Board (“PCAOB”) since +2003. Johnson Lambert conducted audits of the financial statements of the Maven Entities for the +years ended December 31, 2009 and December 31, 2010. + +4. Bradley Diericx (“Diericx”), age 42, is a resident of Wheaton, Illinois and a +certified public accountant (“CPA”) licensed in the state of Illinois. From June 2009 to September +2012, Diericx was a partner at Johnson Lambert and was the engagement partner for Johnson +Lambert’s audits of the Maven Entities’ financial statements for the years ending December 31, +2009 and December 31, 2010. +C. OTHER RELEVANT ENTITIES/PERSONS + +5. Nikolai Simon Battoo was an alternative investment manager who managed assets +using a variety of vehicles and entities. From 2004 through 2012, Battoo raised more than $400 +million from investors who directed their funds to his PIWM investment program and several +hedge funds he controlled. Battoo acted as investment adviser to investors in his Private +International Wealth Management (“PIWM”) investment program through two entities that he +controlled: BC Capital Group, S.A. (Panama) (“BC Panama”) and BC Capital Group Ltd. (Hong +Kong) (“BC Hong Kong”) (collectively the “BC Capital entities”). In September 2012, the +Commission filed an emergency enforcement action in district court against Battoo and the BC +Capital entities, alleging that they defrauded investors located worldwide in violation of the +antifraud provisions of the federal securities laws and acted as unregistered broker-dealers (the +“SEC Battoo Lawsuit”). On September 30, 2014, the district court entered a default judgment +against Battoo and the BC Capital entities, which included permanent injunctions and +disgorgement, prejudgment interest, and civil penalties totaling $358,129,196.86. +6. Maven Assurance Ltd. and Maven Life International Ltd. were insurance +companies formed under the laws of Anguilla in 2006. Maven Assurance offered investment +products in the form of a so-called “captive insurance” program to high-net-worth individuals +and small business owners. Maven Life offered variable annuities. The bulk of the funds that +investors directed to the Maven Entities were placed with Battoo’s PIWM investment program. +At the time the Commission filed the SEC Battoo Lawsuit, the Maven Entities’ clients believed +they had $95 million invested with Battoo’s PIWM. In reality, Battoo lost or stole nearly all of +the Maven Entities’ funds. The Maven Entities, which are now defunct, were never registered +with the Commission and had no disciplinary history. +7. Alliance Investment Management Limited (“AIM”) is a Bahamas-based company +that is registered as a broker-dealer with the Securities Commission of the Bahamas. AIM is a +wholly-owned subsidiary of Benchmark Bahamas Limited, a publicly traded investment +company listed on the Bahamas International Securities Exchange. AIM has never been +registered in any capacity with the Commission. On August 8, 2014, the Commission filed +charges against AIM and its President Julian Brown, alleging that they engaged in fraud and +aided and abetted Battoo’s fraud. +4 +D. FACTS +The Maven Entities’ Background +8. The Maven Entities offered insurance-linked investment options to U.S.-based +investors, mainly high net worth individuals and profitable small businesses. Maven Life sold +variable annuities. Maven Assurance purported to offer “captive insurance” products in which +the vast majority of the premium was invested at the direction of the investor. The Maven +Entities touted their products as means of obtaining tax-deferred gains. The Maven Entities were +based in Anguilla, but run by individuals located in the greater Chicago area. + +9. In 2006, the Maven Entities entered into investment management agreements with +BC Hong Kong, an entity managed and controlled by investment manager Nikolai Battoo. The +agreements gave BC Hong Kong discretion to manage the Maven Entities’ assets. Since 2006, BC +Hong Kong purported to invest the majority of the Maven Assurance’s assets into shares of hedge +funds (some controlled by Battoo) and in Battoo’s PIWM investment program, a private +investment program that purported to invest primarily in alternative investments. Maven Life +invested in PIWM beginning 2008. +Battoo’s Fraud and its Impact on the Maven Entities +10. Battoo oversaw a massive fraud that caused investors worldwide to lose hundreds +of millions of dollars. Battoo touted himself as a highly successful alternative asset manager +who achieved exceptional risk-adjusted returns. He concealed major losses in his hedge funds +and in his PIWM investment program and misappropriated PIWM investors’ assets for personal +use. +11. In 2008, Battoo’s hedge funds suffered major losses in several areas. Battoo’s +hedge funds had made large, leveraged investments in Madoff feeder funds that suffered total +losses as a result of the Madoff Ponzi scheme. In addition, Battoo’s hedge funds were invested +heavily in fund-linked certificates whose performance was linked to Phi R Squared, a hedge fund +managed by Battoo. Phi R Squared suffered substantial losses in 2008 based on impairments +caused by the financial crisis. As a result, the fund-linked certificates lost approximately 85% of +their value. Battoo’s PIWM investment program also suffered substantial losses in 2008 due to +its high concentration of exposure to Battoo’s hedge funds. Rather than disclose the losses to +existing and prospective PIWM investors, Battoo concealed the losses by reporting fictitious +strong investment returns in investment reports and marketing materials. He created fictitious +account statements and verification reports on the letterhead of AIM, a Bahamas-based broker- +dealer. AIM acted as PIWM’s custodian. At Battoo’s behest, AIM sent account statements and +verification reports to investors and their agents. Battoo exacerbated the PIWM investor losses +by stealing investor funds to support his extravagant lifestyle. +12. On September 6, 2012, the Commission filed an emergency injunctive action in +U.S. district court against Battoo and the entities he controlled. The Commission’s complaint +alleged violations of: Section 17(a) of the Securities Act of 1933 (“Securities Act”); Sections +10(b) and 15(a) of the Exchange Act and Rule 10b-5 thereunder; and Section 206(4) of the +Investment Advisers Act of 1940 (“Advisers Act”) and Rule 206(4)-8 thereunder. On September +5 +30, 2014, the district court entered a default judgment permanently enjoining Battoo and his BC +Capital companies from violating Section 17(a) of the Securities Act; Sections 10(b) and 15(a) of +the Exchange Act and Rule 10b-5 thereunder; and Section 206(4) of the Advisers Act and Rule +206(4)-8 thereunder. The district court also ordered Battoo and his two BC Capital entities to +pay disgorgement, prejudgment interest, and penalty, imposed jointly and severally, totaling +$358,129,196.86. +13. The Maven Entities collectively invested nearly $95 million with Battoo. The +Battoo investments represented approximately 78% of the Maven Entities’ assets. From 2006 +until the Commission filed the SEC Battoo Lawsuit in September 2012, the Maven Entities +believed that Battoo had their assets custodied at AIM. In fact, the Maven Entities’ AIM +accounts held a small fraction of the assets reported to the Maven Entities on their account +statements. +Audits of the Maven Entities +14. The Maven Entities hired independent auditors to perform annual audits of their +financial statements. Audit Firm A audited the Maven Entities’ 2006 financial statements, while +Audit Firm B audited the Maven Entities’ 2007 and 2008 financial statements. Audit Firm A +issued a qualified opinion on Maven Assurance’s 2006 financial statements because the firm did +not have the necessary information to perform valuation procedures on Maven Assurance’s +investments in the PIWM program, which constituted approximately 60% of Maven Assurance’s +assets. Likewise, Audit Firm B, who conducted the 2007 and 2008 audits of the Maven Entities, +issued qualified opinions for the 2007 and 2008 Maven Assurance audits due to its inability to +obtain reliable audit evidence regarding the existence and valuation of the investments with Battoo. +15. The Maven Entities decided to switch auditors yet again for the 2009 audit. The +Maven Entities retained Johnson Lambert to audit the Maven Entities’ 2009 financial statements. +16. Diericx served as the engagement partner for the audits. Diericx lacked +experience dealing with issues that were prevalent in the audits. Before Johnson Lambert +accepted the engagement, Diericx emailed Johnson Lambert’s managing partner and a Johnson +Lambert tax partner about the engagement. In the email’s subject line, Diericx simply wrote +“Help.” He noted that Maven Assurance’s prior financials had “a qualified opinion and other +problematic things.” In the email, Diericx acknowledged that he had never dealt with valuations of +foreign hedge funds or the “[r]amifications/tax risks on what this thing is.” He asked for their +opinion on whether Johnson Lambert should accept the engagement. The managing partner +responded, noting that the prior auditor’s qualified opinion was based on its inability to get audited +financial statements for a hedge fund investment and audit evidence to support the existence and +value of another investment. The managing partner said that unless something has changed in +available evidence, Johnson Lambert would have the same opinion issue. +17. Johnson Lambert accepted the engagement. It assigned Diericx as engagement +partner, despite his lack of experience dealing with the very issues that were the cause of the prior +auditor’s qualified opinion – that is, the valuation of foreign hedge funds. To attempt to +compensate for Diericx’s inexperience, Johnson Lambert’s partner responsible for quality control +over accounting and auditing practice sent Diericx a link to the American Institute of Certified +6 +Public Accountants’ (“AICPA”) Practice Guide to Auditing Alternative Investments4 and assigned +engagement quality control reviewers that the firm believed had expertise in audits involving +alternative investments. +18. In fact, no one on the engagement team had experience dealing with these types of +investments. No one made the engagement quality control reviewers aware of the engagement +team’s lack of experience, the risks associated with the engagement, or the problems with the prior +audits that led to reports with qualified opinions, nor did anyone instruct the engagement quality +control reviewers to devote more effort to the review given the circumstances. +19. Diericx completed both the 2009 and 2010 audits of the Maven Entities. Johnson +Lambert issued audit reports with unqualified opinions for each entity in both years. The 2009 +and 2010 audit reports for Maven Assurance and Maven Life stated that Johnson Lambert +audited the Maven Entities’ financial statements in accordance with GAAS and expressed its +opinion that the financial statements presented fairly, in all material respects, the financial +position of the Maven Entities as of December 31, 2009 and December 31, 2010, in accordance +with U.S. generally accepted accounting principles (“GAAP”). The investments in Battoo’s +alternative investment program constituted approximately 79% of the Maven Entities’ total +assets according to their 2009 and 2010 financial statements. +Johnson Lambert’s and Diericx’s improper professional conduct +20. Contrary to the representations in the audit reports, Johnson Lambert’s audits +were not conducted in accordance with GAAS. Johnson Lambert and Diericx deviated from +GAAS in many critical respects that resulted in the issuance of audit reports with unqualified +opinions that were not supported by sufficient appropriate audit evidence. +Johnson Lambert and Diericx failed to exercise due professional care and to adequately staff the +Maven Entity audits. +21. GAAS requires auditors to exercise due professional care in the planning and +performance of the audit and the preparation of the report. AU § 230.01-02.5 Auditors should +be assigned to tasks and supervised commensurate with their level of knowledge, skill, and +ability, so that they can evaluate the audit evidence they are examining. The auditor with final +responsibility for the engagement should know, at a minimum, the relevant professional +accounting and auditing standards, and should be knowledgeable about the client. AU § 230.06. +Auditors must have adequate technical training and proficiency to perform the audit, and the firm + +4 In 2006, the AICPA’s Alternative Investment Task Force developed and issued a practice +aid for auditors titled “Alternative Investments – Audit Considerations” (“AICPA Alternative +Investment Aid”). As noted in the publication, the information in it “is intended to provide +guidance to auditors” and “may help the auditor understand and apply the Statements on +Auditing Standards.” According to Johnson Lambert personnel, they considered this practice aid +to be the best source of audit guidance on alternative investments. + +5 Citations to “AU” are citations to Statements on Auditing Standards issued by the AICPA +in effect at the time of the relevant conduct. +7 +should consider in accepting or continuing the client engagement whether it has sufficient +personnel with the necessary capabilities and competence. AU § 210.01; QC § 10.31.6 Auditors +should consider whether specialized skills are needed to perform the audit and seek the +assistance of a professional possessing such skills. AU § 311.22. +22. Diericx and Johnson Lambert lacked an understanding of applicable U.S. +professional auditing standards for staffing and planning the Maven audits. Johnson Lambert +failed to staff the Maven Entities’ audits with audit staff with adequate competence and +experience to perform the audits, and otherwise failed to compensate for the audit staff’s lack of +competence through other means. Though alternative investments constituted most of the +Maven Entities’ assets, Diericx lacked adequate professional training to audit the existence and +value of such assets. +23. The only steps Johnson Lambert took to attempt to compensate for Diericx’s lack +of competence and experience with alternative investments was to provide Diericx with the +AICPA Alternative Investment Aid and to appoint engagement quality control reviewers with +alternative investment experience. However, the assigned reviewers were not members of the +engagement team and, consistent with AICPA standards, they did not participate in the planning +or performance of the Maven Entities’ audits or in the gathering of audit evidence. QC § 10.94- +95; see also QC §10.82 (“the engagement partner [is] responsible for the engagement and its +performance, notwithstanding involvement of the engagement quality control reviewer”). In +fact, Johnson Lambert’s policies and procedures prohibited the engagement quality control +reviewer from participating in the performance of the engagement, and provided that significant +consultation between the engagement team and the engagement quality control reviewer during +the audit could necessitate assignment of a new engagement quality control reviewer. Because +the engagement quality control reviewers had no substantive involvement in the Maven Entities’ +audits, they did little to compensate for Diericx’s incompetence and inexperience. Johnson +Lambert did not take any steps to assess whether the engagement team was consulting with +others with the necessary expertise, or to ensure that the engagement quality control reviewers +devoted more effort to their review in light of Diericx’s lack of experience. +Johnson Lambert and Diericx failed to obtain sufficient appropriate audit evidence to support its +audit opinion on the Maven Entities’ financial statements. +24. Auditors “must obtain sufficient appropriate audit evidence by performing audit +procedures to afford a reasonable basis for an opinion regarding the financial statements under +audit.” AU § 326.01. Johnson Lambert and Diericx failed to plan and perform sufficient +substantive audit procedures to obtain sufficient appropriate audit evidence of the existence and +valuation of the Maven Entities’ investments with Battoo, and otherwise failed to properly evaluate +the reliability of third-party information concerning those investments. +25. Once an audit team identifies risks of material misstatement at the financial +statement level, “the auditor should plan and perform substantive procedures to be responsive to +the related assessment of the risk of material misstatement.” AU § 318.50. “The auditor should + +6 Citations to “QC” are citations to Statements on Quality Control Standards issued by the +AICPA in effect at the time of the relevant conduct. +8 +design tests of details responsive to the assessed risk with the objective of obtaining sufficient +appropriate audit evidence to achieve the planned level of assurance at the relevant assertion +level.” AU § 318.56. +26. With respect to auditing investments in securities, auditors should use the +assessed levels of inherent risk and control risk for assertions about the securities to determine +the nature, timing, and extent of the substantive procedures to be performed to detect material +misstatements of the financial statement assertions. AU § 332.19. Substantive procedures to test +existence of securities may include confirmation with the issuer of the security, physical +inspection of the security, and reading or inspecting underlying agreements or other forms of +supporting documentation. AU § 332.21. Auditors should also obtain evidence supporting +management’s assertions about the fair value of securities measured or disclosed at fair value. +AU § 332.35. +7 When the valuation of investments in securities is based on fair value, the auditor +should test the entity’s fair value measurements and disclosures, which may involve, among +other things, testing management’s significant assumptions, the valuation model, and the +underlying data, or developing independent fair value estimates for corroborative purposes. AU +§ 328.23. “In circumstances in which the auditor determines that the nature and extent of +auditing procedures should include verifying the existence and testing the measurement of +investments in securities, simply receiving a confirmation from a third party, either in aggregate +or on a security-by-security basis, does not in and of itself constitute adequate audit evidence +with respect to the valuation assertion in section 332.” AU § 9332.02. Furthermore, receiving +confirmation from a third party for investments in aggregate does not constitute adequate audit +evidence with respect to the existence assertion. Id. +27. Johnson Lambert and Diericx identified certain risks with respect to the existence +and value of the Maven Entities’ investments even before they accepted the engagement. They +knew that the previous auditor’s inability to obtain audit evidence of the existence and value of +the Maven Entities’ alternative investments resulted in the issuance of reports with qualified +opinions. Nevertheless, they accepted and completed the engagements without planning or +performing sufficient substantive procedures to address the existence assertion and the valuation +assertion regarding these investments. +28. According to Maven Assurance’s financial statements and account statements +provided by AIM and PIWM, Maven Assurance purportedly had more than $75 million invested +in Battoo’s PIWM program during 2009 and 2010, or 78% of its total assets, which consisted +primarily of hedge funds as well as other “managed accounts” comprised of alternative +investments. Likewise, Maven Life purportedly had more than $5 million invested in PIWM’s +alternative investment strategies in 2009 and more than $10 million in 2010, representing more +than 80% of its total assets. +29. Although the investments in Battoo’s PIWM program constituted the majority of +the Maven Entities’ assets, Johnson Lambert and Diericx never attempted to contact the +managers of the underlying hedge fund investments in PIWM to confirm the Maven Entities’ + +7 Generally accepted accounting principles may require that a security be valued based on +cost, the investee’s financial results, or fair value. AU § 332.26. The Maven Entities’ financial +statements purported to present investments at fair value. +9 +interests in the funds or to assess the reasonableness of the valuations in the Maven Entities’ +financial statements. Instead, Johnson Lambert and Diericx took at face value confirmations +received from AIM, the purported custodian of the assets, and PIWM, the investment program +operated by Battoo. They did so even though the confirmations provided little information about +the specific investments purportedly owned by the Maven Entities. +30. Had Johnson Lambert or Diericx contacted the hedge funds identified on the AIM +account statements, they may have discovered that the Maven Entities’ investments in those +hedge funds did not come close to matching the investments reflected on the AIM account +statements. Indeed, in most cases, the Maven Entities did not own any interest in the hedge +funds listed on the AIM account statements. +31. The AIM account statements and audit confirmations contained virtually no +information about the purported investments held by the Maven Entities in “managed accounts.” +The confirmations merely identified the name and purported strategy of the account (e.g., +“Alliance – PIWM-I: Multi-Strategy Managed Futures & Commodities”), and the dollar value of +each managed account. Johnson Lambert did not attempt to determine what the underlying +investments were that constituted the managed accounts or the value of those investments. The +AIM confirmations also included date discrepancies on their face (one AIM portfolio +confirmation for December 31, 2010 stated that it was “as of 2/9/2010” with “12/31/2010 +prices”), which no one at Johnson Lambert recognized during the audits. +32. Rather than perform any additional substantive testing of the existence and value +of the Maven Entities’ purported investments listed in the AIM audit confirmations, Johnson +Lambert and Diericx relied on representations by Julian Brown, AIM’s President, regarding the +existence and value of the investments. They did so even though Brown acknowledged that AIM +did not monitor net asset values of the investments and directed Johnson Lambert to contact +advisors, sub-custodians, and fund managers with specific questions relating to the +confirmations. Johnson Lambert and Diericx failed to acknowledge or follow-up on these red +flags. +33. The failure to perform adequate substantive audit procedures to test the existence +and value of the majority of the Maven Entities’ assets was particularly problematic in light of +Johnson Lambert’s and Diericx’s identification of internal control weaknesses in this area. +Management is responsible for making the fair value measurements and disclosures included in +the financial statements, which includes establishing an accounting and financial reporting +process for determining the fair value measurements and disclosures, selecting appropriate +valuation methods, identifying and adequately supporting any significant assumptions used, +preparing the valuation, and ensuring that the presentation and disclosure of the fair value +measurements are in accordance with GAAP. AU § 328.04. In November, 2010, Johnson +Lambert issued a letter to the Maven Entities’ Board of Directors, which identified “significant +deficiencies” in the Maven Entities’ internal controls relating to their investments. Johnson +Lambert noted that the Maven Entities did not have a process in place to independently evaluate +the fair value measurement procedures performed by its fund managers. Yet the auditors still +failed to design substantive procedures to test the valuations of the investments provided by third +parties or the assumptions underlying those valuations. AU §§ 332.19, 35, 38-39, 41, 43. +Johnson Lambert and Diericx relied entirely on valuations provided by PIWM and AIM without +10 +any support for how those valuations were being calculated and without any information from +underlying hedge fund managers. +Johnson Lambert and Diericx failed to exercise professional skepticism by overlooking “red- +flags.” +34. Due professional care requires an auditor to exercise professional skepticism, +which “includes a questioning mind and a critical assessment of audit evidence.” AU § 230.07. +In addition, the auditor should “consider the competency and sufficiency of the evidence. Since +evidence is gathered and evaluated throughout the audit, professional skepticism should be +exercised throughout the audit process.” AU § 230.08. Auditors should also place emphasis on +testing material transactions with parties he/she knows are related to the reporting entity. AU § +334.07. +35. Johnson Lambert and Diericx failed to exercise such skepticism. They overlooked +red flags and other warnings in the course of the Maven audits. For example, the audit +confirmations Johnson Lambert and Diericx sent to PIWM and AIM (the only procedure around +the existence and valuation assertions performed by Johnson Lambert and Diericx) were +addressed to the same P.O. Box in Nassau, Bahamas. Yet Johnson Lambert and Diericx +accepted the confirmation results without question at face value and without performing any +additional procedures related to the information contained in those confirmations. See AU § +330.27 (in the confirmation process, “[i]f information about the respondent's . . . objectivity and +freedom from bias with respect to the audited entity comes to the auditor's attention, the auditor +should consider the effects of such information on . . . evaluating the results, including +determining whether other procedures are necessary;” where respondent is custodian of material +amount of audited entity’s assets, auditor should exercise heightened degree of professional +skepticism); AU § 330.04 (confirmation process should include “[e]valuating the information … +provided by the third party … including the reliability of that information.”). +36. Johnson Lambert’s internal workpapers disclosed that the custodian of the Maven +Entities’ investments was BC Hong Kong (not AIM), which was controlled by Battoo, and that +BC Hong Kong used AIM as a “sub-custodian.” BC Hong Kong and BC Panama were +controlled by Battoo and closely related to AIM through Julian Brown, President of AIM, who +was on the Executive Board of BC Panama. Further, the workpapers reflected that until May +2009, Maven and BC Hong Kong shared a common director. These related party relationships +necessitated heightened professional skepticism and scrutiny by Johnson Lambert and Diericx. +In fact, Johnson Lambert and Diericx ignored these issues. +37. There were numerous other factors that should have caused Johnson Lambert and +Diericx to conduct their audits with a heightened degree of professional skepticism and consider +whether additional procedures or audit evidence was required, including: +a. The Maven Entities’ prior auditor told Diericx that it had issued reports +with qualified opinions, in part, because it was unable to obtain adequate +audit evidence of the existence of or the valuation of the Maven Entities’ +managed accounts allegedly held at AIM. +11 +b. The Maven Entities had no process in place to independently evaluate the +fair value measurement procedures performed by the funds purportedly +holding their assets. +c. The account statements Johnson Lambert received from AIM, the +purported custodian of the Maven Entities’ investments, contained “as of” +dates that did not match the year end date (e.g., for the 2010 audit, AIM +sent Johnson Lambert statements for “12/31/2010 prices” but which were +“as of 2/9/2010”). Johnson Lambert and Diericx made no additional +inquiries regarding the “as of” date discrepancies on the AIM account +statements. +E. FINDINGS +38. Based on the foregoing, the Commission finds that Johnson Lambert and Diericx +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. +8 + +F. UNDERTAKINGS + +39. Review of Written Policies and Procedures. Johnson Lambert shall, within sixty +(60) days after the entry of this Order, evaluate its existing written policies and procedures and +shall make such revisions as may be necessary in order to adopt, implement, and enforce written +policies and procedures to provide reasonable assurance that Johnson Lambert’s audits are +conducted in compliance with (a) the relevant Commission regulations and (b) audit and attest +standards relevant to appearing and practicing before the Commission. Johnson Lambert shall +review and revise as necessary its written policies and procedures in the following areas: (i) client +and engagement acceptance; (ii) the staffing of engagements; (iii) contact with and requests for +information from prior auditors; (iv) performing proper risk assessment; (v) obtaining sufficient +appropriate audit evidence relating to investments in securities; (vi) testing for valuation and +existence of investments in securities; (vii) auditing of alternative investments; (viii) third-party +confirmations; (ix) work paper review and signoff by engagement quality control reviewers; and +(x) related-party transactions and relationships. + +40. Retention of an Independent Consultant. Johnson Lambert shall retain, within sixty +(60) days after the entry of this Order, an independent consultant (“Independent Consultant”), not +unacceptable to the Commission staff. Johnson Lambert will require the Independent Consultant +to review and evaluate the audit and interim review policies and procedures of Johnson Lambert +regarding (i) client and engagement acceptance; (ii) the staffing of engagements; (iii) contact + +8 Section 4C(b) and Rule 102(e)(1)(iv) define improper professional conduct with respect +to persons licensed to practice as accountants. Pursuant to these provisions, “improper +professional conduct” includes two types of negligent conduct: (1) a single instance of highly +unreasonable conduct that results in a violation of professional standards in circumstances where +heightened scrutiny is warranted; or (2) repeated instances of unreasonable conduct, each +resulting in violations of professional standards, that indicate a lack of competence. +12 +with and requests for information from prior auditors; (iv) performing proper risk assessment; (v) +obtaining sufficient appropriate audit evidence relating to investments in securities; (vi) testing +for valuation and existence of investments in securities; (vii) auditing of alternative investments; +(viii) third-party confirmations; (ix) work paper review and signoff by engagement quality +control reviewers; and (x) related-party transactions and relationships. Johnson Lambert will +require that the Independent Consultant’s review and evaluation assess the foregoing areas to +determine whether Johnson Lambert’s policies and procedures are adequate and sufficient to +ensure compliance with (a) the relevant Commission regulations and (b) audit and attest +standards relevant to appearing and practicing before the Commission. Johnson Lambert will +cooperate fully with the Independent Consultant and will provide reasonable access to firm +personnel, information, and records as the Independent Consultant may reasonably request for +the Independent Consultant’s reviews and evaluations. Johnson Lambert will provide the +Commission staff a copy of the engagement letter detailing the scope of the Independent +Consultant’s responsibilities. + +41. Within ninety (90) days of being retained, Johnson Lambert will require the +Independent Consultant to issue a report (“Report”) to Johnson Lambert: (a) summarizing the +Independent Consultant’s review and evaluation; and (b) making recommendations, where +appropriate, reasonably designed to ensure that audits conducted by Johnson Lambert comply +with Commission regulations and relevant audit and attest standards. At Johnson Lambert’s +direction, the Independent Consultant will provide a copy of the Report to the Commission staff +when the Report is issued. + +42. Johnson Lambert will adopt, as soon as practicable, the recommendations of the +Independent Consultant in the Report. Provided, however, that within thirty (30) days of issuance +of the Report, Johnson Lambert may advise the Independent Consultant in writing of any +recommendation that it considers to be unnecessary, unduly burdensome, or impractical. +Johnson Lambert need not adopt any such recommendation at that time, but instead may propose +in writing to the Independent Consultant and the Commission staff an alternative policy or +procedure designed to achieve the same objective or purpose. Johnson Lambert and the +Independent Consultant will engage in good-faith negotiations in an effort to reach agreement on +any recommendations objected to by Johnson Lambert. + +43. In the event that the Independent Consultant and Johnson Lambert are unable to +agree on an alternative proposal within thirty (30) days, Johnson Lambert will abide by the +determinations of the Independent Consultant. + +44. Within sixty (60) days of issuance of the Report, Johnson Lambert will certify to +the Staff in writing that it has adopted and has implemented or will implement all +recommendations of the Independent Consultant (“Certification of Compliance”). + +45. Johnson Lambert 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 Johnson Lambert, or +any of its present or former affiliates, directors, officers, employees, or agents acting in their +13 +capacity. The agreement will also provide that the Independent Consultant will require that any +firm with which he/she is affiliated or of which he/she is a member, and any person engaged to +assist the Independent Consultant in performance of his/her duties under this Order shall not, +without prior written consent of the Commission’s Chicago Regional Office, enter into any +employment, consultant, attorney-client, auditing or other professional relationship with Johnson +Lambert, 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. + +46. Johnson Lambert’s Acceptance of New Public Company Audit Clients. Johnson +Lambert shall not accept engagements for new clients for public company audits prior to the later +of one (1) year from the date of entry of this Order, or the date of issuance of the Certification of +Compliance. A public company audit is defined as an engagement to audit the financial statements +of an “issuer” as that term is defined in Section 2(a)(7) of the Sarbanes-Oxley Act of 2002. In +addition, Johnson Lambert shall not accept audit engagements for new clients pursuant to the +Exchange Act, the Securities Act, the Advisers Act, or the Investment Company Act of 1940, prior +to the later of one (1) year from the date of entry of this Order, or the date of issuance of the +Certification of Compliance. + +47. Training and Professional Development. Johnson Lambert shall establish, +implement, and enforce policies and procedures designed to provide reasonable assurances that +Johnson Lambert’s professionals participate in professional development activities in accordance +with firm guidelines, in subjects that are relevant to their responsibilities, and will contribute to +their technical training and proficiency as auditors. Johnson Lambert shall require each audit +professional to undergo a minimum of eight (8) hours of audit-related training on topics +including, but not limited to: (i) exercising due professional care and professional skepticism; (ii) +evaluating third party confirmations involving investments in securities; (iii) audit planning, +including but not limited to the staffing of engagements, contact with and requests for +information from prior auditors, and performing proper risk assessment; (iv) obtaining sufficient +appropriate audit evidence; (v) auditing of alternative investments; (vi) related party transactions +and relationships; and (vii) adequate audit documentation relating to the above. + +48. Certification of Compliance. Johnson Lambert 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. The certification and supporting material shall be submitted to Jeffrey A. Shank, +Assistant Regional Director, Chicago Regional Office, 175 W. Jackson Boulevard, Suite 900, +Chicago, IL 60604, with a copy to the Office of Chief Counsel of the Enforcement Division, 100 +F Street, N.E., Washington DC 20549, no later than sixty (60) days from the date of the +completion of the undertaking(s). + +49. Cooperation with the Commission’s Investigation and Related Litigation. Johnson +Lambert (including its partners, principals, officers, agents, and employees) and Diericx shall +cooperate fully with the Commission in any and all investigations, litigations, administrative and +14 +other proceedings commenced by the Commission or to which the Commission is a party relating +to or arising from the matters described in this Order. In connection with such investigation, +litigation, administrative or other proceedings, Respondents agree to the following: (i) to produce, +without service of a notice or subpoena, any and all documents and other materials and information +as requested by the Commission; (ii) to appear and testify without service of a notice or subpoena +in such investigations, interviews, depositions, hearings, and trials, at such times and places as +reasonably requested by the Commission; and (iii) to respond promptly to all inquiries from the +Commission. The foregoing obligations are subject to Johnson Lambert’s and Diericx’s rights: (i) +to claim that documents or information requested is subject to attorney-client privilege or attorney +work product protection; and (ii) to seek entry of a confidentiality order as to (aa) sensitive +business documents or information, (bb) sensitive personnel documents or information, or (cc) +confidential information pertaining to clients other than the Maven Entities. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Johnson Lambert’s and Diericx’s Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: +A. Johnson Lambert is hereby censured. +B. Johnson Lambert shall comply with the undertakings enumerated in Section III, +paragraphs 39 to 49 above. +C. Diericx is denied the privilege of appearing or practicing before the Commission as +an accountant. +D. After three years from the date of this order, Diericx may request that the +Commission consider his reinstatement by submitting an application (attention: +Office of the Chief Accountant) to resume appearing or practicing before the +Commission as: +1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission. Such an application must satisfy the Commission that +Respondent’s work in his/her practice before the Commission will be +reviewed either by the independent audit committee of the public company +for which he/she works or in some other acceptable manner, as long as +he/she practices before the Commission in this capacity; and/or +2. an independent accountant. Such an application must satisfy the +Commission that: +(a) Diericx, 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; +15 +(b) Diericx, or the registered public accounting firm with which he is +associated, has been inspected by the PCAOB and that inspection +did not identify any criticisms of or potential defects in the +respondent’s or the firm’s quality control system that would +indicate that the respondent will not receive appropriate +supervision; +(c) Diericx 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) Diericx acknowledges his responsibility, as long as Diericx 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 control reviewer +procedures and quality control standards. +E. The Commission will consider an application by Diericx 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 Diericx’s character, integrity, +professional conduct, or qualifications to appear or practice before the +Commission. + + By the Commission. + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3682.txt b/raw/aaer/2015/AAER-3682.txt new file mode 100644 index 0000000000000000000000000000000000000000..75a938cb4c78287d2ea4791e1693671697b87bdc --- /dev/null +++ b/raw/aaer/2015/AAER-3682.txt @@ -0,0 +1,706 @@ + + +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75844 / September 4, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3682 / September 4, 2015 + +Admin. Proc. File No. 3-15659 + + +In the Matter of + +THOMAS D. MELVIN, CPA + + + +OPINION OF THE COMMISSION + +RULE 102(e)(3) PROCEEDING + +Grounds for Remedial Action + + Civil Injunction + +Certified public accountant was permanently enjoined from violating antifraud provisions +of the federal securities laws. Held, it is in the public interest to permanently disqualify +respondent from appearing or practicing before the Commission. + +APPEARANCES: + +C. Brian Jarrard, C. Brian Jarrard, LLC, for Thomas D. Melvin. + +Joshua A. Mayes, for the Division of Enforcement. + +Appeal filed: October 14, 2014 +Last brief received: March 3, 2015 + +2 + + + + Thomas D. Melvin, a certified public accountant and a principal in the accounting firm of +Melvin, Rooks, and Howell in Griffith, Georgia, appeals from an initial decision permanently +disqualifying him from practicing before the Commission, based on his having been enjoined +from violating antifraud provisions of the federal securities laws and rules thereunder.1 We base +our findings on an independent review of the record, except with respect to those findings not +challenged on appeal. + +I. BACKGROUND + A. Melvin consented to the entry of an injunction in federal district court. + On April 10, 2013, Melvin settled civil proceedings by consenting to the entry of a final +judgment (the "Injunctive Order") that permanently enjoined him from violating Exchange Act +Sections 10(b) and 14(e) and Exchange Act Rules 10b-5 and 14e-3.2 As part of that settlement, +he agreed that, "in any disciplinary proceeding before the Commission based on the entry of the +injunction in this action, Melvin understands that he shall not be permitted to contest the factual +allegations of the complaint in this action." + + The complaint in the civil proceeding (the "Complaint") alleged that, in December 2009, +Melvin learned about a pending tender offer involving the stock of Chattem, Inc., a Tennessee- +based distributor of over-the-counter pharmaceutical products. Melvin learned of the tender +offer from a longtime accounting client, who was a Chattem director and who consulted Melvin +to "mitigat[e] the personal tax liability that would accompany [the] tender offer and forced +exchange of" Chattem stock options the director held. But, according to the Complaint, the +client "made clear," and Melvin understood, that the tender offer information was confidential +and disclosed "solely for the purpose of obtaining tax advice." Nonetheless, within an hour of +discussing the tender offer with this client, Melvin called a longstanding client of his accounting +practice and told him of the pending offer, including the information that Chattem was to be +acquired in the near future and that the purchase price for Chattem would be approximately $90 +per share. Over the next few days, Melvin made similar disclosures to two other long-time +accounting clients and a partner in his accounting practice.3 Each of the four tippees who +learned of the tender offer from Melvin traded in Chattem stock, the price of which rose + +1 Thomas D. Melvin, CPA, Initial Decision Release No. 673, 2014 WL 4678751 (Sept. 22, +2014). +2 15 U.S.C. §§ 78j(b), 78n(e); 17 C.F.R. §§ 240.10b-5, 240.14e-3. Melvin also agreed to +disgorge approximately $61,328 in profits and $6,995 in prejudgment interest (for which he was +jointly and severally liable with other persons involved in the misconduct), and to pay a civil +penalty of $108,930.05. + Melvin signed a second consent on June 28, 2013. There is no material difference +between the two consents with respect to the issues on appeal. +3 Two of the accounting clients were also close friends of Melvin. +3 + + + +substantially on the day the tender offer was announced.4 Moreover, Melvin's four tippees told +five other people about the Chattem tender offer; these five tippees also traded in the stock, and +one of them tipped two additional people, who also traded. Eventually, according to the +Complaint, at least ten individuals (not including Melvin) traded the stock based on inside +information obtained directly or indirectly from Melvin, profiting by more than $550,000.5 + + The Georgia Board of Accountancy Code of Professional Conduct (the "Code") expressly +provided that a Georgia-licensed CPA, such as Melvin, could not, without the consent of his +client, disclose any confidential information pertaining to the client that the CPA obtained in the +course of performing professional services. The Complaint alleged that Melvin "[d]isregard[ed] +the duty of confidentiality owed to his client and imposed on him by the [Code,] misappropriated +the material non-public information . . . and disclosed" that information to others. His +misappropriation and disclosures were alleged to have provided him a benefit in the form of +furthering his professional and personal relationships. + + B. An administrative law judge permanently disqualified Melvin from +practicing before the Commission. + On December 20, 2013, we issued an Order Instituting Proceedings ("OIP"), based on the +Injunctive Order and pursuant to Rule of Practice 102(e)(3)(i),6 and temporarily suspended +Melvin from appearing or practicing before the Commission.7 In doing so, we found that +suspending Melvin was "appropriate and in the public interest."8 Melvin filed a timely petition +to lift the temporary suspension,9 which we denied.10 We also directed that a hearing be held +before a law judge to "determine[] what, if any, action may be appropriate to protect the + +4 The acquisition price represented a roughly 33% premium over the closing price for +Chattem stock on the day preceding announcement of the merger. +5 The Complaint alleges that Melvin's four tippees "and six others" traded in the securities +of Chattem based on the material non-public information that Melvin disclosed, but it +enumerates a total of eleven traders: Melvin's four tippees, their five tippees, and two more +remote tippees. Our determination that Melvin's permanent disqualification from appearing or +practicing before the Commission is an appropriate sanction would be the same whether there +were ten or eleven tippees. +6 17 C.F.R. § 201.102(e)(3)(i). +7 Thomas D. Melvin, CPA, Exchange Act Release No. 71161, 2013 WL 6705182 (Dec. 20, +2013). +8 Id. at *1. +9 See Rule of Practice 102(e)(3)(ii), 17 C.F.R. § 201.102(e)(3)(ii) (providing that a +temporary suspension imposed under Rule 102(e)(3)(i) will become permanent unless a petition +to lift it is filed within thirty days after service of the order imposing the temporary suspension). +10 Thomas D. Melvin, CPA, Exchange Act Release No. 71761, 2014 WL 1091679, at *2 +(Mar. 20, 2014). +4 + + + +Commission's processes" in light of the Injunctive Order.11 On September 22, 2014, the law +judge issued an initial decision permanently disqualifying Melvin from practicing before the +Commission.12 This appeal followed.13 + +II. Analysis + A. Burden of Proof and Standard of Review + The Division introduced evidence, and it is undisputed, that Melvin was permanently +enjoined from violating "provision[s] of the Federal securities laws."14 As a result, under our +rules, "the burden" passed to Melvin "to show cause" why he should not be censured or +disqualified from appearing and practicing before us. In determining whether that burden has +been met and assessing an appropriate sanction, we are guided by the strong and clear public +interest in ensuring the integrity of our processes.15 That assessment is, in turn, informed by our +consideration of public interest factors we traditionally consider in other types of administrative +proceedings, including the egregiousness of the respondent's actions, the isolated or recurrent +nature of the infraction, the degree of scienter involved, the sincerity of the respondent's +assurances against future violations, the respondent's recognition of the wrongful nature of his or +her conduct, and the likelihood of future violations.16 Our application of these factors is flexible + +11 Id. at *2. See Rule 102(e)(3)(iii), 17 C.F.R. § 201.102(e)(3)(iii) (providing for +Commission action in response to petition filed pursuant to Rule 102(e)(3)(ii)). +12 Thomas D. Melvin, CPA, 2014 WL 4678751, at *9. +13 The Initial Decision allowed twenty-one days after service of the Initial Decision for +filing petitions of review, citing Rule of Practice 360, 17 C.F.R. § 201.360. But Rule of Practice +540, 17 C.F.R. § 201.540, requires that a petition for review of an initial decision as to whether a +temporary sanction shall be made permanent must be filed within ten days after service of the +initial decision. The Initial Decision was served on Melvin on September 22, 2014, and Melvin +filed his petition for review of October 14, 2014. Although the petition was not timely filed in +accordance with Rule 540, we have determined, in an exercise of our discretion, to grant review +in this instance given the longer period specified in the Initial Decision. +14 Rules 102(e)(3)(i)(A), 102(e)(3)(iv); 17 C.F.R. §§ 201.102(e)(3)(i)(A), 102(e)(3)(iv). +15 See, e.g., Michael C. Pattison, CPA, Exchange Act Release No. 67900, 2012 WL +4320146, at *5 (Sept. 20, 2012) ("Rule of Practice 102(e) has been the primary tool available to +the Commission to preserve the integrity of its processes . . . .") (citing additional authority). +16 See, e.g., id. at *8 (102(e)(3) proceeding; citing Steadman v. SEC, 603 F.2d 1126, 1140 +(5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981)); Chris G. Gunderson, Esq., +Exchange Act Release No. 61234, 2009 WL 4981617, at *5 (Dec. 23, 2009) (same). +5 + + + +and no single factor is dispositive. 17 We also consider the extent to which a sanction may have a +deterrent effect.18 + +Applying these factors, and based on our consideration of all the circumstances +surrounding Melvin's misconduct, we find that he represents such a significant threat to the +integrity of our processes that he must be permanently disqualified from appearing or practicing +before us. Beginning almost immediately after receiving what he understood to be confidential +information, Melvin, acting with scienter,19 directly tipped three clients and his partner in +separate conversations, abusing his position of trust to enhance professional relationships that +could yield him pecuniary gain. By misappropriating the information and disclosing it for +personal benefit, Melvin defrauded the client whose information he misused, "feigning fidelity to +the source of [the misappropriated] information" and thus engaging in "fraud akin to +embezzlement."20 Melvin's four tippees continued to pass along the misappropriated +information, such that Melvin's misconduct ultimately led to trading by at least ten individuals. +Moreover, Melvin's disclosures were particularly serious because the non-public information +related to a tender offer,21 and the specific details he passed along about the imminence of the +tender offer and the anticipated share price enhanced the tippees' ability to profit from the +misappropriated information. We have stated that conduct that violates the antifraud provisions +of the federal securities laws, including insider trading, is "especially serious"22 and warrants +"'the severest of sanctions.'"23 And we have held that "'[f]idelity to the public interest' requires a +severe sanction when a respondent's misconduct involves fraud because the 'securities business is + +17 Pattison, 2012 WL 4320146, at *8 (citing David Henry Disraeli, Exchange Act Release +No. 57027, 2007 WL 4481515, at *4 (Dec. 21, 2007), petition denied, 334 F. App'x 334 (D.C. +Cir. 2009)). +18 Id. (citing additional authority). +19 "Scienter is a mental state consisting of an intent to deceive, manipulate, or defraud, and +includes recklessness, commonly defined as 'an extreme departure from the standards of ordinary +care . . . to the extent that the danger was either known to the [respondent] or so obvious that the +[respondent] must have been aware of it." Toby G. Scammell, Investment Advisers Act Release +No. 3961, 2014 WL 5493265, at *6 n.41 (Oct. 29, 2014) (quoting Johnny Clifton, Exchange Act +Release No. 69982, 2013 WL 3487076, at *10 n.67) (July 12, 2013)). +20 See United States v. O'Hagan, 521 U.S. 642, 654-55 (1997) (finding such deception +"essential to the misappropriation theory" of insider trading). +21 See Tender Offers, Exchange Act Release No. 17120, 1980 WL 20869, at *4-5 (Sept. 4, +1980) ("The abuses which result from trading in securities by persons in possession of material, +nonpublic information are particularly troublesome in the context of tender offers. . . . This +practice results in unfair disparities in market information and market disruption."). +22 Peter Siris, Exchange Act Release No. 71068, 2013 WL 6528874, at * 6 (Dec. 12, 2013) +(quoting Vladimir Boris Bugarski, Exchange Act Release No. 66842, 2012 WL 1377357, at *5 +(Apr. 20, 2012)), petition denied, 773 F.3d 89 (D.C. Cir. 2014). +23 Toby G. Scammell, 2014 WL 5493265, at *5 (quoting Gunderson, 2009 WL 4981617, at +*5). +6 + + + +one in which opportunities for dishonesty recur constantly.'"24 Further, we have recognized the +applicability in disciplinary proceedings under Rule 102(e) of the general rule that "an antifraud +injunction 'ordinarily' warrants barring participation in the securities industry."25 + +Melvin violated explicit professional conduct standards and betrayed the trust placed in +him by a longtime client seeking tax accounting advice. As we previously stated in the +analogous context of an investment banker who disclosed a client's confidential information in +order to favor his own interest in establishing a collegial relationship, + +[t]he ability to credibly assure a client that [obviously confidential] information +will be used solely to advance the client's own interests is central to any securities +professional's ability to provide informed advice to clients. Disclosure of such +information jeopardizes the foundation of trust and confidence crucial to any +professional advising relationship.26 +Melvin's unethical and illegal actions were, in our view, clearly egregious. The betrayal of trust, +the rapidity with which he shared the confidential information, the details he passed on about the +tender offer, and the tipping of multiple business associates all contribute to our assessment of +the gravity of his misconduct. Although Melvin's violation involved one misappropriation of +client information, it was not an 'isolated' infraction, as he passed the information along to four +people at four different times. Thus, Melvin chose to breach his client's trust on four different +occasions, each giving him a chance to reflect on his actions. We see little recognition by +Melvin of the wrongfulness of his actions and find that, given those actions, he constitutes an +unacceptable threat to our processes. We further find that Melvin's permanent disqualification +serves important deterrent objectives, both for him and other securities industry professionals.27 + + +24 Id. (quoting Gunderson, 2009 WL 4981617, at *5). +25 Gunderson, 2009 WL 4981617, at *5 (quoting Justin F. Ficken, Investment Advisers Act +Release No. 2803, 2008 WL 4610345, at *3 (Oct. 17, 2008)). +26 Thomas W. Heath, III, Exchange Act Release No. 59223, 2009 WL 56755, at *10 (Jan. 9, +2009), petition denied, 586 F.3d 122 (2d Cir. 2009). +27 Cf. Steadman, 603 F.2d at 1140 (stating that a compelling reason supporting a bar would +be that "the nature of the conduct mandates permanent debarment as a deterrent to others in the +industry"). +7 + + + + Melvin does not dispute the allegations that form the basis for the Injunctive Order,28 but +argues that they do not justify his permanent disqualification. In support, he asserts that he did +not personally trade on the information or benefit financially from his actions. According to +Melvin, the misappropriation was an "isolated event in an otherwise law-abiding and productive +life." He further claims that he has recognized his misconduct by agreeing to settle the matter +and timely pay the amounts agreed to in the settlement. Rather than permanent disqualification, +Melvin argues that "[i]t is appropriate to impose a three year bar" which is consistent, he asserts, +with settlement discussions he had with Division counsel.29 Although he acknowledges that the +Commission is not bound by such discussions, he asserts that it should nevertheless consider +what "the SEC employee most familiar with" the case believes would be "appropriate given all +that [the employee] knew of the case." + +We are unpersuaded by Melvin's effort to minimize the seriousness of his misconduct. +His argument that his conduct was not so bad because he was "only a tipper" fails to +acknowledge how destructive that conduct was. Melvin's misconduct created substantial losses, +or the risk of substantial losses, to other persons: he defrauded Chattem of the exclusive use of +the tender offer information, conduct that the Supreme Court has likened to embezzlement,30 and +he undermined the integrity of the negotiating process for the tender offer, thus creating the risk +of substantial losses to both the target company and the potential acquirer.31 Moreover, the + +28 As noted, Melvin agreed that he would not challenge allegations supporting the +Injunctive Order in a related Commission disciplinary proceeding. See Rule of Practice +101(a)(3), 17 C.F.R. § 201.101(a)(3) (defining "disciplinary proceeding" to mean "an action +pursuant to Rule 102(e)"). Melvin is therefore precluded from contesting the Complaint's +allegations here, and we may consider them in determining an appropriate sanction. See, e.g., +Siris v. SEC, 773 F.3d 89, 96 (D.C. Cir. 2014) (holding that the Commission "was entitled to rely +on the allegations of the complaint" in deciding whether to impose a permanent bar in a follow- +on proceeding based on a consent judgment, where the terms of the consent judgment +"unambiguously barred Siris from making any future challenge to the allegations in the +complaint") (citations omitted); Toby G. Scammell, 2014 WL 5493265, at *3, 7 (refusing to +consider "claims that impermissibly contradict the allegations of the complaint" in determining +sanctions in follow-on proceeding based on injunction entered by consent, where Scammell had +"specifically agreed [in the consent agreement] that he would not contest the factual allegations +of the complaint in any administrative proceeding before the Commission"). +29 Melvin asserts in his pleadings that he and Division staff agreed, in connection with +discussions regarding settlement of the civil proceedings, that he also would "not be banned from +practicing before the Commission . . . in excess of three years." He further asserts that he first +learned that the Commission was "not honoring the agreement" several months later, after the +OIP was issued. Nevertheless, Melvin concedes in his brief that "the Commission itself is not +bound by the commitments of its [D]ivision counsel." +30 See O'Hagan, 521 U.S. at 652-54. +31 See Litton Indus., Inc. v. Lehman Bros. Kuhn Loeb Inc., 967 F.2d 742, 747-51 (2d Cir. +1992) (finding that insider trading in advance of a tender offer can artificially inflate the price the +acquirer must pay for the acquisition, resulting in overpayment by the acquirer and its +(continued…) +8 + + + +substantial gains by all of the tippees who benefited from the confidential information passed +along by Melvin are attributable to Melvin, even if Melvin did not personally trade.32 Melvin's +tipping his clients and partner in the expectation that they would trade is equivalent to Melvin's +trading himself and then giving the trading profits to those individuals.33 Had Melvin not +misappropriated the confidential client information and passed it along, the ensuing improper +trading, which resulted in illegal profits of more than half a million dollars, would not have +happened, making Melvin's conduct in some respects more "directly culpable" than that of the +tippees who personally traded.34 And, as discussed above, Melvin is not permitted to contest the +fact that he personally benefitted from his unlawful disclosures by furthering personal and +professional relationships.35 Despite Melvin's attempt to minimize the benefits he received, they +apparently were sufficient to motivate the multiple instances of misconduct at issue here, +providing reason to believe that they could do so again. His actions reveal a highly troubling +willingness to ignore a fundamental professional obligation to respect and protect client +confidence along with a willingness to instigate and facilitate fraudulent stock trading activity.36 +As we have held, + +[t]he prohibitions against insider trading [in our securities laws] play an essential +role in maintaining the fairness, health, and integrity of our markets. We have +long recognized that the fundamental unfairness of insider trading harms not only + +(…continued) +shareholders); SEC v. Gaspar, No. 83 Civ. 3037, 1985 WL 521, at *15-17 (S.D.N.Y. Apr. 16, +1985) (escalation in share price resulting from insider trading decreased attractiveness of +premium offered, contributing to collapse of tender offer). +32 See, e.g., SEC v. Warde, 151 F.3d 42, 49-50 (2d Cir. 1998) ("A tippee's gains are +attributable to the tipper, regardless [of] whether benefit accrues to the tipper."). +33 See Dirks v. SEC, 463 U.S. 646, 659, 663-64 (1983) (citing Exchange Act Section 20(b), +15 U.S.C. § 78t(b), which "mak[es] it unlawful to do indirectly 'by means of any other person' +any act made unlawful by the federal securities laws," and finding that when a person "makes a +gift of confidential information to a trading relative or friend," that is equivalent to "trading by +the [person] himself followed by a gift of the proceeds to the recipient"). +34 Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 312-13 & n.23 (1985). +35 See Dirks, 463 U.S. at 663-64 (recognizing that a breach of fiduciary duty and +exploitation of nonpublic information for insider trading purposes may be shown when a tipper +receives a "direct or indirect personal benefit from the disclosure," such as when the tipper +"makes a gift of confidential information to a trading relative or friend"). +36 See, e.g., Thomas W. Heath, III, 2009 WL 56755, at *4 (finding that investment banker +who disclosed confidential client information "violated one of the most fundamental ethical +standards in the securities industry"). +9 + + + +individual investors, but also the very foundations of our markets, by undermining +investor confidence in the integrity of our markets.37 +Our view that conduct like Melvin's merits significant sanctions is evident from a similar case in +which we found that a bar was an appropriate sanction for insider trading even though the tipper +was not charged with trading and received no direct economic benefit for the tip he provided.38 +Nor do we consider it significant that, as Melvin claims, he discussed a possible +settlement with our staff that would have resulted in his disqualification for a number of years + +37 Toby G. Scammell, 2014 WL 5493265, at *6 (quoting Selective Disclosure & Insider +Trading, Exchange Act Release No. 42259, 1999 WL 1217849, at *17 (Dec. 20, 1999), and +citing H.R. Rep. No. 98-355, at 2 (1984), reprinted in 1984 U.S.C.C.A.N. 2274, 2275, 1983 WL +25397, at *2 (finding that insider trading destroys the integrity of the marketplace "by +undermining the public's expectations of honest and fair securities markets where all participants +play by the same rules")). +38 See Robert Bruce Lohmann, Exchange Act Release No. 48092, 2003 WL 21468604, at +*4-5 (June 26, 2003). Cf. SEC v. Gupta, No. 11 Civ. 7566, 2013 WL 3784138, at *4 (S.D.N.Y. +July 17, 2013) (permanently enjoining Gupta from further violations of the securities laws and +imposing officer-director and associational bars "notwithstanding the fact that Gupta's long-term +pecuniary gain from the insider trading conspiracy was speculative"). + +Melvin does not raise any argument challenging the factual premises that underlie his +liability as a tipper under Exchange Act Section 10(b) or 14(e) and Exchange Act Rules 10b-5 +and 14e-3. Nor can he, because as part of settling the civil proceeding he agreed not to contest +the factual allegations of the Complaint in this disciplinary proceeding. Accordingly, we +understand Melvin's argument that he did not personally trade as an attempt to establish a +mitigating factor regarding relief, not as a challenge to his underlying liability. In any event, +there would be no merit to such a challenge to his liability. The Complaint alleged that Melvin's +misappropriation and disclosures were alleged to have provided him a benefit in the form of +furthering both his personal and professional relationships. See Dirks, 463 U.S. at 663-64 +("reputational benefit that will translate into future earnings" is sufficient); SEC v. Yun, 327 F.3d +1263, 1280 (11th Cir. 2003) (sufficient personal benefit where tipper and tippee worked closely +together and were frequently partners in real estate deals); SEC v. Sergeant, 229 F.3d 68, 77 (1st +Cir. 2000) (tipping "to maintain a useful networking contact" is sufficient personal benefit); +United States v. Newman, 773 F.3d 438, 452-53 (2d Cir. 2014) (tipping that "could yield future +pecuniary gain," including a "referr[al]" or monetary "commission," is sufficient). The +allegation that Melvin had a close personal relationship with his tippees independently supports +the sufficiency of his personal benefit. See Dirks, 463 U.S. at 663-64; Lohmann, 2003 WL +21468604, at *4; Yun, 327 F.3d at 1275; Sargent, 229 F.3d at 77; SEC v. Obus, 693 F.3d 276, +285 (2d Cir. 2012). Finally, a breach of fiduciary duty for personal benefit is not an element of +liability under Exchange Act Section 14(e) and Rule 14e-3. See O'Hagan, 521 U.S. at 676; +Tender Offers, 1980 WL 20869, at *5-13 (Sept. 4, 1980). + +10 + + + +rather than permanently. As he acknowledges, we are not bound by such discussions,39 and we +have repeatedly held that sanctions imposed in connection with settlements are frequently less +severe than those that result from litigation.40 There is no suggestion that Melvin was in any way +prevented from identifying the circumstances that, according to him, led a member of our staff to +conclude (or that otherwise support his position) that disqualification for a term of years is +sufficient.41 We have carefully considered the evidence he has presented and his arguments in +mitigation, but conclude that they do not justify any leniency. + +Although Melvin asserts that he "has recognized the wrongful nature of what transpired," +his arguments on appeal support a contrary conclusion. His contention that although his conduct +was bad, the conduct of his partner, who also engaged in fraudulent misconduct related to the +Chattem tender offer, was worse, indicates that he does not appreciate the seriousness of his +misconduct.42 + +39 See, e.g., CFTC v. Field, 249 F.3d 592, 594 (7th Cir. 2001) ("[A] settlement on behalf of +the United States may be enforced only if the person who entered into the settlement had actual +authority to settle the litigation."). See also SEC Division of Enforcement, Enforcement Manual, +available at http://www.sec.gov/divisions/enforce/enforcementmanual.pdf, Section 2.5.1 (noting +that "most settlements of previously authorized enforcement actions . . . require Commission +authorization" and describing procedure for obtaining such authorization); Eric J. Brown, +Exchange Act Release No. 66469, 2012 WL 625874, at *19 & n.67 (Feb. 27, 2012) ("[O]ur rules +are clear on this point: an offer to settle is binding only if formally submitted to, and approved +by, the Commission . . . ." (citing Rule of Practice 240, 17 C.F.R. § 201.240 ("Final acceptance +of any offer of settlement will occur only upon the issuance of findings and an order by the +Commission.")), aff'd on other grounds sub nom., Collins v. SEC, 736 F.3d 521 (D.C. Cir. 2013). +40 See, e.g., Pattison, 2012 WL 4320146, at *11 ("[R]espondents who offer to settle may +properly receive lesser sanctions than they otherwise might have," because in settling cases "'we +take into account pragmatic considerations such as the avoidance of time-and-manpower- +consuming adversary proceedings.'") (quoting Nassar & Co., 47 S.E.C. 20, 26 & n.3 (1978), +aff'd, 600 F.2d 280 (D.C. Cir. 1979)). +41 Cf., e.g., Jose P. Zollino, Exchange Act Release No. 55107, 2007 WL 98919, at *4 (Jan. +16, 2007) (although respondent in a follow-on proceeding may not challenge the allegations that +provide the basis for the underlying injunctive order, he or she is "free to introduce evidence +regarding the 'circumstances surrounding those allegations as a means of addressing 'whether +sanctions should be imposed in the public interest'") (quoting Schield Mgmt. Co., Exchange Act +Release No. 53201, 2006 WL 231642, at *6 (Jan. 31, 2006)). +42 Melvin asserts that his partner "admitted to misappropriating" confidential information +about the Chattem tender offer, but cites nothing to support this assertion. We are unaware of +any allegations that the partner misappropriated confidential information, as opposed to trading +on the basis of confidential information that Melvin disclosed to him. Based on the premise that +the partner's conduct was worse than his, Melvin argues that any sanction imposed on him +should be less serious than the permanent suspension from appearing or practicing as an +accountant imposed on his partner. +(continued…) +11 + + + + C. The proceeding was timely instituted. + + Melvin also challenges his disqualification on procedural grounds, arguing that "these +proceedings were untimely under clearly established federal law," because the order of +temporary suspension (which was included in the OIP) was not issued until December 20, 2013, +more than 90 days after entry of the Injunctive Order. Under Rule of Practice 102(e)(3), the +temporary suspension order had to be issued no "more than 90 days after the date on which the +final judgment has become effective, whether upon completion of review or appeal procedures or +because further review or appeal procedures are no longer available."43 Melvin does not dispute +that, under the Federal Rules of Appellate Procedure, he had 60 days to file a notice of appeal of +the Injunctive Order, but he contends that because he waived his right to appeal the Injunctive +Order, "appeal procedures [were] no longer available" within the terms of Rule 102(e)(3) from +the time the Injunctive Order was entered, and that Rule 102(e)(3)'s 90-day limit therefore +expired on November 12, 2013. The Division responds that, though "he was almost certain to +fail, Melvin was free to file a notice of appeal and challenge the judgment" and that, therefore, +the temporary suspension order was timely because it was issued within 90 days of when +Melvin's period for filing an appeal expired on October 13, 2013. + +The parties cite to no authority interpreting this aspect of the Rule. The relevant statutory +language does not address the issue, nor do the related proposing or adopting releases.44 Thus, +we must interpret the language without any such guidance. + +(…continued) + We reject this argument. Both the partner and Melvin were enjoined from antifraud +violations, which, as we noted above, ordinarily warrants permanent exclusion from participation +in the securities industry. Their misconduct was serious for many of the same reasons, and the +fact that some particulars differed—Melvin misappropriated but didn't trade, his partner traded +but didn't misappropriate, Melvin tipped four people, his partner tipped one person—does not +mean that the public interest would mandate that they receive different sanctions. + We further find that Melvin deserves no special credit for making the payments he agreed +to. Cf., e.g., Howard Braff, Exchange Act Release No. 66467, 2012 WL 601003, at *7 (Feb. 24, +2012) (for those who agreed to abide by FINRA's rules, compliance with obligations under those +rules is not a mitigating factor in determining sanctions); Kevin M. Glodek, Exchange Act +Release No. 80937, 2009 WL 3652429, at *8 (Nov. 4, 2009) (same), petition denied, 416 F. +App'x 95 (2d Cir. 2011). +43 17 C.F.R. § 201.102(e)(3). +44 When the Commission adopted the amendment to then-Rule 2(e) that made "a +permanent injunction against securities-laws violations or a finding of securities-laws +violations . . . a basis upon which the Commission may initiate proceedings to censure or +temporarily or permanently disqualify an attorney, accountant, engineer, or other professional or +expert from appearing and practicing before the Commission," the amendment contained the +language currently found in Rule 102(e)(3) that looks to whether "further review or appeal +procedures are no longer available," among other factors, in determining whether the +Commission's entry of an order of temporary suspension was timely. Suspension or Disbarment +(continued…) +12 + + + + +For purposes of Rule 102(e)(3), we interpret the phrase "further review or appeal +procedures are no longer available" to mean that the party is foreclosed from pursuing further +review or appeal of his or her case because the time for appeal has expired. We recognize that +the application of the language of the rule may be ambiguous where, as here, a party has waived +the right to an appeal. Review is arguably "no longer available" in light of a waiver. But we +believe the phrase "appeal procedures are no longer available" is better interpreted to refer to the +procedural availability of the means for bringing an appeal under the federal rules, rather than to +the viability of any substantive claim that is brought. + +We do not believe it is correct to say that "appeal procedures are no longer available" +simply because a person has waived the right to appeal in a consent agreement. Even where such +a waiver is enforced and an appellate court dismisses the appeal because of the waiver, "appeal +procedures" are still "available" in the sense that a person is entitled to file the appeal within the +time provided by the federal rules and to obtain a ruling of some kind from the appellate court. +Moreover, there are some very limited instances in which an appellate court may decide to reject +a waiver and hear an appeal on the merits.45 For these reasons, we construe the phrase "appeal +procedures are no longer available" to mean that the period allotted by rule for filing a notice of +appeal has expired, without regard to whether the right to appeal has been waived in a particular +case or to the validity of any such waiver. Applying this interpretation, we find that Federal Rule +of Appellate Procedure 4(a)(1)(B) allows 60 days for filing an appeal from a district court's final +judgment in which the United States or an agency is a party, and therefore, for purposes of Rule +102(e)(3), appeal procedures were "available" to Melvin with respect to the Injunctive Order +within the terms of the rule until that period ended.46 + +(…continued) +from Appearance or Practice Before the Commission, Securities Act Release No. 5147, 1971 +WL 126066, at *2, 4 (May 10, 1971). There is no discussion of the phrase, "no longer +available," and subsequent amendments to Rule 102(e) have not clarified the meaning of that +language. +45 Appeal waivers will generally be enforced, absent exceptional circumstances such as the +lack of actual consent, fraud in obtaining consent, or mistake. See, e.g., Van v. Barnhart, 483 +F.3d 600, 609 & n.5 (9th Cir. 2007) (noting general rule and citing cases that recognize +exceptions); Mock v. T.G. & Y. Stores Co., 971 F.2d 522, 526-27 (10th Cir. 1992) (affirming +judgments of district court in favor of defendants where plaintiffs consented to judgment and did +not reserve the right to appeal). Where a party has consented to a valid settlement, as Melvin did +here, courts do not hesitate to enforce provisions expressly waiving the right to appeal. E.g., +SEC v. Adair, 549 F. App'x 699 (9th Cir. 2013) (dismissing appeal where litigant had expressly, +voluntarily, and knowingly waived the right to appeal the district court's order); cf. Throne v. +Citicorp Inv. Servs., Inc., 378 F. App'x 629, 631-32 (9th Cir. 2010) (affirming district court +awarding attorneys' fees and costs for appeal where appeal was filed in contravention of express +waiver). +46 While this interpretation works to Melvin's detriment in that it allows the proceeding +against him to continue, Melvin cannot credibly argue that his conduct would have been any +different if he had known when he consented to the settlement of the civil proceeding that we +(continued…) +13 + + + + Melvin argues that the majority of federal courts do not generally consider the merits of +appeals from consent judgments, and that no applicable exception to this general rule applies in +this case. We agree with both of those assertions.47 But, as explained above, this does not mean +that "appeal procedures [were] no longer available" to Melvin; it simply means that the use of +those procedures would very likely have proved unsuccessful. + +Our interpretation of Rule 102(e)(3) is also supported by policy considerations. We find +it preferable for reasons of efficiency, clarity, and ease of administration, to adopt a bright-line +rule that bases the timeliness of temporary suspension orders in Rule 102(e)(3) disciplinary +proceedings on the time for filing a notice of appeal. Federal Rule of Appellate Procedure +4(a)(1)(B) clearly sets forth such a deadline, making it easy to determine when a disciplinary +proceeding must be brought. By contrast, Melvin's proposed interpretation of the phrase "no +longer available" would require a case-by-case analysis as to whether a particular appeal or +review proceeding would be futile or unsuccessful for reasons other than lack of timeliness. That +approach would create uncertainty over the application of our deadlines in particular cases. The +time for filing an appeal is a more certain and uniform starting point to gauge the running of our +90-day period. + +Our approach is also supported by the approach taken by the United States Court of +Appeals for the District of Columbia Circuit in Adams v. SEC. 48 The court there adopted a +similar bright-line rule that a final disposition of an administrative proceeding became +"unappealable" for the purpose of determining the timeliness of fee applications under the Equal +Access to Justice Act only when the statutory period allowed for appeals from such dispositions +had expired. The court rejected a rule like the one advanced by Melvin here that would have + +(…continued) +would apply Rule 102(e)(3) in this way. The consent Melvin signed specifically alluded to the +possibility of a "disciplinary proceeding before the Commission based on the entry" of the +Injunctive Order. Moreover, his argument that Division counsel had discussed the possibility of +a three-year suspension from practice with him demonstrates that he understood that a 102(e) +proceeding could follow. Thus, this is not a situation where a respondent was deprived of fair +notice of our interpretation of a rule governing the respondent's conduct in a way that impacts the +fairness of a proceeding. See, e.g., Marrie v. SEC, 374 F.3d 1196, 1208 (D.C. Cir. 2004) +(finding that Commission impermissibly applied interpretation to Rule 102(e) retroactively, in +part because accountants "did not have fair notice [when they engaged in conduct at issue] that +they could be sanctioned for improper professional conduct even if they had been acting in good +faith); KPMG, LLC v. SEC, 289 F.3d 109, 116, 126 (D.C. Cir. 2002) (reversing finding that +"success" fee/royalty arrangement violated AICPA Rule 302 because KPMG "lacked fair notice" +that the Commission would interpret the rule so as to deem that arrangement to be a prohibited +contingent fee). To the contrary, adopting the interpretation Melvin urges would effectively give +him a windfall, by relieving him of the need to participate in a proceeding that he knew to be a +likely outcome of his actions. +47 See supra note 45. +48 287 F.3d 183, 184, 191 (D.C. Cir. 2002). +14 + + + +analyzed whether a particular disposition was specifically appealable based on the standing or +lack of standing of the litigant. The court recognized that adopting this bright-line rule, which +was "discernible by looking at the category of order in question," "eliminate[d] the high potential +for confusion" that would have resulted from determining appealability on a case-by-case basis.49 + + Melvin also argues that most federal courts hold that a consent judgment is "effective" +immediately upon entry, and that we should interpret Rule 102(e)(3) the same way.50 We +understand him to be using "effective" here to mean something like "binding on the party subject +to the judgment." Indeed, "effective" is used that way elsewhere in Rule 102(e)(3), when the +rule states that "[a]n order of temporary suspension shall become effective upon service on the +respondent."51 In the case before us, though, the question is not whether Melvin was bound by +the injunction as soon as it was entered, but rather when the time for entering an order of +temporary suspension started to run. The Rule 102(e)(3) language we must interpret measures +the time for entering an order of temporary suspension from "the date on which the final +judgment or order entered in a judicial or administrative proceeding described in paragraph +(e)(3)(i)(A) or (e)(3)(i)(B) of this section has become effective, whether upon completion of +review or appeal procedures or because further review or appeal procedures are no longer +available." In this context, "effective" means that review or appeal procedures have been +completed or that further review or appeal procedures are no longer available.52 + +49 Id. Several other federal courts of appeals have also adopted a bright-line rule in similar +circumstances. See, e.g., Impresa v. Construzioni Geom. Domenica Garufi v. United States, 531 +F.3d 1367, 1372 (Fed. Cir. 2008) (adopting a uniform rule for EAJA petitions in the Court of +Federal Claims in holding that the period for filing an EAJA application started on expiration of +the period for filing a petition for certiorari from the final judgment of the Federal Circuit +because "a clear rule better serves the interests of litigants and the court"); Van, 483 F.3d at 612 +(adopting bright-line rule whereby "EAJA's 30-day filing period does not begin to run until after +the 60-day appeal period in Rule 4(a) has expired," even when a claimant has obtained a +judgment as to which the Commissioner of the Social Security Administration has consented, in +part because the possibility that consent judgments can be appealed otherwise could create +uncertainty and confusion). +50 Melvin cites no authority to support this contention. +51 17 C.F.R. § 201.102(e)(3). +52 This does not mean, however, that an order or judgment is not effective or binding until +all appeals have been resolved or the period for filing appeals has run. As we have repeatedly +held, for example, the pendency of an appeal of a civil or criminal proceeding does not justify +any delay in related "follow-on" administrative proceedings. See, e.g., Ran H. Furman, +Exchange Act Release No. 65680, 2011 WL 5231425, at *2 (Nov. 3, 2011) ("Although Furman +is entitled to appeal the underlying case against him, the possibility of an appeal to the court of +appeals 'does not alter the effect' of the jury's finding of securities law violations or the court's +imposition of an injunction here.") (quoting Daniel S. Lezak, Exchange Act Release No. 50729, +2004 WL 2721400, at *2 & n.16 (Nov. 23, 2004)); Gunderson, 2009 WL 4981617, at *4 ("'[I]t is +well established that the existence of an appeal of the district court's decision does not affect the +[permanent] injunction's status as a basis for administrative action.'") (quoting Conrad P. +(continued…) +15 + + + + +* * * +Melvin engaged in serious misconduct. He betrayed a longtime client by +misappropriating sensitive and valuable information that he knew was confidential and sharing it +with business associates. Although he did not personally trade on the information, his +disclosures furthered his professional and personal relationships and led to fraudulent and +profitable insider trading by at least ten individuals. Moreover, Melvin does not appear fully to +appreciate the wrongfulness of his actions, which heightens our concerns about the possibility of +future misconduct. In sum, Melvin's actions demonstrate that he poses a threat to the integrity of +our processes and amply justify his permanent disqualification from appearing or practicing +before us. +An appropriate order will issue.53 +By the Commission (Chair WHITE and Commissioners AGUILAR, GALLAGHER, +STEIN, and PIWOWAR). + + + + Brent J. Fields + Secretary + + +(…continued) +Seghers, Investment Advisers Act Release No. 2656, 2007 WL 2790633, at *3 & n.12 (Sept. 26, +2007), and citing additional authority). +53 We have considered all the arguments advanced by the parties. We reject or sustain them +to the extent that they are inconsistent or in accord with the views expressed herein. + + +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75844 / September 4, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Rel. No. 3682 / September 4, 2015 + +Admin. Proc. File No. 3-15659 + + +In the Matter of + +THOMAS D. MELVIN, CPA + + + +ORDER IMPOSING REMEDIAL SANCTIONS + +On the basis of the Commission's Opinion issued this day, it is + +ORDERED that Thomas D. Melvin, CPA, is hereby permanently disqualified from +appearing or practicing before the Commission. + +By the Commission. + + + + Brent J. Fields + Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3684.txt b/raw/aaer/2015/AAER-3684.txt new file mode 100644 index 0000000000000000000000000000000000000000..10398d4bb8c5ce1c13e187f7f4b5bf64e9cf536c --- /dev/null +++ b/raw/aaer/2015/AAER-3684.txt @@ -0,0 +1,586 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9902 / September 8, 2015 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75850 / September 8, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3684 / September 8, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16787 + + + +In the Matter of + +HYUNJIN LERNER, 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 Hyunjin +Lerner (“Respondent” or “Lerner”) pursuant to Section 8A of the Securities Act of 1933 +(“Securities Act”), Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange +Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications + +2 + + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of +1933, Sections 4C and 21C of the Securities Exchange Act of 1934, and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +SUMMARY + +This proceeding results from Bankrate, Inc., through its chief financial officer, Edward +DiMaria, vice president and director of accounting, Matthew Gamsey, and vice president of +finance, Hyunjin Lerner, intentionally manipulating its financial results for the second quarter of +2012 in order to meet and/or exceed analyst consensus estimates for key financial metrics. As a +result of this manipulation, Bankrate materially overstated its financial results for the second +quarter of 2012. + + +to represent others . . . (2) to be lacking in character or integrity, or to have +engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found…to have +willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + + 3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. +3 + +After reviewing Bankrate’s preliminary financial results for the second quarter 2012, which +fell short of analyst estimates for certain key metrics, DiMaria arbitrarily decided to increase +Bankrate’s revenue following the end of the quarter in order to meet those metrics. As a result, +DiMaria, through Lerner, improperly directed two Bankrate divisions, the Insurance and Credit +Cards divisions, to book additional revenue of $300,000 and $500,000, respectively, without any +support or analysis. + +The Insurance division immediately booked the $300,000 of revenue directed by DiMaria +to a dormant customer account, with no intention of justifying the revenue until the company’s +outside auditor asked for additional information about it five days later. In response to the +auditor’s inquiry, the Insurance division quickly devised a purported justification for the +improperly booked revenue – a justification that changed shortly thereafter. These purported +justifications were not, however, provided to Bankrate’s auditor. Instead, Lerner sent a misleading, +generic explanation to the auditor – an explanation that was reviewed and approved by DiMaria +and Gamsey. Further, although the Insurance division’s ultimate justification was reviewed and +approved by Lerner and others, Lerner knew, or was reckless in not knowing, that the purported +justification did not support the recognition of revenue under Generally Accepted Accounting +Principles (“GAAP”). + +The accountants from the Credit Cards division were only willing to record $176,000 of the +$500,000 in revenue directed by DiMaria, thereby infuriating DiMaria. Refusing to accept the +Credit Cards division’s unwillingness to record the full $500,000 of revenue he had directed, +DiMaria insisted that the approximate difference be recorded as revenue on the books of +Bankrate’s mortgage business, Bankrate Core. As a result, Bankrate recorded an additional +$305,000 of unsupported revenue to two arbitrary Bankrate Core customers. Bankrate’s recording +of both the $176,000 and the $305,000 in revenue was contrary to GAAP. +Further manipulating Bankrate’s financial results for the second quarter, DiMaria, without +any support or analysis, improperly directed a Bankrate Core accountant to reduce the accrual for +certain marketing expenses by $400,000, which was known to Lerner. Bankrate, through DiMaria +and with Lerner’s knowledge, had been allowing this marketing accrual account to accrue as a +“cushion” account for more than a year, and then selectively decided to reduce the accrual in the +second quarter of 2012 in order to improve the company’s financial results. In the second quarter +2012, DiMaria improperly reversed $400,000 of the accrual amount, thereby reducing second +quarter expenses, to help Bankrate meet analyst estimates. Finally, as part of its effort to +artificially inflate its financial results to meet or exceed analyst estimates for the second quarter +2012, Bankrate, through Lerner and others, intentionally failed to book approximately $99,000 in +known accounting expenses that had been incurred in the second quarter. +As a result of these improper accounting entries, entries that the company reversed as part +of a broader restatement, Bankrate’s second quarter 2012 earnings release and associated Form 8- +K, filed on July 31, 2012, reported adjusted earnings before interest, taxes, depreciation, and +amortization (“Adjusted EBITDA”) of $37.5 million, exceeding analyst consensus estimates by +4 + +approximately $300,000, and adjusted earnings per share (“Adjusted EPS”) of $0.18, thereby +meeting analyst consensus estimates.4 Further, due to these improper accounting entries, Bankrate +materially overstated its second quarter 2012 net income reported in its Form 10-Q filed on August +13, 2012. During the two week period following the issuance of Bankrate’s second quarter 2012 +earnings release, DiMaria and Lerner each sold Bankrate stock, thereby profiting from a stock +price that had been artificially inflated by the company’s materially overstated financial results. +RESPONDENT + +1. Hyunjin Lerner, age 46, is a resident of Stuart, Florida. During the relevant +period, Lerner was Bankrate’s vice president of finance. Lerner obtained his certified public +accountant license in California in 1996, but his license is currently delinquent. Lerner, whose +employment was terminated by Bankrate due to the improper accounting practices described +herein, sold $30,045 worth of Bankrate stock on August 6, 2012, six days after Bankrate issued its +materially false second quarter 2012 earnings release. + +OTHER RELEVANT ENTITY + +2. Bankrate, Inc. is a Delaware corporation based in North Palm Beach, Florida, that +owns and operates an Internet-based consumer banking and personal finance network. Bankrate’s +common stock is registered with the Commission pursuant to Exchange Act Section 12(b) and +trades on the New York Stock Exchange (ticker: RATE). Bankrate files periodic reports, including +Forms 10-K, 10-Q, and 8-K, with the Commission pursuant to Section 13(a) of the Exchange Act +and the related rules thereunder. On June 17, 2011, Bankrate filed an S-8 registration statement for +an offering relating to its equity compensation plan. This offering, which was ongoing at the time +of the misconduct described herein, incorporated future company filings with the Commission, +including the Form 8-K containing the company’s materially false second quarter 2012 earnings +release and the second quarter 2012 Form 10-Q that materially overstated the company’s net +income. + +FACTS + +Bankrate’s Business And Structure. + +3. Bankrate is engaged in the business of providing consumers with personal finance +information across multiple vertical categories including mortgages, deposits, insurance, credit +cards, and other categories, such as retirement, automobile loans, and taxes. Bankrate also +aggregates rate information from over 4,800 institutions on more than 300 financial products. Its +principal platform is its Bankrate.com Internet website. + +4 Bankrate defines Adjusted EBITDA as earnings before interest, taxes, depreciation and +amortization, excluding stock based compensation expense and IPO and deal related expenses, +and defines Adjusted EPS as earnings per fully diluted share, excluding stock based +compensation expense, amortization, IPO and deal related expenses. +5 + +4. During the relevant period, Bankrate had three primary divisions: (1) Bankrate +Core, the original mortgage information business; (2) Bankrate Insurance, comprised of +numerous insurance information companies acquired by Bankrate; and (3) Bankrate Credit +Cards, comprised of a number of credit card information companies acquired by Bankrate. +5. Bankrate generates revenue by selling consumer information (“leads”) gleaned +from users of its websites in the insurance and credit cards vertical categories. Its other sources +of revenue include display advertising, performance-based advertising, distribution +arrangements, and traditional media avenues, such as syndication of editorial content and +subscriptions. Some of its customers pay Bankrate each time that a consumer clicks through a +link on Bankrate’s website to the customer’s website. +Bankrate’s Manipulation Of Second Quarter 2012 Revenue And Expenses. +6. On July 6, 2012, after being provided with preliminary second quarter financial +results for Bankrate Core and Credit Cards (the Insurance division’s financial results had not yet +been added to the consolidated numbers), DiMaria, unwilling to accept the company’s second +quarter 2012 financial results, informed Lerner that Adjusted EBITDA needed to be $37 million +for the quarter. +7. On July 7, 2012, the first version of Bankrate’s consolidated financial results was +circulated to DiMaria, Lerner, and Gamsey, as well as others on the accounting team, reflecting +current Adjusted EBITDA for the second quarter of $36,144,000, which DiMaria knew was +below analyst consensus estimates. +8. Three days later, after realizing it had double-counted $286,000 of revenue, the +Credit Cards division submitted revised financials for consolidation. The next day, DiMaria was +informed that Bankrate’s second quarter revenue had decreased by $286,000 due to the +correction for the Credit Cards division’s double-counting of revenue, further jeopardizing the +company’s prospects of meeting its metrics. Shortly thereafter, at DiMaria’s instruction, Lerner +emailed the Insurance and Credit Cards divisions directing them to book additional revenue of +$300,000 and $500,000, respectively. Lerner’s July 11, 2012 email instructions to both Credit +Cards and Insurance, which were copied to DiMaria, did not specify a legitimate justification for +the revenue, but rather contained an ambiguous description of what the revenue purportedly +related to, and did not identify any specific customers with which it was associated. +9. Within a few minutes of sending these email instructions, Lerner forwarded the +emails (and subsequent related emails) to Gamsey. In emails between themselves using strong +expletives, Lerner and Gamsey expressed serious concerns about the validity of the revenue the +divisions had just been directed to book and commiserated about the improper accounting entries +directed by DiMaria. Their emails also stated that DiMaria’s improper accounting entries would +have to be reversed in the third quarter, thereby creating an even larger revenue shortfall and a +need to record additional improper revenue in the third quarter. + +6 + +Bankrate Insurance Records $300,000 in Baseless Revenue. +10. Without any support or analysis, the Insurance division immediately recorded the +$300,000 of additional revenue directed by DiMaria, booking the revenue to a dormant customer +account. Although the Insurance division did not have any intention of justifying the $300,000 +of additional revenue, on July 16, 2012, five days after the revenue was booked, Bankrate’s +auditors asked for an explanation for the $300,000 as part of its accounts receivable variance +review, thereby prompting Bankrate to quickly create a purported explanation for this revenue. +11. Within twenty-four hours of Bankrate’s auditors asking about the $300,000 entry, +the Insurance division, with the knowledge and/or involvement of DiMaria, Lerner, Gamsey, and +others, prepared a draft chart purportedly supporting the $300,000 in revenue – a chart that was +changed shortly thereafter. Tellingly, although this second chart changed the amounts of +revenue assigned to certain categories and replaced certain initial explanations for the revenue +with new purported explanations for the revenue, the second chart still totaled the $300,000 in +revenue that DiMaria and Lerner had directed the Insurance division to book. +12. The purported explanations for the $300,000 in revenue were baseless. For +example, in the second purported explanation for the $300,000 in revenue, $179,000 related to +estimated June 2012 revenue from a brand new bonus provision with a customer of the Insurance +division. However, as DiMaria, Gamsey, and Lerner knew, at the time this revenue was +recognized, the Insurance division did not have any actual data from the customer indicating that +a June bonus had been earned. In addition, both Gamsey and Lerner knew that the Insurance +division was not performing at a level that would have triggered a bonus in the months leading +up to June 2012. Indeed, the Insurance division employee who prepared the high-level, +conclusory “support” for the bonus revenue advised Lerner at the time that she was not +comfortable with the Insurance division recognizing revenue on the basis of this type of analysis +in the future. When the actual data on which a potential bonus was based were later reported to +the Insurance division, the Insurance division’s performance did not qualify for a bonus. In fact, +the Insurance division missed the bonus under the two applicable bonus formulas by +approximately 50% and 200%, respectively. +13. For these reasons, among others, Bankrate’s recognition of the $300,000 in +revenue was contrary to GAAP.5 + +5 The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification +(“ASC”) Topic 605-10-25-1 provides that revenue may be properly recognized only when it is +both a) realized or realizable and b) earned. See also Staff Accounting Bulletin Topic 13, +Revenue Recognition, as codified in ASC 605-10-S99, which provides that revenue is generally +realized or realizable and earned when all of the following criteria are met: 1) persuasive +evidence of an arrangement exists; 2) delivery has occurred or services have been rendered; 3) +the seller’s price to the buyer is fixed or determinable; and 4) collectability is reasonably assured. +7 + +14. In addition, Bankrate did not share either of the purported explanations for the +$300,000 in revenue with its auditor, despite the auditor specifically asking for information about +the $300,000. Rather, at approximately the same time the initial chart attempting to explain the +$300,000 entry was being circulated internally, Lerner sent a misleading, generic explanation +that had been reviewed and approved by DiMaria and Gamsey to the auditor, implicitly +affirming that the revenue was associated with the single customer account to which it was +booked. Moreover, Bankrate did not forward either chart to its auditor, nor did Bankrate update +its misleading, generic explanation for the $300,000 in revenue. +Credit Cards Does not Fully Comply with the Directive to Book Baseless Revenue, Causing +Bankrate to Immediately and Arbitrarily Record Revenue to A Different Business Unit. +15. Unlike Insurance, the Credit Cards accountants initially refused to book the +$500,000 of unsupported revenue directed by DiMaria. Unwilling to accept, and angered by, the +Credit Cards accountants’ reaction to his improper directive, DiMaria told other Bankrate +personnel that he was “going to rip [the Credit Cards CEO’s] f[***]ing head off” and fire the +Credit Cards accountants if they “f[***] up the accounting.” +16. Credit Cards personnel eventually recorded an additional $176,000 in revenue to +the second quarter 2012, revenue that was contrary to Bankrate’s revenue recognition policy. On +July 12, 2012, upon learning that Credit Cards had only booked $176,000 of the $500,000 in +additional revenue he had directed, DiMaria informed Lerner that the difference should be +booked to Bankrate Core. Thirty-five minutes later, Lerner instructed the Bankrate Core +accounting personnel to book $305,000 in additional revenue. Conveniently using two of the +Core customers on a revenue spreadsheet that had legitimate revenue listed as $234,000 and +$71,000, Bankrate Core simply doubled the revenue attributable to these customers without any +basis to arrive at the $305,000 of additional revenue, a fact that soon became known to DiMaria, +Lerner, and Gamsey. +17. By adding this improper revenue directly to the revenue spreadsheet rather than +through a manual journal entry, Bankrate avoided the questions that its auditors typically +directed toward post-quarter manual journal entries. This manner of booking the $305,000 also +circumvented Bankrate’s accounting controls, as the revenue spreadsheet had already been +approved for entry into the general ledger and did not require additional approvals. +18. For these reasons, among others, the recognition of both the $176,000 in revenue +booked with the Credit Cards division and the $305,000 in revenue booked with Bankrate Core +was contrary to GAAP. +Bankrate Makes Additional Baseless Reductions In Marketing Expense Accrual. +19. On July 13, 2012, the day after Bankrate improperly recorded $305,000 of +additional revenue on Bankrate Core’s books, a revised version of Bankrate’s consolidated +financial results for the second quarter 2012 was circulated to DiMaria, Lerner, and Gamsey that +reflected Adjusted EBITDA of $36,656,000. +8 + +20. Shortly after the circulation of the revised financial results, results that continued +to fall short of the $37 million in Adjusted EBITDA dictated by DiMaria one week earlier, +DiMaria directed a Core accountant to reduce a marketing accrual account for Search Engine +Marketing (known as “SEM”) by $400,000. Reducing the SEM accrual (a balance sheet +account) led to a corresponding reduction in the SEM expense (an income statement account), +thereby artificially increasing Bankrate’s quarterly earnings. +21. DiMaria’s email instruction to the Core accountant did not reference or contain +any support for the accounting entry. Similarly, the manual journal entry executing DiMaria’s +instruction to reduce the SEM marketing accrual by $400,000 did not have any support beyond +DiMaria’s email instruction. +22. Upon learning of this $400,000 reduction in the SEM accrual, Gamsey questioned +Lerner as to whether there was any basis for DiMaria’s reduction in the SEM accrual, or whether +DiMaria directed this entry instead of additional unsupported revenue entries. +23. In fact, Bankrate, through DiMaria and Lerner, had been using the SEM accrual +account as one of its “cushion” or “cookie jar reserve” accounts (i.e., an account known to have +excess accruals that could be selectively used to boost the financial results of particular quarters) +since at least early 2011. It was inappropriate for Bankrate to use the SEM account as a +“cushion” account, and to reduce the SEM accrual without a proper basis, in order to meet the +Adjusted EBITDA number being dictated by DiMaria. +24. Given these circumstances, Lerner knew, or was reckless in not knowing, that the +$400,000 SEM adjustment was improper. +25. Following the booking of this $400,000 reduction in the SEM accrual, a revised +version of Bankrate’s second quarter 2012 financial results was circulated to DiMaria, Lerner, +and Gamsey, reflecting Adjusted EBITDA of $37,056,000. +Bankrate Fails to Book Additional Second Quarter Expenses. +26. The baseless accounting entries detailed above were not the only steps in +Bankrate’s scheme to meet analyst estimates. On July 6, 2012 – indeed, within a few hours of +being told by DiMaria that second quarter Adjusted EBITDA needed to be $37 million – Lerner +instructed Bankrate Core to reverse certain second quarter accounting fees associated with +Bankrate’s Sarbanes-Oxley compliance provider. This instruction was made without any basis. +27. After realizing that accounting fees incurred in the second quarter had not yet +been recorded, Lerner, instead of reversing these fees, decided not to record the proper amount of +fees to the second quarter, but to instead record those fees to the third quarter. As a result, +Bankrate improperly failed to book at least $99,000 in known accounting fees that were incurred +during the second quarter. +9 + +Lerner, Together with DiMaria and Gamsey, Made Material Misrepresentations and +Omissions to Bankrate’s Auditor Concerning the Improper Accounting Entries in the +Second Quarter 2012. +28. As set forth in paragraph 14 above, Lerner, after receiving approval from DiMaria +and Gamsey, provided Bankrate’s auditor with a generic and misleading explanation for the +$300,000 in improper revenue booked by the Insurance division, and took no steps to advise the +auditor that Bankrate’s explanation for this revenue later changed significantly. +29. In addition, Lerner and others again made material misrepresentations and +omissions to Bankrate’s auditor in the August 13, 2012 management representation letter that he +(and others) signed for the second quarter 2012. Although Lerner knew about the improper +accounting practices taking place at the company, he falsely represented to the company’s auditor +that: 1) the company’s financial statements had been prepared and were fairly presented in +conformity with GAAP; 2) there were no material transactions that had not been properly recorded +in the company’s accounting records; and 3) he had no knowledge of fraud or suspected fraud +affecting the company involving management, employees with significant internal control roles, or +others where the fraud could materially affect the company’s financial statements. + +Bankrate’s Reported Financial Results Met And/Or Exceeded Analyst Consensus +Estimates. +30. As a result of its improper entries as described above, Bankrate released +artificially inflated financial results on July 31, 2012, and just met analyst targets. Analyst +consensus estimates for Bankrate’s second quarter 2012 financial results were $37.2 million for +Adjusted EBITDA and $0.18 for Adjusted EPS. In its July 31, 2012 earnings release, which was +incorporated in a Form 8-K filed by Bankrate on the same date, Bankrate reported second quarter +2012 Adjusted EBITDA of $37.5 million and Adjusted EPS of $0.18. The above-described +improper entries were therefore material, as they allowed Bankrate to meet and/or exceed analyst +consensus estimates for these key financial metrics. Due to the improper entries, Bankrate also +materially misstated its reported net income in its second quarter 2012 Form 10-Q, filed on +August 13, 2012. +31. The day after Bankrate’s announcement of its financial results for the second +quarter 2012 on July 31, 2012, Bankrate’s stock price rose from $15.95 to $17.57 per share. +Lerner sold Bankrate stock during a one-week period following the announcement of Bankrate’s +second quarter 2012 financial results, a period during which Bankrate’s stock price was +artificially inflated as a result of Bankrate’s scheme to inflate its financial results. +32. At the time Lerner sold Bankrate stock on August 6, 2012, he was in possession +of material, nonpublic information concerning Bankrate’s reported second quarter financial +results (i.e., that Bankrate had overstated its financial results as a result of the improper +accounting entries described herein). As a result of these stock sales, Lerner improperly +benefited by as much as $30,045. +10 + +VIOLATIONS + +33. As a result of the conduct described above, Lerner willfully6 violated Section +17(a) of the Securities Act, which prohibits fraudulent conduct in the offer or sale of securities, +and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent +conduct in connection with the purchase or sale of securities. +34. As a result of the conduct described above, Lerner also willfully violated Section +13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, which prohibit persons from +knowingly circumventing or knowingly failing to implement a system of internal accounting +controls, knowingly falsifying any book, record or account, and directly or indirectly falsifying +or causing to be falsified any book, record, or account. +35. In addition, as a result of the conduct described above, Lerner willfully violated +Rule 13b2-2 of the Exchange Act, which prohibits an officer or director of an issuer from, +directly or indirectly: (1) making or causing to be made a materially false or misleading +statement to an accountant or (2) omitting to state, or causing another person to omit to state, any +material fact necessary in order to make statements made, in light of the circumstances under +which such statements were made, not misleading, to an accountant in connection with, among +other things, a required audit, review or examination of the issuer’s financial statements or the +preparation or filing of any document or report required to be filed with the Commission. +36. Also as a result of the conduct described above, Lerner willfully aided and abetted +and caused Bankrate’s violation of Section 13(a) of the Exchange Act and Rules 13a-11, 13a-13, +and 12b-20 thereunder, which require that every issuer of a security registered pursuant to +Section 12 of the Exchange Act file with the Commission, among other things, information, +documents, quarterly reports, and current reports as the Commission may require, and mandate +that periodic reports contain such further material information as may be necessary to make the +required statements not misleading. +37. Because Bankrate improperly recorded its revenue, expenses, and accruals, its +books, records, and accounts did not, in reasonable detail, accurately and fairly reflect its +transactions and dispositions of assets. +38. In addition, Bankrate failed to implement internal accounting controls relating to +its revenue, expense, and accrual accounts which were sufficient to provide reasonable +assurances that these accounts were accurately stated in accordance with GAAP. +39. As a result of the conduct described above, Lerner willfully aided and abetted and +caused Bankrate’s violation of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, which + +6 A willful violation of the securities laws means merely “‘that the person charged with the duty +knows what he is doing.’” Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting +Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)). +11 + +require reporting companies to make and keep books, records and accounts which, in reasonable +detail, accurately and fairly reflect their transactions and dispositions of their assets, and to +devise and maintain a system of internal accounting controls sufficient to provide reasonable +assurances that transactions are recorded as necessary to permit preparation of financial +statements in accordance with GAAP. +40. Exchange Act Section 4C(a)(3) and Rule 102(e)(1)(iii) of the Commission’s +Rules of Practice provide, in pertinent part, that “[t]he Commission may censure a person or +deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to +any person who is found . . . [t]o have willfully violated, or willfully aided and abetted the +violation of, any provision of the Federal securities laws or the rules and regulations +thereunder.” 17 C.F.R. § 201.102(e)(1)(iii). As a result of the conduct described above, Lerner +willfully violated, and willfully aided and abetted the violation of, the aforementioned provisions +of the Securities Act and Exchange Act within the meaning of Section 4C(a)(3) and Rule +102(e)(1)(iii). +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Lerner’s Offer. + + Accordingly, pursuant to Section 8A of the Securities Act, Sections 4C and 21C of the +Exchange Act, and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice it is hereby +ORDERED that: + + A. Respondent Lerner cease and desist from committing or causing any violations and +any future violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), +13(b)(2)(B), and 13(b)(5) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-11, 13a-13, 13b2-1, +and 13b2-2 thereunder. + +B. Respondent Lerner is denied the privilege of appearing or practicing before the +Commission as an accountant. + + C. After 5 years from the date of this Order, Respondent may request that the +Commission consider his reinstatement by submitting an application (Attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission. Such an application must satisfy the Commission that +Respondent’s work in his practice before the Commission will be +reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he +practices before the Commission in this capacity; and/or + +12 + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting +Oversight Board (“Board”) in accordance with the Sarbanes-Oxley +Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection +did not identify any criticisms of or potential defects in the +respondent’s or the firm’s quality control system that would +indicate that the respondent will not receive appropriate +supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions +imposed by the Board (other than reinstatement by the +Commission); and + + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an +independent accountant, to comply with all requirements of the +Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring +partner reviews and quality control standards. + +D. The Commission will consider an application by Respondent to resume appearing +or practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Respondent’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission. + + E. Respondent Lerner is prohibited for a period of 5 years from the date of this +Order from acting as an officer or director of any issuer that has a class of securities registered +pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to +Section 15(d) of the Exchange Act. + +F. Respondent Lerner shall, within 14 days of the entry of this Order, pay a civil +money penalty in the amount of $150,000 and disgorgement of $30,045 and prejudgment interest +of $2,571 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 +13 + +the Commission, in its discretion, will seek to distribute funds or, subject to Section 21F(g)(3), +transfer them to the general fund of the United States Treasury. The Commission may distribute +civil money penalties collected in this proceeding if, in its discretion, the Commission orders the +establishment of a Fair Fund pursuant to 15 U.S.C. § 7246, Section 308(a) of the Sarbanes-Oxley +Act of 2002, as amended. If timely payment is not made, additional interest shall accrue pursuant +to Rule 600 of the Commission’s Rules of Practice or 31 U.S.C. §3717, as applicable. 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 +Lerner as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Ian Karpel, Assistant Regional Director, +Division of Enforcement, Securities and Exchange Commission, 1961 Stout Street, Denver, CO +80294-1961. + + G. 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 +14 + +Respondent by or on behalf of one or more investors based on substantially the same facts as +alleged in the Order instituted by the Commission in this proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3686.txt b/raw/aaer/2015/AAER-3686.txt new file mode 100644 index 0000000000000000000000000000000000000000..abce34638ab27fe0b803f87f4ea42b42348e2f7a --- /dev/null +++ b/raw/aaer/2015/AAER-3686.txt @@ -0,0 +1,376 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9906 / September 8, 2015 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75854 / September 8, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3686 / September 8, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16791 + + + +In the Matter of + +L. Gary Davis, 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 L. Gary +Davis, CPA (“Respondent” or “Davis”) 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 + +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 +Davis served as the chief financial officer (“CFO”) of the MusclePharm Corporation +(“MSLP”) from July 3, 2012 until April 15, 2014. MSLP is a Denver-based sports nutrition +company that develops, manufactures, and markets sports nutrition products. When Davis became +CFO of MSLP, he discovered that MSLP had almost no internal controls, policies or procedures. +Davis worked to bring MSLP’s accounting and disclosures in compliance with generally accepted +accounting principles (“GAAP”) and the Commission’s reporting requirements. During his tenure +as CFO, however, Davis failed to ensure sufficient internal controls were enacted and proper books +and records were kept. Additionally, Davis became aware of issues regarding undisclosed +perquisites and undisclosed related parties, yet continued to sign MSLP Commission filings with +misstatements and omissions. As a result, between July 2012 and April 2014, when Davis ceased +being CFO, MSLP had a series of accounting and disclosure failures that resulted in the company + +violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found…to have +willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. +3 + +filing materially false and misleading filings with the Commission. Specifically, as described +further below, MSLP failed to disclose perquisite compensation to its executive officers, failed to +disclose related party transactions, and failed to properly disclose manufacturing concentration, +rent expense, and international sales in the financial statements in Commission filings that Davis +reviewed, approved, and signed. +Respondent +1. L. Gary Davis, CPA, was the CFO of MSLP from July 3, 2012 through April 15, +2014. Davis continued to be employed by MSLP in a special projects role until December 31, +2014. Davis has been licensed as a CPA in Ohio since 1985 and licensed in Idaho since 1992. + +Relevant Entity + +2. MSLP is a Nevada corporation, based in Denver, Colorado, that manufactures and +markets sports nutrition products. From 2010 to present, MSLP’s common stock was registered +with the Commission pursuant to Section 12(g) of the Exchange Act and was quoted on the OTC +Bulletin Board. + +MSLP’s Failure to Disclose Perquisites from 2012 through 2014 + +3. From 2012 through April 2014, MSLP materially understated its disclosed +perquisites by approximately $285,000 or 66% in Forms 10-K and Forms S-1 filed with the +Commission. Davis reviewed, approved, and signed Forms 10-K and Forms S-1 while CFO. +MSLP understated its disclosed perquisites in 2012 by approximately $214,000 or 93% and in +2013 by approximately $71,000 or 35%. From 2012 through 2013, MSLP’s chief executive +officer (“CEO”) received approximately $152,000 of undisclosed perquisites. The perquisites +included perquisites related to meals, autos, apparel, and two golf club memberships. +4. In July 2012, MSLP hired Davis as the CFO. Davis realized that MSLP had almost +no internal controls or policies or procedures. Davis focused on maintaining MSLP’s daily +operations and focused on developing the accounting department by hiring additional accounting +staff with CPAs. Soon after starting, however, Davis received information that MSLP was +reimbursing executives for expenses, including a golf club membership and executive auto use, +which were not disclosed as perquisites. +5. In October 2012, Davis received a draft Form S-1, which included a summary +compensation table that for the first time included disclosure amounts under the “All Other +Compensation” column for 2009, 2010, and 2011. A few weeks later, on October 26, MSLP filed +the final Form S-1, which had removed items from the draft and failed to list several undisclosed +perquisites. Davis reviewed, approved, and signed the Form S-1. +6. Beginning in November 2012, Davis began to implement travel and expense +policies, which required MSLP employees to provide original receipts for their expenses. Davis, +however, did not implement any formal policies or procedures to ensure perquisites were being +4 + +properly identified and disclosed. Executives continued to submit reimbursement forms and make +charges on company credit cards for personal items without providing original receipts. MSLP +continued paying for these items without properly identifying them as perquisites. As a result, +MSLP filed several Commission filings through April 2014, which failed to include complete +disclosure of the perquisites. +7. By summer 2013, Davis had begun conducting an internal review to determine the +amount of undisclosed perquisites paid by MSLP to its executives since 2010. In July 2013, Davis +identified at least $100,000 of undisclosed perquisites. Despite the perquisite review not being +complete, MSLP filed a Form S-1 in August 2013 with incorrect perquisite disclosures that were +identical to amounts previously disclosed before the internal review began. Davis reviewed, +approved, and signed the Form S-1. + +8. On March 31, 2014, MSLP filed its 2013 Form 10-K, which was reviewed, +approved, and signed by Davis. In the summary compensation table, MSLP set forth previously +undisclosed perquisites for 2011 and 2012 totaling approximately $189,000 (previously +undisclosed perquisites of $74,000 for 2011 and $115,000 for 2012). The table also disclosed +approximately $134,000 of perquisites in 2013. These disclosures, however, still understated +perquisites paid to MSLP executives. + +9. After Davis was no longer working for MSLP, on October 31, 2014, MSLP filed +amended Forms 10-K for the years ended 2012 and 2013. In total, MSLP failed to report +perquisites totaling approximately $285,000 from 2012-2013. + +MSLP’s Failure to Disclose Related Party Transactions with a +Major Customer + +10. From August 2012 through the end of the year, MSLP failed to disclose material +related party transactions with a major customer in Commission filings that were reviewed, +approved, and signed by Davis. + +11. In May 2011, MSLP had hired a new chief marketing officer (“CMO”). The CMO +was a former executive and co-founder of a major customer of MSLP. Davis knew that the +CMO’s brother remained the CEO of the major customer. The CMO’s brother was also a greater +than 10% owner of the major customer. Additionally, Davis had previously been CFO of MSLP’s +major customer (where the CMO’s brother was CEO) and acquired a 1.75% indirect interest in the +major customer. Davis also continued to perform work for the CEO of the major customer +personally at no charge while he worked at MSLP. + +12. In August 2012, MSLP’s auditor requested that MSLP update an April 2012 memo +it had provided to the auditors addressing whether the major customer was a related party requiring +disclosure under GAAP, specifically due to the CMO’s or Davis’ employment. The August memo +concluded that transactions with the major customer did not require disclosure under GAAP. The +memo misapplied GAAP, which Davis, the only accountant signing the memo, did not correct. +The memo also contained inaccurate information about the relationship between MSLP, the CMO, +5 + +Davis, and the major customer. As a result, MSLP failed to disclose transactions with its major +customer as related party transactions in Commission filings until it filed its Form 10-Q for the +quarter ended March 30, 2013 in May 2013. + +Other Financial Statement, Accounting, and Disclosure Failures from 2012-2013 + +13. MSLP, while Davis was CFO, failed to disclose that it had one supplier that +accounted for nearly 100% of its product purchases in its 2012 Commission filings as required +under GAAP. + +14. MSLP, while Davis was CFO, failed to disclose $100,000 of rent expense related +to an August 2012 aircraft lease agreement in its 2012 Form 10-K as required under GAAP. As a +result, MSLP understated its disclosed rent expense by 23%. In addition, MSLP, while Davis was +CFO, instead of recognizing no gain or loss on the settlement since the $100,000 paid equaled the +$100,000 owed per the lease agreement, MSLP recorded a $35,000 gain in 2013 related to the +January 2013 settlement. + +15. MSLP, while Davis was CFO, failed to disclose the amount of its international +sales in its 2012 and 2013 Commission filings as required under GAAP. MSLP’s international +sales accounted for 30% for 2012 and 31% for 2013. + +Books, Records, and Lack of Internal Controls + +16. Because MSLP improperly recorded and/or reported its perquisites, related parties, +manufacturing concentration, leases, and international sales, its books, records and accounts did +not, in reasonable detail, accurately and fairly reflect its transactions and dispositions of assets. + +17. In addition, MSLP failed to implement internal accounting controls relating to its +perquisites, related parties, manufacturing concentration, leases, and international sales, which +were sufficient to provide reasonable assurances that transactions were recorded as necessary to +permit the preparation of financial statements in conformity with GAAP and to maintain the +accountability of assets. +Violations + +18. As a result of the conduct described above, Davis willfully4 violated Sections +17(a)(2) and 17(a)(3) of the Securities Act and caused MSLP’s violations of Sections 17(a)(2) and +17(a)(3) of the Securities Act, which make it unlawful for any person in the offer or sale of any + +4 A willful violation of the securities laws means merely “‘that the person charged with the duty +knows what he is doing.’” Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting +Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)). There is no requirement that the actor +“‘also be aware that he is violating one of the Rules or Acts.’” Id. (quoting Gearhart & Otis, +Inc. v. SEC, 348 F.2d 798, 803 (D.C. Cir. 1965)). + +6 + +securities by the use of interstate commerce to obtain money or property by means of any untrue +statement of a material fact or any omission to state a material fact necessary in order to make the +statements made, in light of the circumstances under which they were made, not misleading; and to +engage in any transaction, practice, or course of business which operates or would operate as a +fraud or deceit upon the purchaser. + +19. As a result of the conduct described above, Davis caused MSLP’s violations of +Section 13(a) of the Exchange Act Rules 13a-1, 13a-13, and 12b-20 thereunder, which require +every issuer of a security registered pursuant to Section 12 of the Exchange Act file with the +Commission information, documents, and annual and quarterly reports as the Commission may +require, and mandate that periodic reports contain such further material information as may be +necessary to make the required statements not misleading. + +20. As a result of the conduct described above, Davis caused MSLP’s violations of +Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep +books, records and accounts, which in reasonable detail, accurately and fairly reflect their +transactions and dispositions of assets. + +21. As a result of the conduct described above, Davis caused MSLP’s violations of +Section 13(b)(2)(B) of the Exchange Act and willfully violated Rule 13b2-1 thereunder, which +require all reporting companies to devise and maintain a system of internal accounting controls +sufficient to provide reasonable assurances that transactions are recorded as necessary to permit the +preparation of financial statements in conformity with GAAP and to maintain the accountability of +assets; and prohibit persons from directly or indirectly falsifying or causing to be falsified any +book, record, or account. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Davis’ Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Davis shall cease and desist from committing or causing any violations and any +future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, and 13b2-1 +promulgated thereunder. + + B. Davis is denied the privilege of appearing or practicing before the Commission as +an accountant. + + C. After two years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + +7 + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission. Such an application must satisfy the Commission that +Respondent’s work in his practice before the Commission will be +reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he +practices before the Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting +Oversight Board (“Board”) in accordance with the Sarbanes-Oxley +Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection +did not identify any criticisms of or potential defects in the +respondent’s or the firm’s quality control system that would +indicate that the respondent will not receive appropriate +supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions +imposed by the Board (other than reinstatement by the +Commission); and + + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an +independent accountant, to comply with all requirements of the +Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring +partner reviews and quality control standards. + +D. The Commission will consider an application by Respondent to resume appearing +or practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Respondent’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission. + +8 + + E. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $30,000 to the Securities and Exchange Commission. If timely payment +is not made, additional interest shall accrue pursuant to 31 U.S.C. 3717. Payment must be made in +one of the following ways: + + (1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + + (2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + (3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying L. +Gary Davis 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 Thomas J. Krysa, Division of +Enforcement, Securities and Exchange Commission, 1961 Stout Street, Suite 1700, Denver, CO +80294. +9 + + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3687.txt b/raw/aaer/2015/AAER-3687.txt new file mode 100644 index 0000000000000000000000000000000000000000..4eaf9c3390fd9b1e3b47074499dbe9f1a4b229d8 --- /dev/null +++ b/raw/aaer/2015/AAER-3687.txt @@ -0,0 +1,232 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75855 / September 8, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3687 / September 8, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16792 + + +In the Matter of + +Donald W. Prosser, CPA, + +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 Donald W. Prosser (“Prosser” 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 +MusclePharm Corporation (“MSLP”) is a Denver-based sports nutrition company that +develops, manufactures, and markets sports nutrition products. When MSLP became a public +company in 2010, it was unprepared for the Commission’s reporting requirements and lacked +sufficient infrastructure to support its rapid growth. MSLP’s revenues greatly increased each year +(MSLP’s reported revenue was $3M in 2010, $17M in 2011, $67M in 2012 and $111M in 2013). +MSLP’s senior management lacked public company or accounting experience. While the +company focused on revenue growth, it failed to establish sufficient internal controls and keep +proper books and records. From July 2012 through April 10, 2014, Prosser was a member of +MSLP’s board of directors and chair of the audit committee. Beginning in September 2012, +Prosser, the board of directors and members of senior management had reason to know that MSLP +had not disclosed certain perquisite compensation paid to its executive officers. Prosser, however, +knew or should have known that he signed materially false and misleading filings with the +Commission that failed to disclose all perquisites MSLP was required to disclose under the +securities laws. By summer 2013, MSLP began an internal review to determine the amount of +undisclosed perquisites paid by MSLP to its executives since 2010. In July 2013, Prosser became +directly involved in MSLP’s internal perquisite review. MSLP nevertheless continued to make +filings with the Commission that materially understated perquisite compensation through July +2014. +Respondent +1. Donald W. Prosser, CPA, age 64, a resident of Denver, Colorado, was a member of +the MSLP board of directors from July 2012 through April 10, 2014. As an independent member +of the MSLP board of directors, Prosser served as chair of the audit committee, a member of the +compensation committee, and a member of the nominating and governance committee. From +April 10, 2014 through March 2, 2015, Prosser served as interim chief financial officer (“CFO”) of +MSLP. Prosser has been licensed as a certified public accountant (“CPA”) in Colorado since 1977, +except for the three year period from June 1, 1998 to June 26, 2001. + +Relevant Entity + +2. MSLP is a Nevada corporation, based in Denver, Colorado, that manufactures and +markets sports nutrition products. From 2010 to present, MSLP’s common stock was registered +with the Commission pursuant to Section 12(g) of the Exchange Act and was quoted on the OTC +Bulletin Board. + +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 + +Prosser’s Role in MSLP’s Executive Compensation Disclosures + +3. In September 2012, according to the MSLP board minutes, Prosser attended a +meeting of the MSLP board of directors and compensation committee. During the meeting, the +MSLP board of directors determined perquisites related to autos, golf club memberships, and +private plane usage would be disclosed in Commission filings. MSLP, however, filed several +Commission filings in the form of Forms 10-K and Forms S-1, as well as amendments thereto, +through July 2014, which failed to include complete disclosure of the perquisites identified at the +September 2012 board meeting and otherwise known by senior management. Prosser signed these +filings as a director. +4. On January 4, 2013, Prosser attended a meeting of the MSLP Compensation +Committee of the board of directors. During the meeting, it was resolved that the cost of the use of +a private plane from non-employee relatives of MSLP officers in 2012 would be imputed to the +executives. MSLP, however, filed several Commission filings in the form of Forms 10-K and +Forms S-1, as well as amendments thereto, through March 2014, which failed to include +perquisites related to officer spousal use of a private plane in 2012. Prosser signed these filings as +a director. +5. By summer 2013, MSLP began an internal review of its records to determine the +amount of undisclosed perquisites paid by MSLP to its executives since 2010. MSLP’s CFO +began this review and in July identified over $100,000 of undisclosed perquisites, including jet use, +autos, and golf club memberships and informed Prosser of the amount of undisclosed perquisites +located to date. +6. In July 2013, the audit committee, with Prosser as its chair, became directly +involved in MSLP’s perquisite review process. MSLP hired an outside consultant to perform a +factual review of documents and information related to potential perquisites. MSLP, however, +filed a Form S-1 in August 2013 with incorrect perquisite disclosures that were identical to +amounts previously disclosed before the internal review. Prosser signed this filing as a director. +7. After the August Form S-1 was filed, Prosser assisted and supervised the +independent consultant in connection with his review of perquisites. Prosser also approved the +independent consultant’s work plan and consulted with the independent consultant during the +review. +8. In December 2013, MSLP stopped using the independent consultant. The board +approved and MSLP hired an internal auditor and assigned the perquisite review to the internal +auditor. Prosser assisted and supervised the work of the internal auditor and consulted with the +internal auditor during the review. +9. On March 31, 2014, MSLP filed its Form 10-K for the year ended December 31, +2013. Prosser approved and signed this filing. The 2013 Form 10-K included a revised executive +compensation table for the years 2011-2013. In the table, MSLP set forth previously undisclosed +perquisites for 2011 and 2012 totaling approximately $189,000 ($73,000 for 2011 and $115,000 + 4 +for 2012). The table also disclosed approximately $130,000 of perquisites in 2013. These +disclosures, however, still significantly understated perquisites paid to MSLP executives. +10. On April 14, 2014, Prosser resigned from the MSLP board, including as a member +of the audit committee as its chair, and became MSLP’s interim CFO. +11. On July 23, 2014, MSLP filed a Definitive Proxy Statement, which included the +same deficient perquisite disclosure as the 2013 Form 10-K. +12. MSLP and its audit committee reexamined its perquisite investigation results from +spring 2014 through fall 2014. On October 31, 2014, MSLP filed amended Forms 10-K for the +years ended 2012 and 2013. Prosser signed these filings as the Principal Financial Officer and +Principal Accounting Officer. The 2013 Form 10-K/A disclosed approximately $252,000 of +additional perquisites for the years 2011, 2012, and 2013 that were not included in the 2013 Form +10-K or MSLP’s July 2014 proxy statement. The 2012 Form 10-K/A disclosed approximately +$37,000 of additional perquisites for 2010. In total, MSLP failed to report perquisites totaling +approximately $482,000 from 2010-2013. +13. Because MSLP did not properly identify and record perquisites paid to its +executives, MSLP’s books, records and accounts did not, in reasonable detail, accurately and fairly +reflect its transactions and dispositions of assets and its filings with the Commission were +materially false and misleading. + +Violations + +14. As a result of the conduct described above, Prosser caused MSLP’s violations of +Section 14(a) of the Exchange Act and Rule 14a-9 thereunder, which prohibits solicitations by +means of a proxy statement, form of proxy, notice of meeting or other communication, written or +oral, containing a statement which, at the time and in the light of the circumstances under which it +was made, was false or misleading with respect to any material fact, or which omitted to state any +material fact necessary in order to make the statements therein not false or misleading or necessary +to correct any statement in any earlier communication with respect to the solicitation of a proxy for +the same meeting or subject matter which has become false or misleading. + +15. As a result of the conduct described above, Prosser caused MSLP’s violations of +Section 13(a) of the Exchange Act Rules 13a-1 and 12b-20 thereunder, which require every issuer +of a security registered pursuant to Section 12 of the Exchange Act file with the Commission +information, documents, and annual and quarterly reports as the Commission may require, and +mandate that periodic reports contain such further material information as may be necessary to +make the required statements not misleading. + +16. As a result of the conduct described above, Prosser caused MSLP’s violations of +Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep +books, records and accounts, which in reasonable detail, accurately and fairly reflect their +transactions and dispositions of assets. + 5 + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Prosser’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Prosser cease and desist +from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), +and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, and 14a-9 thereunder. + +B. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $30,000 to the Securities and Exchange Commission. If timely payment +is not made, additional interest shall accrue pursuant to 31 U.S.C. 3717. Payment must be made in +one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission and +hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Donald W. Prosser 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 Thomas J. Krysa, Division of +Enforcement, Securities and Exchange Commission, 1961 Stout Street, Suite 1700, Denver, CO +80294. + 6 + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3689.txt b/raw/aaer/2015/AAER-3689.txt new file mode 100644 index 0000000000000000000000000000000000000000..5455a95a2c0302ef44b83a7a5627ed4532ecbda5 --- /dev/null +++ b/raw/aaer/2015/AAER-3689.txt @@ -0,0 +1,1659 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75859 / September 9, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3689 / September 9, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16797 + + + +In the Matter of + +Sean C. Henaghan, CPA, +John E. Rainis, CPA, +Leland E. Graul, CPA, +James J. Gerace, CPA, and +Wendy M. Hambleton, CPA, + +Respondents. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections +4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice 2 against Sean C. Henaghan, CPA (“Henaghan”), John E. + +1 Section 4C provides, in relevant part, that: +The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (2) . . . to have engaged in unethical or +improper professional conduct. +2 Rule 102(e)(1) provides, in relevant part: +The Commission may censure a person or deny, temporarily or permanently, the +privilege of appearing or practicing before it in any way to any person who is +found . . . +* * * + + +2 +Rainis, CPA (“Rainis”), Leland E. Graul, CPA (“Graul”), and James J. Gerace, CPA (“Gerace”), +and pursuant to Section 21C of the Exchange Act against Wendy M. Hambleton, CPA +(“Hambleton”) (Henaghan, Rainis, Graul, Gerace, and Hambleton are referred to collectively as +“Respondents”). + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) that the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over them and the subject matter of +these proceedings, which is admitted, and except as provided herein in Section V, Respondents +consent to the entry of this Order Instituting Public Administrative and Cease-and-Desist +Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934, and Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions and a Cease-and-Desist Order (the “Order”), as set forth below. + + III. + +On the basis of this Order and Respondent’s Offers, the Commission finds3 that: + +A. SUMMARY + +1. This matter involves improper professional conduct in BDO USA, LLP’s (“BDO”)4 +audits of General Employment Enterprises, Inc. (“GEE” or the “Company”), a staffing services + +(ii) to have engaged in unethical or improper professional conduct. +* * * +(iv) with respect to persons licensed to practice as accountants, “improper +professional conduct” under Rule 102(e)(1)(ii) means: +* * * +(B) either of the following two types of negligent conduct: +(1) A single instance of highly unreasonable conduct that results in a +violation of applicable professional standards in circumstances in which an +accountant knows, or should know, that heightened scrutiny is warranted. +(2) Repeated instances of unreasonable conduct, each resulting in a +violation of applicable professional standards, that indicate a lack of +competence to practice before the Commission. +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + +3 +company whose stock trades on the NYSE MKT. During BDO’s 2009 audit of GEE’s financial +statements for its fiscal year ended September 30, 2009, Respondents learned that $2.3 million +(comprising approximately half of GEE’s assets and substantially all of its cash) was unaccounted +for when GEE’s chief financial officer (the “GEE CFO”) advised BDO, in November 2009, that +(a) GEE’s purported 90-day non-renewable certificate of deposit (“CD”) at a New York bank had +not been repaid by the bank after the stated maturity date in mid-October, (b) GEE was missing +documentation supporting the CD, and (c) a bank employee had told GEE’s CFO that the bank had +no record of a CD. Thereafter, BDO received multiple conflicting stories from GEE management +and board members concerning both the status of the CD and a series of transfers totaling $2.3 +million made to GEE by three entities unaffiliated with the bank, one of which BDO had been told +was owned by GEE’s Chairman and majority shareholder. After BDO raised questions about these +deposits, GEE’s chief executive officer claimed the deposits were the proceeds of an agreement to +assign the CD to a purported unrelated party. +2. Henaghan, BDO’s engagement partner, and Rainis, BDO’s concurring partner, +consulted with senior BDO partners, including Gerace, the assigned BDO regional technical +director, Graul, BDO’s national director of accounting and risk management partner, and +Hambleton, BDO’s national SEC practice director. The consultation resulted in BDO issuing a +five-page letter, dated December 21, 2009, in which BDO advised GEE of its belief that BDO had +not been provided sufficient audit evidence to formally conclude on the matter and demanded that +GEE’s audit committee commission a full investigation of the matter by an independent firm. +BDO received conflicting information from various sources as to the existence of the CD and +never received rational explanations as to why the $2.3 million went missing and why an +equivalent amount was later received under suspect circumstances. Only days later, however, after +GEE’s chief executive officer resigned, Respondents agreed to withdraw BDO’s demand for an +independent investigation and BDO issued an audit report containing an unqualified opinion on +GEE’s financial statements. Those financial statements, included in GEE’s Form 10-K filed on +January 8, 2010, represented that GEE had a $2.3 million cash equivalent in the form of CD as of +September 30, 2009, and had entered into an assignment agreement to sell the CD for full face +value to an unrelated party. +3. Approximately two months after GEE filed its 2009 Form 10-K with BDO’s +unqualified audit opinion, Respondents learned of a criminal complaint against the New York bank +president. The criminal complaint alleged, in connection with a wide-ranging conspiracy +involving, among others, GEE’s then-chief executive officer and GEE’s then-majority shareholder +and chairman of the board, that (i) GEE’s purported $2.3 million CD never existed, (ii) the bank +president signed a false confirmation to BDO, (iii) GEE’s $2.3 million was used to attempt to +conceal a loan default connected to the broader conspiracy, and (iv) the entities that transferred the +$2.3 million back to GEE were related to the bank president’s co-conspirators, including GEE’s +then-majority shareholder and chairman of the board. The bank president pled guilty in October + +4 BDO, formerly known as BDO Seidman, LLP, is a Delaware limited liability partnership and a +PCAOB-registered public accounting firm with its headquarters in Chicago, Illinois. BDO +served as GEE’s independent auditor from 2004 through 2012. + + +4 +2010. Despite this additional new information, Respondents failed to either perform or confirm +that others performed appropriate audit procedures to determine whether this new information had +any impact on GEE’s 2009 financial statements or BDO’s audit report thereon. In addition, BDO +failed to adequately consider this information during its subsequent audit when it provided an audit +report containing an unqualified opinion on GEE’s financial statements included in the Company’s +2010 Form 10-K. +4. Specifically, among other audit failures during the 2009 and 2010 audits of GEE, +BDO: (1) failed to adequately plan, design, and perform audit procedures necessary to determine +the existence of a disputed asset and the existence of related party transactions; (2) failed to obtain +sufficient competent evidential matter; (3) failed to exercise professional skepticism and due +professional care; (4) ignored red flags of fraud, potential illegal acts by GEE’s agents, and +unidentified related party transactions; (5) placed improper reliance on management +representations from individuals they did not trust; and (6) failed to appropriately consider the +discovery of new facts. +5. BDO issued audit reports containing unqualified opinions on the financial +statements in GEE’s 2009 and 2010 Form 10-Ks, which incorrectly stated that GEE had a cash +equivalent of $2.3 million as of September 30, 2009, and did not disclose that the $2.3 million was +returned by entities related to GEE’s chairman of the board. BDO’s reports, which Respondents +knew would be filed with GEE’s Form 10-Ks, inaccurately stated that the audits had been +conducted in accordance with standards adopted by the Public Company Accounting Oversight +Board (“PCAOB”) and that GEE’s financial statements presented fairly, in all material respects, +the company’s position and results at September 30, 2009, in conformity with generally accepted +accounting principles in the United States of America (“GAAP”). +B. RESPONDENTS + +6. Henaghan, age 42, is a Certified Public Accountant (“CPA”) licensed to practice in +Illinois and was licensed in Florida from 2010 through 2012. Henaghan served as the BDO +engagement partner on the 2009 and 2010 audits of GEE and had final responsibility for the audits. +7. Rainis, age 57, is a CPA licensed to practice in Illinois. Rainis served as the BDO +concurring reviewer on the 2009 and 2010 audits of GEE. + +8. Graul, age 66, is a CPA licensed to practice in Illinois. Prior to his retirement, +Graul served as BDO’s national director of accounting and risk management partner when he was +consulted during the 2009 and 2010 audits of GEE. + +9. Gerace, age 54, is a CPA licensed to practice in Illinois. Gerace served as the +regional technical director of BDO when he was consulted during the 2009 and 2010 audits of +GEE. + + + +5 +10. Hambleton, age 53, is a CPA licensed to practice in Illinois. Hambleton served as +BDO’s national SEC practice director when she was consulted during the 2009 and 2010 audits of +GEE. + +C. ISSUER AND OTHER RELEVANT ENTITIES AND INDIVIDUALS +11. GEE is an Illinois corporation headquartered in Oakbrook Terrace, Illinois that +provides professional placement services and temporary staffing services in certain industries. +GEE’s common stock is registered with the Commission pursuant to Section 12(b) of the +Exchange Act and trades on the NYSE MKT stock exchange. GEE files periodic reports, +including Forms 10-K and 10-Q, with the Commission pursuant to Section 13(a) of the Exchange +Act and related rules thereunder. +12. River Falls Financial Services, LLC (“River Falls Financial”), River Falls +Investments, LLC f/k/a Oxygen Unlimited II, LLC (“River Falls Investments”), River Falls +Holdings, LLC (“RFH”), Accredited Investor Resources, LLC f/k/a Oxygen Investment +Partners, LLC (“AIR”), Oxygen Unlimited, LLC (“Oxygen”), O2HR, LLC (“O2HR”), SDH +Realty, LLC (“SDH”), WTS Acquisition LLC (“WTS”), H2H Holdings, LLC (“H2H”), and +PSQ, LLC (“PSQ”) (collectively, the “Affiliated Entities”) are purported holding, investment, +employment-related, and insurance companies. During at least 2009 and 2010, Wilbur Anthony +Huff (“Huff”)5 exercised substantial financial and management control over numerous entities, +including, among others, the Affiliated Entities and their holdings. Huff installed other business +partners to perform day-to-day operational functions and/or serve as the listed owners, directors, or +managers. As a convicted felon, Huff faced legal and practical barriers to operating business +entities in his own name, particularly business in regulated industries, including employment- +related, insurance, and banking companies. + +13. Park Avenue Bank (“PAB” or “the Bank”) was a New York State chartered bank +until it was closed by the New York State Banking Department on March 12, 2010, and the +Federal Deposit Insurance Corporation was named Receiver. The Affiliated Entities primarily +conducted their banking business through PAB. Charles J. Antonucci, Sr. (“Antonucci”) served + +5 Huff pled guilty to federal mail fraud charges for obtaining insurance premium finance loans +under false pretenses in the Western District of Kentucky in 2003. In 2008, the Commission filed +charges against Huff related to a scheme to misappropriate assets from and to record fake letters of +credit at Certified Services, Inc. (“Certified”). SEC v. Huff, 08-CV-60315 (S.D. Fla.). On October +22, 2010, the Court entered judgment for the Commission against Huff requiring him to pay more +than $13 million, among other relief. Separately, after an October 2012 indictment against him, +Huff pled guilty on December 23, 2014 to an information, which alleged, among other things, that: +(1) Huff controlled GEE, in whole or in part, by installing other individuals; (2) Huff participated +with Antonucci in a conspiracy in which they stole $2.3 million from GEE and Huff later returned +the $2.3 million to GEE from three companies he controlled; and (3) a large portion of the $2.3 +million received by GEE were funds entrusted to Oxygen by its clients for payment of the clients’ +employment tax and other obligations. U.S. v. Huff, 12-CR-750 (S.D.N.Y.). + + +6 +as the president and CEO of PAB from June 2004 until October 2009. In October 2010, Antonucci +pled guilty to multiple criminal charges, including securities fraud, bank bribery, embezzlement, +and providing a false confirmation to BDO of GEE’s purported CD at PAB. Separately, Park +Avenue Insurance was a private insurance company owned by Antonucci that was not affiliated +with PAB. +14. Stephen B. Pence (“Pence”) served as the chairman of the board of GEE from July +1, 2009, through November 17, 2010. Although Pence purported to be the sole member and owner +of PSQ, whose sole asset was the GEE shares representing a controlling stake in the Company as +of July 1, 2009, PSQ was one of the Affiliated Entities over which Huff exercised substantial +financial and management control. PSQ’s acquisition of GEE stake was funded by AIR and +Oxygen. Pence also represented to BDO that he was the 100% owner of River Falls Financial, +another of the Affiliated Entities. Huff directed substantial monthly payments to Pence ($25,000) +from several of the Affiliated Entities to ensure his control over, and ability to influence, GEE’s +operations. Pence formerly served as the lieutenant governor of Kentucky from 2003 to 2007 and +the United States Attorney for the Western District of Kentucky from 2001 to 2003. +15. Ronald E. Heineman (“Heineman”) was appointed as the chief executive officer +(“CEO”) of GEE on July 1, 2009, in connection with PSQ’s acquisition of a controlling stake in +GEE. Heineman served as CEO until his resignation on December 23, 2009, in connection with +the events described herein. Huff directed substantial monthly payments to Heineman ($15,000) +from the Affiliated Entities during this time period. +16. Salvatore J. Zizza (“Zizza”) served as the CEO of GEE from December 23, 2009, +through December 2012. Prior to his appointment as CEO, Zizza received monthly payments of +$20,000 from PSQ, which were funded by several of the Affiliated Entities, for purported +consulting services, and Zizza frequently attended GEE board meetings as an “invited guest.” In +2009, businesses owned or operated by Zizza received loans in excess of $1 million that Huff +directed from certain of the Affiliated Entities. + +17. Associate-1 was another of Huff’s business partners and was listed or served at +various times as a manager of River Falls Investments, Oxygen, and O2HR, and as co-manager of +River Falls Financial with Heineman. Associate-1 was also involved in PSQ’s acquisition of a +controlling stake in GEE and attended several GEE board meetings in 2009. In addition, from July +2009 until September 2009, Associate-1 was a signatory on GEE’s bank account at PAB despite +the fact that Associate-1 was not an official employee, officer, or director of the Company. +Associate-1 also purported to be the owner of WTS (another of the Affiliated Entities), a holding +company of On-Site Services, Inc. (“On-Site”) and Ameritemps, Inc. (“Ameritemps”), which +WTS had acquired in January 2009 with funding from other Affiliated Entities. Almost +immediately after PSQ’s acquisition of a controlling stake in GEE, Heineman began presenting +proposals to GEE’s board for GEE to acquire these companies. For example, at an August 10, +2009, GEE board meeting, attended by Pence and Zizza, the board authorized Heineman to enter +into a letter of intent with WTS to acquire On-Site, and Heineman reported that he would present +another acquisition candidate, Ameritemps, at the September board meeting. + + +7 +D. BACKGROUND +18. GEE’s May 18, 2009, definitive proxy statement disclosed that, in January 2009, +GEE began discussions with representatives of River Falls Financial, including Heineman and +Pence, concerning the possibility of a tender offer and direct cash investment in GEE. As +Henaghan learned later in 2009, Huff was also present for one of the relevant meetings. The proxy +statement further disclosed that, on February 11, 2009, River Falls Financial and PSQ, a special +purpose vehicle purportedly formed by Pence, entered into a non-binding letter of intent with GEE +for a purchase and tender offer agreement to obtain a controlling stake in GEE. +19. According to GEE’s May 18, 2009, definitive proxy statement, on March 30, 2009, +after negotiations continued following the February 2009 non-binding letter of intent, Pence signed +on behalf of PSQ a definitive securities purchase and tender offer agreement (the “Purchase +Agreement”). The Purchase Agreement provided that, subject to shareholder approval, PSQ would +acquire a controlling stake in GEE by (1) purchasing 7,700,000 newly-issued shares of GEE +common stock in a private placement transaction at a purchase price of $0.25 per share for a total +purchase price of $1,925,000; (2) commencing a cash tender offer to purchase from the Company’s +shareholders up to 2,500,000 shares of common stock at a purchase price of $0.60 per share; (3) +appointing three directors to a five-member board of directors, including Pence becoming the +chairman of the board; and (4) designating Heineman GEE’s CEO. On June 22, 2009, a GEE +press release announced that shareholders approved the Purchase Agreement and the closing of the +Purchase Agreement was announced on July 1, 2009. As a result, PSQ acquired more than 65% +ownership of the Company, Pence became GEE’s chairman and appointed two other directors, and +Heineman became GEE’s CEO. +20. As part of the July 2009 closing of PSQ’s purchase agreement with GEE, GEE +opened a checking account at PAB into which PSQ’s escrowed $1,925,000 would be deposited +upon the closing. According to PAB records received by Henaghan in 2009, in June 2009, +Associate-1 coordinated with GEE’s chief financial officer (the “GEE CFO”) to have the GEE +checking account opened at PAB and the authorized signatories on the account were the GEE +CFO, Pence, and Associate-1. Those PAB records also indicated that the GEE CFO, Pence, and +Associate-1 remained the only authorized signatories on the account until September 2009, at +which time Associate-1 was removed and Heineman was added. Following the closing in early +July 2009, GEE transferred an additional $750,000 from GEE’s accounts at other banks to the +GEE PAB checking account. The approximately $2.6 million deposited in the GEE PAB checking +account constituted substantially all of GEE’s cash and half of its assets. + +21. According to information received by BDO’s engagement partner, Henaghan, +GEE’s CFO identified that $2.3 million had been withdrawn from the GEE PAB operating account +on July 23, 2009, without the GEE CFO’s knowledge. The GEE CFO reported to Henaghan that +when he asked about the withdrawn funds, GEE’s CEO Heineman claimed that he had authorized +GEE to invest $2.3 million into a CD at PAB. The GEE CFO also informed Henaghan that, +although he had repeatedly requested documentation concerning the purported CD, such as a +written approval or account agreement—and cited the lack of documentation as a control +deficiency—Heineman only provided the GEE CFO with a one-page PDF of a typewritten + + +8 +“Certificate of Deposit Receipt” for $2.3 million with a single maturity date of October 21, 2009 +and interest rate of two percent. + +E. BDO RECEIVED INCONSISTENT EVIDENCE CONCERNING THE +PURPORTED CD AND THE EXISTENCE OF RELATED PARTY +TRANSCTIONS + +22. GEE’s fiscal year ended on September 30, 2009. As part of its audit of GEE, BDO +addressed confirmations for GEE’s bank accounts, including the purported CD, to a PAB vice +president and branch manager. In October, BDO received a confirmation signed by that vice +president for the operating account and a confirmation signed by the PAB president Antonucci for +the purported CD. BDO concurring partner Rainis noted that it was “unusual” for the PAB +president to sign the confirmation. + +23. On October 19, 2009, the GEE CFO provided to audit committee members and +BDO’s engagement partner, Henaghan, a report of the evaluation of internal control for fiscal year +2009, which noted the purported PAB CD as an identified control deficiency. The report noted +that“[t]he transaction was not executed by the office of the Treasurer, and no written approval or +account agreement was provided to the accounting department” and that “it did not conform to the +company’s investment guidelines” because it did not provide sufficient diversification and PAB +did not meet GEE’s size requirement. However, the report concluded that the control deficiency +did not constitute a material weakness. BDO concurred with this assessment. + +24. In early November 2009, the GEE CFO noticed that PAB had not remitted the +proceeds of the purported CD of $2.3 million plus interest into GEE’s operating account upon the +maturity date, October 21, 2009. When the GEE CFO contacted PAB, a PAB representative stated +that the Bank had no record of the purported CD in its system and then refused to investigate the +matter any further. On November 18, 2009, the GEE CFO conveyed this information to the BDO +engagement partner Henaghan. The GEE CFO also communicated this information to GEE’s +audit committee chairman (the “AC Chair”). + +25. Also in November 2009, BDO partners Henaghan, the engagement partner, Graul, +BDO’s national director of accounting and risk management partner, and Gerace, the assigned +BDO regional technical director, reviewed background check reports of Heineman and Associate-1 +that identified potential concerns. As part of BDO’s client retention procedures, BDO had +procured a background check of Heineman because he was the new CEO of GEE and of +Associate-1 because he purportedly owned On-Site, a subsidiary of WTS that GEE intended to +acquire and which BDO agreed to audit, with Henaghan serving as the engagement partner on that +audit. Those background checks revealed that: + + A 2009 lawsuit named GEE’s CEO Heineman as a defendant and alleged that he received a +fraudulent distribution of in excess of $2 million in cash from a bankrupt company he +formally ran. + + +9 + Associate-1 served as the chief operating officer of a subsidiary of Certified. The +Commission had alleged in a 2008 complaint that Huff was an “undisclosed control +person” who, with others, stole $30 million from Certified. + Associate-1 and Heineman were co-managers of River Falls Financial, and participated in +negotiating PSQ’s acquisition of GEE shares. + Heineman and Associate-1 had several substantial personal tax liens. +26. At a November 23, 2009, audit committee meeting, attended by BDO engagement +partner Henaghan and concurring partner Rainis, the GEE CFO reported his concerns that GEE +had little documentation supporting the purported CD, including no written authorization from an +account signatory and no deposit agreement. According to the audit committee minutes, +Heineman claimed that he authorized the purported CD at Pence’s direction, and claimed the lack +of documentation was due to “the rapid pace of the transactions in which he had been involved, +coupled with reorganization and personnel changes at Park Avenue Bank.” Heineman next stated +that he had anticipated that the CD would be maintained on a continuing renewal basis but he had +asked Pence to liquidate the purported CD and have the funds transferred into the PAB checking +account by the end of the week. The minutes also state that Henaghan “said that the audit was +substantially completed, pending resolution of the missing funds issue, receipt of legal letters from +counsel, and the executed management representation letter” and that BDO “would be issuing an +unqualified opinion on the consolidated financial statements.” + +27. On November 24, 2009, Henaghan emailed the AC Chair, stating that the GEE +CFO had “indicated there was an update on the CD and that the funds would be returned in +installments. I am not sure if you can provide any further clarity on why this would be. I wanted +to check with you before I had another discussion with [Heineman].” The AC Chair replied that he +“[could] not provide any clarity” and expressed concern that one of the audit committee members +(the “AC Member”) “seems to be tied in with this group.” The AC Member had been appointed +by Pence in connection with the PSQ transaction in July. + +28. Henaghan replied to the AC Chair the following day, November 25, 2009, that he +had spoken to Heineman that morning and Heineman indicated that Pence and the AC Member +“were taking the lead on this as they have a previous working relationship with the bank.” +Henaghan also noted that Heineman, however, had “disagreed with the fact that the CD would be +‘paid back in installments’” and had “indicated that the proceeds of the CD would be in the +Company’s bank account by Monday.” + +29. By the following Monday, November 30, 2009, GEE still had not obtained the $2.3 +million in proceeds of the purported CD from PAB. That day, Pence, Heineman, and Zizza +attended a GEE board of directors meeting. Zizza, who had no formal role at GEE at this time, +attended as an “invited guest.” The board minutes indicate that the AC Chair explained that the +Company’s Form 10-K had not yet been filed because BDO’s “final” opinion was predicated on +the satisfactory accounting for the PAB CD and an explanation for where GEE’s funds had been +since the CD matured on October 21. During this November 30, 2009, board meeting, the AC + + +10 +Member stated he believed that the situation occurred as a result of administrative errors on the +part of the Bank, and Pence said that the AC Member had agreed to pursue the matter with PAB. +Neither Pence nor Heineman mentioned anything about GEE selling or assigning the purported CD +to a third party.6 +30. By December 3, 2009, Henaghan learned that GEE had received four transfers from +SDH and Oxygen totaling $1 million. On December 3, 2009, the AC Member, who had been +tasked by Pence with contacting PAB about the purported CD, told the AC Chair and BDO +engagement partner Henaghan that PAB was sending GEE the $2.3 million proceeds of the +purported CD. The AC Member also told Henaghan that the Bank had made an “administrative +error” and would provide a short apology note. + +31. After consulting with fellow BDO partners Rainis and Gerace, Henaghan sent +GEE’s AC Chair an email on December 4, 2009, summarizing the open items requiring resolution +prior to the issuance of BDO’s audit report: (1) the purported CD; (2) identification of potential +related parties to Pence; and (3) additional subsequent event procedures. The email begins by +noting that after the CD had matured in October 2009, when the GEE CFO had contacted the +Bank, a PAB representative informed the GEE CFO that there was no record of the purported CD +and that after some investigation by the AC Member, “in late November it was determined that the +funds would be returned to GEE in installments.” The email then notes that GEE had received the +following wire transfers: (i) November 24: $300,000 wire transfer from SDH; (ii) November 25: +$300,000 wire transfer from Oxygen; (iii) November 27: $300,000 wire transfer from SDH; and +(iv) December 1: $100,000 wire transfer from Oxygen. Henaghan’s email then noted that he had +discussed the matter with Heineman and Pence, who both referred him to the AC Member who +was working directly with PAB on the matter, and that the AC Member left him a voicemail +“indicating the bank continues to put money against the CD they owe [GEE] and it should be fully +repaid by the close of business on Monday, Dec. 7” and that the Bank would provide a short +apology note. Henaghan’s email continued: +[G]iven the highly unusual nature of this issue and the significant amount of time it +is taking to recover the funds, it is critical that we understand both the nature of the +administrative error as well as the underlying cause of this error.... As I have never +encountered such an issue with a bank or CD and any reasonable person (including +the PCAOB or SEC) would certainly question such an issue, I need to be in a +position to fully explain exactly what occurred…. As such, from an audit +perspective I will require the following prior to issuance of the fiscal 2009 financial +statements: +-Source documents (bank statements, etc.) showing the flow of funds from +the closing of the PSQ transaction through the date the funds are fully + +6 BDO engagement partner Henaghan and concurring partner Rainis confirmed in the workpaper +index that they reviewed all of the minutes for the GEE board and audit committee meetings +discussing the purported CD issue. + + +11 +transferred to Chase bank in December 2009 (including an understanding of +where the CD funds were disbursed upon maturity of the CD in October) +-Explanation as to why the funds received in November and December are +being wire transferred from entities other than Park Avenue Bank +-To corroborate this documentation, we may request to meet with someone +at Park Avenue Bank to understand the nature of the administrative error +-A written report by management or others to fully explain the +circumstances surrounding the matter including steps [GEE] took to gain its +understanding of what transpired.... +Also, as the $2.3 million is critical to our assessment of the Company’s ability to +continue as a going concern, it is important for us to understand this situation so as +to gain comfort that the funds will remain available to the Company to fund +operations as needed. + +32. Henaghan’s December 4 email also noted as an open item that he had a +conversation with Pence that day “to gain an understanding of other investments he has to make +sure we have appropriately identified any potential related parties and may have a few follow up +questions regarding that matter.” One of the items Henaghan had spoken to Pence about was the +ownership of River Falls Financial, of which Pence had indicated he was the 100% owner. + +33. Shortly after receiving it, the AC Chair forwarded Henaghan’s email to Heineman, +Pence, the AC Member, the GEE CFO, and GEE’s board, noting: “Multiple representatives of +BDO have told me that they will not sign off on the GEE Audit . . . until they have sufficient +documentation of what has transpired. [BDO’s] position is that the Liabilities associated with a +sign-off far exceed any past or potential future Audit Fees that [they] have received or will receive. +The high level message is that a letter of apology from Park Avenue Bank will not be sufficient.” +Henaghan received a copy of this email and replied to all: “To clarify, [our] primary concern is +getting an understanding of exactly what has occurred in order to allow us to complete our audit +procedures. As I am sure everyone would agree, what has transpired over the last few weeks with +the funds at [PAB] has been highly unusual. I know everyone has been working to resolve the +issue. However, time continues to pass and [GEE’s] filing deadline will be here before we know it. +As such, I wanted to clarify the importance of appropriately addressing the issue as quickly as +possible to allow us to complete the audit.” + +34. Later in the day on December 4, the AC Chair sent an email to Henaghan and +Rainis summarizing his call with the AC Member, stating that when he spoke with the AC +Member “he told me that [PAB] had reported these transaction [sic] to the FDIC and that the +money sent to the various entities that are now sending GEE the money are sending us the banks +money rather than sending it back to the bank.” The AC Chair continued: “This makes absolutely +no sense. It looks like [PAB] is on the verge of failing. The FDIC and a bankruptcy estate are + + +12 +going to require [PAB] to collect every cent they can under loans or other arrangements to settle +with the creditors of the bank before they send money to third parties.” + +35. The following day, on December 5, 2009, the AC Chair emailed GEE’s board and +Heineman calling for a special audit committee meeting on December 9 because of “several +unanswered questions related to $2.3 million of the Company’s cash which supposedly was +invested in a Certificate of Deposit (‘CD’) at Park Avenue Bank which will need to be answered +before BDO will complete their Audit Report for the Company’s fiscal year ended September 30, +2009.” The AC Chair’s email noted several issues, including that (i) there was no account +agreement with PAB or regular reporting on the CD; (ii) PAB did not remit the proceeds of the CD +into GEE’s operating account when it reached its maturity date on October 21, 2009; (iii) PAB +provided no explanation to the GEE CFO when he attempted to investigate; and (iv) the AC +Member who took the lead on this matter with PAB “was informed on or about November 21, +2009 that the funds would be returned to [GEE] in a series of deposits.” The email also provided a +chart of seven wire transfers totaling $1.7 million, which included the four noted in Henaghan’s +December 4 email plus a December 2, 2009, wire transfer from Oxygen for $100,000, a December +2, 2009, wire transfer from River Falls Financial of $300,000, and a December 3, 2009, wire +transfer from River Falls Financial also for $300,000. The address listed for both SDH and River +Falls Financial on each of their wire transfers in the chart was 11921 Brinley Ave, Louisville, KY. +BDO’s engagement partner Henaghan received a copy of the AC Chair’s December 5 email and +forwarded it to Rainis, Gerace, and BDO’s general counsel. + +36. River Falls Financial was the entity that Henaghan had just been told was 100% +owned by Pence. BDO had also learned in conducting background investigations that Associate-1 +and Heineman were co-managers of River Falls Financial. + +37. On December 4 and December 9, 2009, GEE received two additional wire transfers +from River Falls Financial for $300,000 each, bringing the total amount received by GEE from +River Falls Financial to $1.2 million and the total of the nine wire transfers to $2.3 million, the +same amount that Heineman had purported to invest in a CD. + +38. On December 8, the AC Chair emailed Henaghan, providing some links he +suggested Henaghan review before Henaghan had a conversation with the AC Member and any +representatives of PAB, “particularly the Anthony Huff links” and explained that he “met Anthony +Huff when we went to New York” to negotiate PSQ’s acquisition. The email included links to a +press release announcing the Commission’s lawsuit against Huff, a link to Huff’s website noting +the address 11921 Brinley Avenue, Louisville, KY in the text of the email, and a link to the +website for Oxygen noting the identical address. This is the same address that appeared in the +wires sent to GEE by River Falls Financial and SDH, as noted in the AC Chair’s December 5 +email described in paragraph 36, above. Also, Huff’s website at the time contained references to +River Falls Investments, SDH, Oxygen, and O2HR. + +39. In addition to the background checks of Heineman and Associate-1 discussed in +paragraph 26, on November 23 and December 21, Henaghan, Rainis, and Gerace participated in + + +13 +phone calls with Associate-1. According to Henaghan’s notes of the calls, they discussed Huff’s +connections to River Falls Financial and River Falls Investments and the Commission’s lawsuit +against Huff “alleging fraudulent transfer of assets & non-disclosure of related party transactions.” +Associate-1 told them that Huff’s wife was the original 100% owner of River Falls Financial +before it was sold to Pence. Associate-1 also told them that, through a family trust, Huff had a +70% ownership interest in River Falls Investments. + +40. Also on December 8, 2009, the day before the special audit committee meeting, the +AC Chair received an email from Heineman to the audit committee with several attachments. +Heineman’s email purported to offer a new explanation for why GEE had received $2.3 million +from the three entities rather than PAB. Heineman claimed that he had negotiated an assignment +agreement with the manager of River Falls Investments (Associate-1), who “offered to purchase” +the purported CD from GEE at face value. Heineman also attached to his email an unsigned, draft +assignment agreement and a letter from Heineman to PAB, dated July 21, 2009, that purportedly +authorized the $2.3 million CD investment. Heineman’s email also attached a July 2009 monthly +statement for GEE’s operating account at PAB, which included the description of the $2.3 million +withdrawal as a debit on July 23 with a debit memo stating in handwriting: “To: Park Avenue +Insurance, See Attachment Approval, $2,300,000.00.” + +41. The AC Chair responded to Heineman’s email that day, stating: “Given the chain of +event[s] you described below, why was GEE not informed immediately when River Falls +Investments purchased the CD and why are we just now learning that a law firm has been engaged +to document the assignment of the CD? We have been asking questions about the CD now for +nearly a month.” BDO engagement partner Henaghan received a copy of Heineman’s email with +attachments and the AC Chair’s reply email. On a printout of the AC Chair’s reply email, BDO +engagement partner Henaghan wrote “$ Anthony Huff.” + +42. Henaghan also exchanged emails with the AC Chair later that day, noting his +agreement with the AC Chair’s questions to Heineman and that “the sale of the CD would +constitute a related party transaction which typically should be approved by the board.” The AC +Chair replied to Henaghan that he had just spoken to Heineman and Heineman “claims that RFI +(River Falls Investment) is 100% owned by [Associate-1] and is not related to River Falls +Financial Services or any of the other entities.” Henaghan replied, “That is consistent with what [] +Pence told me in my conversation with him. The common names are a little strange though.” + +43. Prior to the December 9, 2009, special audit committee meeting, BDO had learned +of several indications of fraud relating to the purported CD. Moreover, during the 2009 audit of +GEE, BDO became aware of multiple indications that the purported assignment agreement with +River Falls Investments was a related party transaction, including: + + the common names of River Falls Investments (purportedly owned by a Huff family trust +and Associate-1) and River Falls Financial (purportedly owned by Pence, GEE’s +chairman); + + +14 + River Falls Financial had sent GEE $1.2 million in four installments in connection with the +assignment agreement ; + Heineman and Associate-1 were co-managers of River Falls Financial; + Associate-1 was a signatory for GEE’s operating account at PAB from July to September +2009, when the $2.3 million was purportedly invested in a CD; + Heineman’s email address was rheineman@riverfallsfinancialgroup.com; + The validity of a business purpose for River Falls Investments to purchase the CD at face +value was questionable given that (i) PAB stated that it had no record of the purported CD +in its system; and (ii) GEE did not have a binding agreement in its possession concerning +its purported purchase of the CD with PAB; + River Falls Investments was not listed in GEE’s banking records as the originator of the +wire transfers that were purported to be in connection with the assignment agreement. +GEE received the payments from SDH, River Falls Financial, and Oxygen—all of which +were made before a binding agreement with River Falls Investments was executed; and + River Falls Financial, River Falls Investments, SDH, Oxygen, and Huff all shared a +common address: 11921 Brinley Avenue in Louisville, KY 40234. +44. Prior to the GEE special audit committee meeting scheduled for December 9, 2009, +Henaghan alerted Rainis, Gerace, and BDO’s Midwest Regional Business Line Leader (the “BDO +Midwest Leader”) of Heineman’s new explanation concerning the assignment agreement and each +of them attended the meeting. According to the audit committee meeting minutes: + + Henaghan expressed concern that BDO still did not have a clear understanding of the +purported CD transaction. + Henaghan said that BDO needed to understand the nature of the purported administrative +errors at PAB that he had been told were responsible for the lack of proper documentation +regarding the CD transaction. Henaghan also explained that BDO required documentation +validating the banking transactions, and an explanation as to why there was no existence of +an account agreement with the Bank or no record of the CD being at the bank. + The BDO Midwest Leader said he believed members of GEE’s senior management +appeared hesitant to provide information related to these transactions. + Henaghan stated that the assignment agreement did not resolve the outstanding issues as +BDO still needed to know what transpired within PAB and make a determination of +whether the assignment agreement with River Falls Investments was a related party +transaction. + + +15 + BDO also advised that although the assignment agreement “may reduce or eliminate the +need for going concern disclosure, it would increase the requirement that management +provide sufficient disclosure regarding any related party conflicts.” +45. On December 14, 2009, GEE’s outside counsel sent PAB a formal letter requesting +all documentation and information concerning the purported CD. BDO received a copy of this +letter. PAB’s December 16, 2009, response, also received by BDO, provided only documents +relating to GEE’s checking account and did not provide any documents or other information about +the purported CD. The checking account documentation, however, indicated that only +Associate-1, the GEE CFO, and Pence were authorized signers on GEE’s account from July to +September 2009—not Heineman—and the checking account statements reflected a debit memo for +the transfer of $2.3 million of GEE’s cash to Park Avenue Insurance on July 23, 2009. +46. On Friday, December 18, 2009, BDO received a letter from GEE’s general counsel +that attached the final assignment agreement, dated December 11, and a letter from Associate-1 +claiming that the $2.3 million sent to GEE by SDH, Oxygen, and River Falls Financial originated +from River Falls Investments and its “wholly owned subsidiaries or affiliates.” The letter +concluded: “The entirety, sans interest, used by the Company for the purchase of the CD was +received into the Company’s Chase bank account…. Since time is certainly of the essence to +complete the audit work for the Form 10-K to be filed by the Company no later than December 31, +2009, we believe that any open concerns your firm had with respect to the source of the initial +concerns over the CD are now resolved.” The letter did not provide any additional information +concerning what had happened with the purported CD and why Associate-1 and River Falls +Investments would pay face value for the purported CD which PAB had not honored and had no +records to support. +47. Following the receipt of the December 18 letter, BDO partners Henaghan, Rainis, +and Gerace requested consultation with Graul, BDO’s national director of accounting and risk +management partner, Hambleton, BDO’s national director of SEC practice, and BDO’s general +counsel. After discussion of the situation, these BDO partners agreed they should inform GEE that +the December 18 letter did not fully address the questions BDO had raised and demand that the +audit committee commission an independent investigation to determine exactly what happened. +F. BDO DEMANDED AN INDEPENDENT INVESTIGATION AND, SHORTLY +THEREAFTER, WITHDREW THE DEMAND + +48. On Monday, December 21, 2009, Henaghan sent an email to Graul and Hambleton, +copying Rainis and Gerace, stating: “This morning we informed the [AC Chair] that we will +require an independent investigation of the CD matter in order to conclude the audit of General +Employment (consistent with our discussions with you on Friday.) Attached is our proposed +written communication.” The five-page draft communication described in detail much of the +inconsistent evidence BDO had received concerning the purported CD and the purported +assignment agreement with River Falls Investments and also included a number of proposed +questions. Graul responded: + + + +16 +We do not owe the Board any explanation other than our “audit” of the CD +in question is incomplete because we have been unable to obtain sufficient +evidence to support the existence and ownership of this asset. You could +say that we have obtained bits and pieces of evidence[] but are not satisfied +with the sufficiency of such evidence to support our opinion on the financial +statements. You could also say that because of the unusual circumstances +surrounding the evidence provided thus far, we concluded that the Board +should undertake a full investigation of the matter. +49. Later that day, Hambleton replied to Graul’s email, asking whether they “should go +into detail of the issues in the letter.” Graul responded to Hambleton: “Short of saying we think +there is fraud, the point is we have been looking for support for months and don’t have anything +satisfactory to support a final opinion. If we give a list of questions, we’ll get answers to those +questions and still not know what is really going on. An independent investigation is the only way +to get to the bottom of this. The list doesn’t look like it would get us there.” +50. Also on December 21, 2009, BDO partners Henaghan, Rainis, and Gerace +questioned Associate-1 about the assignment agreement and Huff’s involvement with GEE, River +Falls Financial, and River Falls Investments. According to summary notes of the call, Associate- +1’s explanation for why River Falls Financial, purportedly owned by Pence, wired payments of +$300,000 each to GEE on four days (December 2, 3, 4, and 9), was that the funds were “initially +inadvertently transferred to the [River Falls Financial] account rather than the GEE account.” +Associate-1 also informed them that Huff’s wife was the original 100% owner of River Falls +Financial and that Pence acquired the company in 2009. The notes also reflect that Associate-1 +conveyed that through a trust Huff has an ownership interest in River Falls Investments. +Associate-1 further told them that he was familiar with Park Avenue Insurance and he believes it +“is insolvent at this point.” +51. Ultimately it was determined that the detailed letter would be sent and, early on +December 22, 2009, Henaghan sent GEE’s AC Chair a five-page letter, dated December 21, 2009, +in substantially the same form as Henaghan had internally circulated earlier. Henaghan’s letter +identified a number of inconsistencies in the audit evidence BDO had received regarding the +purported CD: + BDO had not received “sufficient audit evidence” to support the existence of a CD +investment as of September 30, 2009. The questions raised in regards to the CD at both the +November and December audit committee meetings remained unaddressed. + BDO had not received an adequate explanation from PAB as to the whereabouts of the $2.3 +million after July 23, 2009, because the Bank claimed to have no record of a CD in its +system. PAB never “repaid the CD proceeds or provided an adequate explanation +regarding the status of the CD.” + + +17 + BDO had “requested (but not been granted) an opportunity to speak directly with [PAB] +regarding this matter.”7 + The July 2009 PAB statement “indicates the amount was transferred to Park Avenue +Insurance. We would like to understand why it appears that the funds were transferred to +Park Avenue Insurance and were not invested into a CD. . . . [M]anagement has provided +no explanation for this. The documentation also appears to indicate that prior to September +2009, [Associate-1] was an authorized signor on the Company’s operating account.” + Heineman’s statements to BDO: (1) claiming on November 23 that “the issue would be +resolved and the funds deposited in the Company’s bank account within a few days”— +which did not happen; (2) stating on November 25 that the money would not be “paid back +in installments”—which did happen; (3) claiming GEE would have the proceeds by +November 30—which did not happen; (4) asserting on December 8 that he negotiated the +assignment with Associate-1—but “during [BDO’s] earlier discussions with Mr. Heineman +he had represented that he was not involved in the process of resolving the issues related to +the CD.” + BDO received conflicting reports regarding the return of the CD funds: (1) the AC +Member stated on December 4 that “the bank continues to put money against the CD they +owe the Company and it should be fully repaid”; (2) Pence and Heineman referred BDO to +the AC Member; and (3) “In all discussions leading up to December 7, 2009, no one ever +indicated that the CD had been assigned to [Associate-1].” + “At the December 9, 2009 audit committee meeting, general counsel and one audit +committee member requested that BDO not be present for the discussion regarding +the CD matter.” + BDO had not received a clear explanation as to why River Falls Investments would +purchase the CD that the Bank has said does not exist, why River Falls Investments +would transfer funds to GEE before an assignment agreement had been executed, +and whether Associate-1’s intent to sell companies to GEE was related to his +agreement to purchase the CD. + “Approximately $900,000 of the proceeds recovered by the Company was received +from River Falls Financial Services. [BDO] had previously been informed that +River Falls Financial Services was 100% owned by Steve Pence. However, in a +December 18, 2009 telephone conversation with Steve Pence, he was unable to +explain why these amounts were transferred from River Falls Financial Services (as +the proceeds were for [Associate-1’s] purchase of the CD).” + + +7 BDO never contacted PAB or spoke to anyone from PAB after learning that PAB failed to +repay the CD proceeds. + + +18 +52. Henaghan’s letter indicated that he included specific facts in the letter “to illustrate +that it appears that management has not been forthcoming with information surrounding this +matter. This fact pattern has caused us to raise the level of scrutiny surrounding this issue.” + +53. At the end of his letter, Henaghan stated that BDO did not have sufficient audit +evidence at that time to formally conclude the audit and demanded an independent investigation: + +While BDO recognizes that the issue related to the CD may be the result of +potential administrative or other errors at [PAB], we do not believe we have been +provided sufficient audit evidence to formally conclude on this matter at this point. +As a result of the fact that almost one month has passed since the first audit +committee meeting discussing this matter, that it appears management has not been +fully forthcoming on how it was resolving the issue, and certain question remain +unanswered, we will require the audit committee to commission a full investigation +of this matter prior to the completion of our audit for the year ended September 30, +2009. This investigation should be conducted by an independent firm that is +acceptable to our firm and should address the following unexplained matters: + Why would the Company maintain $2.3 million at Park Avenue Bank in direct +violation of its own investment policy? + Why was [Associate-1] an authorized signor on the Company’s account at Park +Avenue Bank? + What happened to the CD? We would like an explanation for all of the facts +noted above surrounding the situation. + Why did the Company not pursue legal action against the bank and report the +situation to the FDIC when the bank failed to reimburse the Company when the +CD matured? + Why would Mr. Heineman & Mr. Pence represent they were unaware of the +status of the CD resolution and why funds were being received from entities +other than Park Avenue Bank when it appears they were aware of the +assignment agreement with [Associate-1]? + Why would [Associate-1] be willing to purchase an asset whose value is in +question when he has no relationship to the Company? + Why did River Falls Financial Services reimburse the Company for the CD if +they did not have any relationship with [Associate-1] and were not a party to the +assignment agreement? + We would like a clear understanding of the relationships between [Associate-1], +Mr. Pence and Mr. Heineman and any entities where they may have joint +ownership? + What is the relationship between [Associate-1], Mr. Pence, Mr. Heineman and +Park Avenue Bank? +Please note that the issues listed above represent[] some of the areas of concern +based on our current understanding of the facts. The above items should not be + + +19 +considered an all-inclusive list and the investigation should not be limited to the +above identified items. We may identify additional questions and require additional +audit evidence based on the results of the investigation. BDO recommends that this +investigation be commissioned as soon as possible. + +54. On the evening of December 22, 2009, Respondents learned that the audit +committee meeting that was scheduled for the following day had been cancelled, Zizza, an advisor +to Pence who had attended GEE board meetings through the fall of 2009, would be taking over as +CEO, and that Pence and Associate-1 intended to prepare written responses to each of the issues +identified in the December 21 letter. In email exchanges that evening and the following morning +regarding these events, Henaghan, Gerace, Hambleton, and the BDO Midwest Leader agreed that +BDO should communicate to GEE in writing that BDO “will continue to require an independent +investigation.” + +55. Following Zizza’s appointment as GEE’s new CEO, BDO partners Henaghan, +Rainis, Gerace, and the BDO Midwest Leader spoke to Zizza and the AC Chair on December 24, +2009. A senior partner in BDO’s New York office (the “NY Partner”) also attended the call +because he handled some of Zizza’s other business relationships with BDO, including audit or tax +work for Zizza’s private company and three public companies for which Zizza served as a board +member. Henaghan later wrote a memo describing the December 24 call, stating that Zizza +“requested that BDO conclude the audit without the need for an independent investigation” +because of “the change in management and the fact that the Company had recovered full control of +the $2.3 million in question” and that the AC Chair agreed. The memo also indicates that both +Zizza and the AC Chair “acknowledged that some inappropriate actions were taken within the +Company and that it was likely that even more inappropriate actions were taken at the Bank” and +that both “felt that with [Heineman’s] removal from the management team, the inappropriate +actions within the Company would stop.” + +56. Also on December 24, BDO partners Henaghan, Rainis, and Gerace had a +telephone conversation with Pence, Zizza, and the AC Chair. According to a memo Henaghan +later wrote describing this call, Pence indicated he asked GEE to move its business to PAB because +of his prior working relationship as an attorney for Antonucci, PAB’s then-President, and +Associate-1’s association with PAB as a customer. The memo also indicates that Pence had told +BDO that the reason he represented he was unaware of the status of the CD resolution and why +funds were being received from entities other than PAB was because “he was unaware of the +assignment agreement until after the funds were returned to the Company.” The memo further +noted that Associate-1’s explanation for why River Falls Financial transferred funds to GEE was +because River Falls Financial “also has an operating account” at the same bank and “[t]he funds +were transferred from one of his companies to [River Falls Financial] in error,” and as such, River +Falls Financial “then had to transfer the funds to GEE.” + +57. After these calls with Zizza, Pence, and the AC Chair, Henaghan sent Rainis, Graul, +Gerace, Hambleton, the NY Partner, the BDO Midwest Leader, and BDO’s general counsel an +email on December 24, 2009, asking for their availability for a call and stating he was drafting a + + +20 +memo summarizing current facts. Graul responded: “Unless there is something new that hasn’t +been discussed in the last few calls, what’s the purpose?” The NY Partner replied: “The purpose +is to try to salvage an account where they made [] changes in the management because of the +alleged wrongdoing.” Graul responded: “Did they change the guy that can’t support the $2 +million that supposedly was put into company? What about the two audit committee members that +stalled the investigation and the lawyer that wouldn’t let us participate in a board meeting to +preserve privilege. There’s something funny going on here.” The NY Partner replied that he had +no disagreement with Graul on the last point. +58. BDO’s 2009 Assurance Manual required Henaghan to consult with Graul, +Hambleton, and Gerace in the circumstances presented here. The Manual required the engagement +partner seeking consultation to prepare a memorandum concerning all consultations, which should, +among other things, define the issues; “identify client source documents/evidence reviewed”; +summarize the proper accounting treatment; summarize the impact on the financial statement +presentation and disclosure; and describe any alternative solutions considered and why they were +rejected. Finally, BDO’s 2009 Assurance Manual required the memorandum to be sent to all +consultants, who “should acknowledge their agreement with the memorandum.” +59. Early in the morning on December 28, Henaghan sent a draft memo to Rainis, +Graul, Gerace, Hambleton, the NY Partner, the BDO Midwest Leader, and BDO’s general counsel. +The memo summarized BDO’s calls with Zizza, the AC Chair, Pence, and Associate-1, and +attempted to answer the questions posed in Henaghan’s letter to the AC Chair dated December 21, +2009. The memo concluded: “the engagement team believes it is appropriate to reconsider the +need for an independent investigation and as such is requesting a consultation on this matter.” +60. That same day, Henaghan, Graul, Gerace, Hambleton, the NY Partner, the BDO +Midwest Leader, and BDO’s general counsel discussed GEE for approximately one hour. Despite +the existence of multiple, unanswered questions, they ultimately agreed to drop the demand for an +independent investigation if GEE agreed to include commentary on two material weaknesses in +internal controls, including certain circumstances surrounding the purported CD, in a Form 8-K +and that Associate-1 would not become part of management, among other things. A memo later +written by Henaghan to document the discussion notes as considerations, among other things, that +Zizza—whom BDO trusted—had replaced Heineman as CEO and that the AC Chair, who had +initially supported the independent investigation, no longer believed that it was required. +61. Following their call, the NY Partner spoke to Zizza and Henaghan spoke to the AC +Chair about the statements BDO wanted made in the Form 8-K and Associate-1’s contemplated +role with GEE. Henaghan emailed an update to Rainis, Graul, Gerace, Hambleton, the NY +Partner, the BDO Midwest Leader, and BDO’s general counsel, stating that the AC Chair indicated +that GEE was contemplating an acquisition that would make Associate-1 an approximate 20% +shareholder of GEE, but not an officer, director, or part of management. Graul responded: “I don’t +like it but won’t object provided [that Associate-1] is not a board member and has no managerial +responsibilities, even with respect to the business he is selling. Please make it perfectly clear that +this is the last accommodation that I am willing to make from a risk management perspective.” + + +21 +62. Also following their December 28 call, Hambleton sent an email to the other BDO +partners asking whether they were comfortable with the classification of the $2.3 million as cash at +September 30. Henaghan responded: “we have a confirmation from Park Ave Bank & the +subsequent execution and funding of the assignment agreement as evidence of the existence of the +CD at 9/30.” Henaghan did not mention any of the inconsistent evidence that he identified in his +letter to the AC Chair dated December 21, 2009, and that indicated that no such CD or other cash +equivalent existed as of September 30, 2009. Neither Hambleton nor any of the other BDO +partners responded or commented on these omissions. +63. BDO provided a draft Form 8-K disclosure to GEE, and reviewed and agreed to the +language ultimately included in GEE’s Form 8-K filed on December 30, 2009. The Form 8-K +disclosed Heineman’s resignation, Zizza’s appointment as CEO, and the fact that Zizza was paid +$20,000 per month since March 2009 to consult for Pence. The Form 8-K also stated: + +In July 2009, the Registrant purchased a $2.3 million certificate of deposit (“CD”) +at a New York bank. When the CD matured in October 2009, the bank did not +timely credit the proceeds of the CD to the Registrant’s account. Although the +Registrant has made a formal inquiry of the bank, to date the Company has not +received an adequate explanation for the bank’s non-performance relating to the +CD. In December 2009, the Registrant was reimbursed in full through a non- +recourse assignment of the CD for face value to an unrelated party, who has other +business interests with the bank. The purchaser of the CD is neither an employee +nor a director of the Registrant. + +64. The Form 8-K also disclosed two material weaknesses: (1) “the size of the New +York bank from which the CD was purchased did not meet the minimum requirements of [GEE]’s +investment policy”; and (2) the Company “authorized an individual that was neither an employer +nor a director as an authorized signor on the Registrant’s bank account.” The Form 8-K did not +indicate that Associate-1 was both the authorized signatory and the purportedly “unrelated party” +who purchased the purported CD. + +65. On January 4, 2010, Henaghan sent an email to Rainis, Graul, Gerace, Hambleton, +the BDO Midwest Leader, and BDO’s general counsel attaching the Form 8-K, the December 21, +2009, letter to the AC Chair demanding an independent investigation, Heineman’s resignation +email, and a final memo discussing BDO’s calls with the AC Chair, Pence, Zizza, and Associate-1 +and concluding that BDO should issue its opinion on GEE’s financial statements. The final memo +noted that Zizza and the AC Chair “acknowledged that some inappropriate actions were taken +within the Company and that it was likely that even more inappropriate actions were taken at the +Bank…. Both men also acknowledged that they felt that with [Heineman’s] removal from the +management team, the inappropriate actions within the Company would stop.” The memo noted +that “without the cooperation of [Heineman] and the Bank – neither of which anyone was likely to +obtain, it was highly unlikely that the motivations or even all of the actions would ever be learned.” +BDO did not attempt to contact Heineman following his resignation nor did BDO attempt to +contact PAB at any time after this issue arose. + + + +22 +66. The memo also stated that Zizza “represented to BDO that [Associate-1] will not +become an employee or director of the Company” and concluded: “To the extent any new adverse +information related to the transaction comes to our attention we will again consult with BDO’s risk +management and National SEC groups in regards to continued client retention.” Rainis, Graul, +Gerace, and Hambleton each reviewed the memo and concurred with the decision to drop the +demand for an independent investigation. BDO’s general counsel also agreed with the approach +outlined in the memo. + +67. On January 5, 2010, after Respondents had already decided that GEE’s Form 8-K +disclosure concerning the purported CD was adequate and informed GEE that BDO would +withdraw its demand for an investigation and issue an unqualified audit opinion, Hambleton asked +BDO’s general counsel, Henaghan, Rainis, Graul, Gerace, and the NY Partner: “I want to make +sure we believe the company’s response is a sufficient response to a potential illegal act. Although +we didn’t specifically say we thought there was a potential illegal act in the [December 21] letter, +we did include enough issues that would lead someone to that view as does the memo’s statement +about some ‘inappropriate actions.’” BDO’s general counsel responded: “I do believe the +company’s response was appropriate under the circumstances.” + +68. On January 8, 2010, GEE filed its Form 10-K, which classified the $2.3 million +purported CD as a cash equivalent and stated in footnote disclosure to the financial statements: + +In July 2009, the Company purchased a $2,300,000 certificate of deposit (“CD”) at +a New York bank. When the CD matured in October 2009, the bank did not timely +credit the proceeds of the CD to the Company’s account. Although the Company +has made a formal inquiry of the bank, to date the Company has not received an +adequate explanation for the bank’s non-performance relating to the CD. In +December 2009, the Company was reimbursed in full through a non-recourse +assignment of the CD for face value to an unrelated party, who has other business +interests with the bank. The purchaser of the CD is neither an employee nor a +director of the Company. +69. GEE’s Form 10-K filed on January 8, 2010 contained an audit report from BDO +that stated BDO’s audits were conducted “in accordance with the standards of the Public +Company Accounting Oversight Board (United States)” and that GEE’s financial statements +presented fairly, in all material respects, the company’s position and results at September 30, 2009, +in conformity with GAAP. + +G. IN 2010, BDO LEARNED OF FACTUAL ALLEGATIONS IN A CRIMINAL +COMPLAINT AGAINST THE PAB PRESIDENT ALLEGING THAT THE +PURPORTED CD DID NOT EXIST + +70. On January 19, 2010, just days after BDO issued its unqualified opinion and GEE +filed its 2009 Form 10-K, Henaghan sent an email to Rainis, Graul, Gerace, Hambleton, the BDO +Midwest Leader, and NY Partner attaching a January 12, 2010, Grand Jury Subpoena, issued to the + + +23 +AC Chair seeking his appearance and production of “any and all documents relating to any account +maintained at Park Avenue Bank.” + +71. On March 13, 2010, the United States of America filed a 44-page criminal +Complaint against former PAB president Antonucci (the “Antonucci Complaint”), alleging a +scheme and conspiracy involving a $6.5 million round-trip transaction in which GEE’s $2.3 +million was diverted as part of the conspiracy. Huff, Heineman, and Pence are referred to and +identifiable as designated “co-conspirator[s] not named herein” in certain aspects of that +conspiracy. The allegations in the Antonucci Complaint contained several details that indicated +that GEE did not have a CD with PAB, that River Falls Financial, River Falls Investments, +Oxygen, SDH, and PSQ were related parties, and that Heineman had authorized the money to be +transferred to Park Avenue Insurance as part of the conspiracy, and not to purchase a CD: + + “To hide the improper diversion of GEE’s funds from GEE’s auditors and Board of +Directors, [Antonucci] and others created a counterfeit certificate of deposit [], falsely +representing that GEE’s $2.3 million had been invested in a 90-day certificate of deposit at +the Bank. In fact, and as [Antonucci] well knew, there was no $2.3 million CD.” + GEE’s $2.3 million had been transferred to Park Avenue Insurance, which was controlled +by Antonucci. According to the Bank records, Heineman authorized this transfer. + Antonucci fraudulently signed the BDO confirmation of the $2.3 million CD, when +Antonucci knew it did not exist. + +The Antonucci Complaint further identified several “Oxygen-related entities” as participants in the +conspiracy, including, River Falls Financial (which Pence said he owned), PSQ (Pence’s entity that +purchased the majority stake in GEE), and Oxygen and SDH—two companies that paid GEE +purportedly under the assignment agreement with River Falls Investments (which Associate-1 said +he and a Huff family trust owned). It further alleged that a group of five associates (including Huff +and Pence) were listed on some of the accounts of the Oxygen-related entities, which shared a +common address in Louisville, Kentucky. + +72. On April 27, 2010, Henaghan sent an email attaching the Antonucci Complaint to +Rainis, Graul, Gerace, Hambleton, the BDO Midwest Leader, and BDO’s general counsel. +Henaghan’s email also attached a March 10, 2010 Grand Jury Subpoena issued to GEE, requesting +(i) documents relating to Huff, Pence, Heineman, the purported CD, SDH, Oxygen, O2HR, and +River Falls Financial and (ii) documents reflecting any payments to Heineman, Pence, Associate-1, +or the AC Member. Henaghan further attached a client retention memo addressed to Graul, +Hambleton, Gerace, the BDO Midwest Leader, and BDO’s general counsel. The memo stated: +“As I believe everyone is aware, in March 2010, Charles Antonucci, the president of Park Avenue +Bank was arrested related to allegations of criminal acts in his role as bank president, including +signing a counterfeit CD and our confirmation when he had in fact diverted the funds for his own +personal use.” The memo also noted that Pence was an unnamed co-conspirator. The memo +concluded that the engagement team recommended that BDO continue its relationship with GEE +because, among other factors, “Pence has not been formally charged yet with any criminal wrong- + + +24 +doing.” However, the memo did not address what impact the Antonucci Complaint’s allegations +might have on the representations contained in GEE’s financial statements (issued two months +before the complaint) concerning the purported CD. + +73. On April 28, 2010, Graul responded to Henaghan’s email requesting that he obtain +additional information concerning certain allegations in connection with client retention concerns. +Specifically, Graul indicated that Gerace had confirmed to him that “[w]hen the missing company +funds were ‘dribbling’ in from other sources” those sources included entities linked to the +conspiracy alleged in the Antonucci Complaint. Graul asked Henaghan to determine (i) whether +any related party transactions might involve the entities mentioned in the complaint; (ii) who +authorized the funds to be paid to GEE from the “Oxygen-related entities” River Falls Financial, +SDH, and Oxygen; and (iii) whether the AC Chair and Zizza are comfortable working with Pence +because “the preponderance of the accusations seem pretty bad for Mr. Pence.” Hambleton +responded to all, stating: “I agree with [Graul]. It seems there are more potential connections +here.” However, neither Graul, Hambleton, Gerace, nor Rainis ever followed up with Henaghan to +learn whether he had identified those “potential connections.” Nevertheless, Graul and Gerace +subsequently approved the retention of GEE as a client. + +74. In a May 25, 2010, email, Henaghan told Zizza that he would like to discuss certain +issues regarding the Antonucci Complaint. Henaghan wrote that he wanted to discuss the +allegations that “Pence purchased a 25% interest in Bedford Consulting from Antonucci for $6.5 +million in what the complaint describes as an ‘artifice designed to cover up the true source of the +$6.5 million.’” Henaghan also wrote: “The Complaint indicates that River Falls is owned by +Pence, [Associate-1], and Heineman. All previous information disclosed to us by Heineman and +Pence indicated that Pence owned 100% of River Falls.” He further noted that the Complaint +indicated that PSQ borrowed money from River Falls to buy the GEE shares. Henaghan’s email to +Zizza did not address the allegations in the Antonucci Complaint denying the existence of the +purported CD or indicating related party issues concerning the funds received by the “Oxygen- +related entities.” + +75. On June 1, 2010, in connection with the allegations contained in the Antonucci +Complaint, an Assistant United States Attorney for the Southern District of New York interviewed +Henaghan in detail about BDO’s 2009 audit, including the information BDO received about the +ownership structures of River Falls Financial, River Falls Investments, WTS, On-Site, Oxygen, +and AIR. + +76. Other than Henaghan’s single discussion with Pence (who denied the allegations) +and further communications with Zizza (who stated that he still trusted Pence), BDO did not +perform any additional procedures specific to the allegations in the Antonucci Complaint +concerning GEE, its chairman and former CEO, or the purported CD. BDO’s workpapers do not +include any information about what BDO did to investigate the allegation that PAB records +indicated that Heineman authorized the transfer of $2.3 million to Park Avenue Insurance. BDO’s +workpapers also do not include any analysis of the impact on GEE’s financial statements if +Heineman had conspired with Antonucci to steal GEE’s $2.3 million, by authorizing the transfer of + + +25 +the money to Antonucci’s company, Park Avenue Insurance, as alleged in the Antonucci +Complaint. The workpapers do not include an analysis of whether the assignment agreement with +River Falls Investments, in which GEE received $2.3 million from SDH, Oxygen, or River Falls +Financial, was a related party transaction. In fact, Henaghan did not document any answers he +received pursuant to his discussions with Pence or Zizza. Moreover, the client retention memo +approved by Graul and Gerace and “matters for reviewer concern” memo reviewed by Henaghan +and Rainis, which were retained in the workpapers for the 2010 audit, make no reference to the +Antonucci Complaint or guilty plea. + +77. In October 2010, Antonucci pled guilty to multiple criminal charges in a criminal +information, including securities fraud, bank bribery, and embezzlement of bank funds. As part of +his guilty plea, Antonucci admitted that he and his co-conspirators caused GEE to use $2.3 million +of its funds to make PAB whole on a loan PAB made to a company controlled by his co- +conspirators that had gone bankrupt, that the purported CD had never existed, and that he had +signed a false confirmation that the bank had issued a CD to GEE that he then sent to BDO. BDO +learned of this guilty plea shortly thereafter. + +78. Henaghan, Rainis, and Gerace learned, through GEE’s November 2010 Form 8-K +filing and publicly available information, that Pence purportedly sold PSQ to a person associated +with Huff (“Associate-2”). After Associate-2 became the majority owner of GEE, a BDO senior +manager on the GEE audit noted that Google showed that Associate-2 was connected to O2HR, +Huff, and Associate-1. According to the Form 8-K, Associate-2 paid nothing for PSQ; he just +assumed promissory notes issued by Pence to AIR for approximately $3 million, which funded +PSQ’s purchase of the majority of GEE shares in July 2009. Associate-1 had previously informed +Henaghan in a December 21, 2009 email that AIR had “investments received and invested in” +River Falls Investments, the entity that purchased the purported CD from GEE. + +79. Despite all of these additional indications of affiliation among AIR, River Falls +Investments, River Falls Financial, Pence, Associate-1, and Huff, BDO did not perform additional +audit procedures in 2010 to determine whether the purported purchase by River Falls Investments +of the purported CD from GEE (i) was fairly characterized in GEE’s financial statements or (ii) +should have been identified as a related party transaction in GEE’s financial statements. Instead, +Henaghan and Rainis relied on GEE management and director representations that there were no +undisclosed related party transactions. BDO also relied on Associate-1’s representations although, +as Graul acknowledged to Gerace and Henaghan on August 10, 2010: “Anything and everything +that involves [Associate-1] should be scrutinized carefully . . . [Associate-1] is not to be trusted and +everyone on the engagement should be made aware of this.” Nevertheless, Henaghan, as +engagement partner, Rainis, as concurring partner, and Gerace, as the assigned regional technical +director, each agreed in those capacities that BDO could issue an unqualified audit opinion. + +80. GEE’s Form 10-K filed on December 28, 2010, for its fiscal year ended September +30, 2010, classified the $2.3 million CD as a cash equivalent as of September 30, 2009, included a +similar disclosure as the disclosure in the Form 10-K filed in January 2010: + + +26 +In November 2009, the Company discovered that it did not receive the proceeds +from a bank for a $2,300,000 certificate of deposit that was scheduled to mature +in October 2009. Although the Company made a formal inquiry of the bank, it +did not receive an adequate explanation for the bank’s non-performance related to +the deposit. In December 2009, the Company entered into an agreement to assign +its interests in the certificate of deposit, without recourse, to an unrelated party +that has other business interests with the bank, and the Company was reimbursed +for the face value of the deposit. + +81. GEE’s Form 10-K filed on December 28, 2010, as amended on April 15, 2011, +contained an audit report from BDO that stated BDO’s audits were conducted in accordance with +PCAOB standards and that GEE’s financial statements presented fairly, in all material respects, +the company’s position and results at September 30, 2010 and 2009, in conformity with GAAP. + +H. VIOLATIONS +RULE 102(e) AND SECTION 4C OF THE EXCHANGE ACT +82. BDO’s 2009 and 2010 audits were deficient and not performed in accordance +with PCAOB standards.8 Section 4C(b) and Rule 102(e)(1)(iv) define improper professional +conduct with respect to persons licensed to practice as accountants. Pursuant to these provisions, +“improper professional conduct” includes two types of negligent conduct: (1) a single instance +of highly unreasonable conduct that results in a violation of professional standards in +circumstances in which heightened scrutiny is warranted; or (2) repeated instances of +unreasonable conduct, each resulting in violations of professional standards, that indicate a lack +of competence. + +Failed to exercise due professional care and an attitude of professional +skepticism (AU § 230) + +83. PCAOB standards require auditors to exercise due professional care in the +planning and performance of the audit and the preparation of the report. (AU § 230.01) +Auditors must maintain an attitude of professional skepticism, which includes “a questioning +mind and a critical assessment of audit evidence.” (AU § 230.07) In addition, the auditor should +“consider the competency and sufficiency of the evidence. Since evidence is gathered and +evaluated throughout the audit, professional skepticism should be exercised throughout the audit + +8 References to auditing standards in this Order are to PCAOB standards in effect at the time the +audit work was performed. + + +27 +process.” (AU § 230.08) The Commission and courts have held that related party transactions +require heightened scrutiny.9 +84. As set forth above, Henaghan, Rainis, Graul, and Gerace knew or should have +known facts that cast substantial doubt on the existence of the purported CD given, among other +things, (1) significant integrity issues with Heineman, the person who claimed to have authorized +the investment, and Associate-1, the person with whom Heineman purportedly “negotiated” the +assignment agreement; (2) PAB had told GEE that it had no record of the purported CD; and (3) +PAB had provided GEE and BDO with documentation showing the $2.3 million actually had been +transferred to Park Avenue Insurance on July 23, 2009. + +85. Henaghan, Rainis, Graul, and Gerace also knew or should have known that the +circumstances presented by the purported $2.3 million CD that was not honored by PAB, the +subsequent receipt by GEE of $2.3 million from River Falls Financial, SDH, and Oxygen, and the +purported assignment agreement with River Falls Investments warranted heightened scrutiny. +Notwithstanding the many red flags concerning the purported CD and the assignment agreement +discussed above, BDO issued audit reports in both 2009 and 2010 containing unqualified opinions +that were filed with GEE’s financial statements in the Form 10-Ks. In those reports, BDO +inaccurately stated that the audit had been conducted in accordance with PCAOB standards and +that GEE’s financial statements presented fairly, in all material respects, the company’s position +and results in conformity with GAAP. + +86. As a result of their above-described conduct, Henaghan, Rainis, Graul, and Gerace +failed to exercise due professional care and an attitude of professional skepticism in BDO’s 2009 +and 2010 audits of GEE. +Failed to obtain sufficient competent evidential matter concerning the +purported CD (AU §§ 326 and 333) +87. PCAOB standards require auditors to obtain sufficient competent evidential matter +to afford a reasonable basis for an opinion with respect to the financial statements under audit. To +be “competent,” evidence “must be both valid and relevant.” (AU § 326.21) “The amount and +kinds of evidential matter required to support an informed opinion are matters for the auditor to +determine in the exercise of his or her professional judgment after a careful study of the +circumstance in the particular case.” (AU § 326.22) This includes evaluating the reliability of the +evidence,10 and weighing all of the evidence obtained. The validity and sufficiency of required +evidence depends on the circumstances and the auditors’ judgment, but should be “persuasive” +though it need not be “convincing.” (AU § 326.22) + + +9 See McCurdy v. SEC, 396 F.3d 1258, 1261 (D.C. Cir. 2005) (citing Howard v. SEC, 376 F.3d +1136, 1149 (D.C. Cir. 2004)) (noting that related party transactions “are viewed with extreme +skepticism in all areas of finance”). +10 AU § 330.33: “the auditor should consider (a) the reliability of the confirmations….” + + +28 +88. PCAOB standards also provide that management representations “are not a +substitute for the application of th[e] auditing procedures necessary to afford a reasonable basis +for an opinion regarding the financial statements under audit,” that “the auditor obtains written +representations from management to complement other auditing procedures,” and that “[i]n +exercising professional skepticism, the auditor should not be satisfied with less than persuasive +evidence because of a belief that management is honest.” (AU §§ 333.02, 333.03, 230.09)11 +89. As a result of his above-described conduct, Henaghan failed to obtain sufficient +evidence supporting assertions in GEE’s 2009 and 2010 Form 10-K financial statements that the +purported CD existed and was a cash equivalent as of September 30, 2009, and that GEE entered +into an assignment agreement with an unrelated party.12 + +Failed to determine whether fraud or potential illegal acts may have impacted +GEE’s fiscal year 2009 and 2010 financial statements (AU §§ 316, 317) +90. Under AU § 316.01, an auditor must plan and perform an audit to obtain +reasonable assurance about whether the financial statements are free of material misstatement, +whether caused by error or fraud. The auditors must brainstorm “how and where they believe +the entity’s financial statements might be susceptible to material misstatement due to fraud, how +management could perpetrate and conceal fraudulent financial reporting, and how assets of the +entity could be misappropriated.” (AU § 316.14) AU § 316.06 states that there are “[t]wo types +of misstatements relevant to the auditor’s consideration of fraud—misstatements arising from +fraudulent financial reporting and misstatements arising from misappropriation of assets.” It +explains that financial reporting may be accomplished by falsification of supporting +documentation, or misrepresentations of events, transactions, or other significant information. It +further instructs that fraudulent financial reporting “need not be the result of a grand plan or +conspiracy” and may instead “be that management representatives rationalize the appropriateness +of a material misstatement … as a temporary misstatement of financial statement … expected to +be corrected later.” It instructs that that misappropriation of assets may be accompanied by +“false or misleading records or documents, possibly created by circumventing controls.” AU § +316.09 also notes that management engaged in fraud will take steps to conceal the fraud from +auditors. AU § 316.10 further states that fraud may be concealed through collusion among +management and third parties. For these reasons, AU § 316.13 requires auditors to exercise +professional skepticism when considering the risk of material misstatement due to fraud. + +11 AU § 508.20 also provided that “[c]ertain circumstances may require a qualified opinion … +[when] “[t]here is a lack of sufficient competent evidential matter or there are restrictions on the +scope of the audit that have led the auditor to conclude that he or she cannot express an +unqualified opinion….” +12 In addition, AS § 3.12 required BDO to “document significant audit findings or issues, actions +taken to address them (including additional evidence obtained), and the basis for the conclusions +reached.” Henaghan failed to comply with this documentation requirement with respect to each +of the major auditing issues encountered during the 2009 and 2010 audits. + + +29 +91. AU § 316.68 lists conditions that may be identified during the fieldwork that are +indicators of potential fraud, including (i) unsupported or unauthorized balances or transactions; +(ii) missing documents; (iii) unusual discrepancies between the entity’s records and confirmation +replies; (iv) inconsistent, vague or implausible responses from management or employees; and +(v) denial of access to records, facilities, certain employees, customers, vendors or others from +whom audit evidence might be sought. +92. AU § 317.10 notes that auditors may become aware of possible illegal acts during +the course of their audit: “When the auditor becomes aware of information concerning a +possible illegal act, the auditor should obtain an understanding of the nature of the act, the +circumstances in which it occurred and sufficient other information to evaluate the effect on the +financial statements.” +93. As a result of his above-described conduct, Henaghan failed to adhere to these +PCAOB standards during BDO’s 2009 or 2010 audits of GEE. +Failed to obtain sufficient audit evidence to determine whether the assignment +agreement was a related party transaction (AU §§ 326 and 334) +94. PCAOB standards require that “[an] auditor should view related party transactions +within the framework of existing [accounting] pronouncements, placing primary emphasis on the +adequacy of disclosure. In addition, the auditor should be aware that the substance of a +particular transaction could be significantly different from its form and that the financial +statements should recognize the substance of particular transactions rather than merely their legal +form.” (AU § 334.02) +95. PCAOB standards require an auditor to obtain sufficient competent evidential +matter to afford a reasonable basis for an opinion regarding the financial statements under audit. +(AU § 326.01) In selecting particular substantive tests to achieve the audit objectives, an auditor +considers, among other things, the risk of material misstatement of the financial statements. (AU § +326.11) With respect to related party transactions, PCAOB standards require that after an auditor +identifies related party transactions, he or she should apply the procedures considered necessary to +obtain satisfaction concerning their purpose, nature, and extent and their effect on the financial +statements. (AU § 334.09) For each related party transaction for which disclosure is required, +PCAOB standards require that the auditor satisfy himself that the transaction is adequately +disclosed in the financial statements. (AU § 334.11) + +96. The failure to disclose the assignment agreement as a related party transaction +caused the financial statements to be misleading. Financial Accounting Standards Board +Accounting Standards Codification (“ASC”) Topic 850, Related Party Disclosures required that +the following must be disclosed concerning related party transactions: (a) the nature of the +relationship involved; (b) a description of the transaction; (c) the dollar amount of the transaction; +and (d) amounts due from or to related parties and, if not otherwise apparent, the terms and manner +of settlement. Related party transactions cannot be presumed to have been conducted at arm’s- +length. GAAP requires these disclosures so the reader can be alerted to their existence, so as to + + +30 +help the reader of the financial statements detect and explain possible differences in financial +statements of a company that engaged in related party transactions to those that did not.13 Such +disclosure helps the reader evaluate the substance of the related party transaction. + +97. As a result of his above-described conduct, Henaghan failed to exercise the +requisite level of care, failed to perform sufficient procedures to identify related party +transactions, failed to obtain sufficient audit evidence to determine whether the assignment +agreement was a related party transaction during BDO’s 2009 or 2010 audits of GEE, and failed +to follow up on evidence indicating that assertions regarding the purported CD and assignment +agreement were unsubstantiated. Respondents also failed to ensure the issuance of an accurate +audit report in 2009 and 2010, which misrepresented that GEE’s financial statements were +presented fairly, in all material respects, in accordance with GAAP. +Failed to Investigate Newly Discovered Facts in 2010 (AU § 561) +98. AU § 561.04 states that when an auditor becomes aware of information that he +would have investigated if it had come to his attention during the course of the audit, he must +determine if the information is reliable and whether the facts existed at the date of his report. If the +information is reliable and existed at the date of the report, the auditor must determine if his report +would have been affected and people relying on the financial statements would find it important. +(AU § 561.05.) + +99. As a result of his above-described conduct, Henaghan failed to adhere to this +PCAOB Standard after learning of, among other things, the Antonucci Complaint in March 2010 +and subsequent guilty plea in October 2010, as it concerned GEE’s 2009 financial statements. +Rainis’s Failure to Comply with Concurring Review Standard + +100. The concurring partner reviewer’s responsibility is to perform an objective review +of significant auditing, accounting, and financial reporting matters and to conclude, based on all the +relevant facts and circumstances of which the concurring partner reviewer has knowledge, that no +matters that have come to his or her attention would cause the concurring partner reviewer to +believe that the client’s financial statements covered by the firm’s audit report are not in +conformity with generally accepted accounting principles in all material respects or that the audit +was not performed in accordance with generally accepted auditing standards. SEC Practice +Section §1000.39 (Appendix E). + +101. As a result of his above-described conduct, Rainis failed to adhere to this standard +during BDO’s 2009 or 2010 audits of GEE. + + +13 ASC 850-10-05-2. + + +31 +Finding + +102. As a result of the conduct described above, the Commission finds that Henaghan, +Rainis, Graul, and Gerace engaged in improper professional conduct within the meaning of +Sections 4C(a)(2), 4C(b)(2)(A), and 4C(b)(2)(B) of the Exchange Act and Rules 102(e)(1)(ii), +102(e)(1)(iv)(B)(1), and 102(e)(1)(iv)(B)(2) of the Commission’s Rules of Practice. The conduct +by Henaghan, Rainis, Graul, and Gerace in the 2009 and 2010 audits of GEE involved repeated +instances of unreasonable conduct, each resulting in violations of PCAOB standards and indicating +a lack of competence, and also satisfies the standard of highly unreasonable conduct resulting in +violations of PCAOB standards in circumstances in which heightened scrutiny was warranted. + +CAUSING VIOLATIONS OF SECTION 10A OF THE EXCHANGE ACT + +103. Section 10A(a)(1) of the Exchange Act requires each audit conducted of an issuer +by a registered public accounting firm to include “procedures designed to provide reasonable +assurance of detecting illegal acts that would have a direct and material effect on the +determination of financial statement amounts.” Section 10A(a)(2) of the Exchange Act requires +each audit conducted of an issuer by a registered public accounting firm to include “procedures +designed to identify related party transactions that are material to the financial statements or +otherwise require disclosure therein.” Section 10A(b)(1) requires a registered public accounting +firm to, in accordance with PCAOB standards, “determine whether it is likely that an illegal act +has occurred” if the firm “detects or otherwise becomes aware of information indicating that an +illegal act (whether or not perceived to have a material effect on the financial statements of the +issuer) has or may have occurred.” No showing of scienter is necessary to establish a violation +of Section 10A. See SEC v. Solucorp Indus., Ltd., 197 F. Supp. 2d. 4, 10-11 (S.D.N.Y. 2002). + +104. In connection with the 2009 and 2010 GEE audits, BDO violated Section +10A(a)(1) of the Exchange Act by failing to plan, design, and carry out audit procedures to +provide reasonable assurance of detecting illegal acts that would have a direct and material effect +on the determination of financial statements amounts. As a result of Respondents’ conduct +described above, Respondents were each a cause of BDO’s violations in circumstances in which +each knew or should have known that their respective acts and omissions would contribute to +BDO’s violations. + +105. In connection with the 2009 and 2010 GEE audits, BDO violated Section +10A(a)(2) of the Exchange Act by failing to plan, design, and carry out audit procedures to +identify GEE’s material related party transactions that required disclosure in the financial +statements. As a result of Respondents’ conduct described above, Respondents were each a +cause of BDO’s violations in circumstances in which each knew or should have known that their +respective acts and omissions would contribute to BDO’s violations. + +106. In connection with the 2009 and 2010 GEE audits, BDO violated Section +10A(b)(1) of the Exchange Act by failing to determine whether it was likely that an illegal act +had occurred after BDO was made aware of information indicating that an illegal act may have + + +32 +occurred. As a result of Respondents’ conduct described above, Respondents were each a cause +of BDO’s violations in circumstances in which each knew or should have known that their +respective acts and omissions would contribute to BDO’s violations. + +107. As a result of the conduct described above, the Commission finds that +Respondents were each a cause of BDO’s violations of Sections 10A(a)(1), (a)(2), and (b)(1) of +the Exchange Act. + +CAUSING VIOLATIONS OF SECTION 13(a) OF +THE EXCHANGE ACT AND RULE 13a-1 THEREUNDER + +108. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require that every +issuer of a security registered pursuant to Section 12 of the Exchange Act file with the +Commission annual reports (i.e., Form 10-K) as the Commission may require, and mandate that +periodic reports contain such further material information as may be necessary to make the +required statements not misleading. The obligation to file such reports embodies the requirement +that they be true and correct. + +109. GEE’s annual reports on Form 10-K for fiscal years 2009 and 2010 included audit +reports from BDO that stated BDO’s audits were conducted “in accordance with the standards of +the Public Company Accounting Oversight Board (United States)” and that GEE’s financial +statements presented fairly, in all material respects, the company’s position and results. These +statements were materially misleading. As a result of Respondents’ above-described conduct, +BDO’s 2009 and 2010 audits were not conducted in accordance with PCAOB standards and the +financial statements included in GEE’s 2009 and 2010 Form 10-Ks were materially misstated +because, among other things, they incorrectly represented GEE had a $2.3 million CD and +classified it as a cash equivalent as of September 30, 2009, and did not disclose the assignment +agreement as a related party transaction, contrary to GAAP. At a minimum, each of the +Respondents knew or should have known that their acts or omissions would contribute to GEE’s +filing of inaccurate 2009 and 2010 Form 10-Ks. + +110. As a result of the conduct described above, the Commission finds that +Respondents were a cause of GEE’s violations of Section 13(a) of the Exchange Act and Rule +13a-1 thereunder. + +IV. + +In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanctions agreed to in Respondents’ Offers. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Pursuant to Section 21C of the Exchange Act, Henaghan, Rainis, Graul, Gerace, +and Hambleton shall cease and desist from committing or causing any violations and any future + + +33 +violations and any future violations of Sections 10A and 13(a) of the Exchange Act and Rule +13a-1 thereunder. + +B. Henaghan is denied the privilege of appearing or practicing before the +Commission as an accountant. +1. After three years from the date of this Order, Henaghan may request +that the Commission consider his reinstatement by submitting an application +(attention: Office of the Chief Accountant) to resume appearing or practicing before +the Commission as: +a. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission. Such an application must satisfy the Commission that +Henaghan’s work in his practice before the Commission will be reviewed +either by the independent audit committee of the public company for which +he works or in some other acceptable manner, as long as he practices before +the Commission in this capacity; and/or +b. an independent accountant. Such an application must satisfy the +Commission that: +(1) Henaghan, or the public accounting firm with which he is associated, is +registered with the PCAOB in accordance with the Sarbanes-Oxley Act +of 2002, and such registration continues to be effective; +(2) Henaghan, or the registered public accounting firm with which he is +associated, has been inspected by the PCAOB and that inspection did +not identify any criticisms of or potential defects in his or the firm’s +quality control system that would indicate that Henaghan will not +receive appropriate supervision; +(3) Henaghan, has resolved all disciplinary issues with the PCAOB, and has +complied with all terms and conditions of any sanctions imposed by the +PCAOB (other than reinstatement by the Commission); and +(4) Henaghan acknowledges his responsibility, as long as Henaghan +appears or practices before the Commission as an independent +accountant, to comply with all requirements of the Commission and the +PCAOB, including, but not limited to, all requirements relating to +registration, inspections, engagement quality review, and quality control +standards. +2. The Commission will consider an application by Henaghan to resume +appearing or practicing before the Commission provided that his CPA license is current +and he has resolved all other disciplinary issues with the applicable boards of + + +34 +accountancy. However, if CPA licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Henaghan’s character, integrity, professional +conduct, or qualifications to appear or practice before the Commission. +C. Rainis is denied the privilege of appearing or practicing before the Commission as +an accountant. +1. After two years from the date of this Order, Rainis may request that +the Commission consider his reinstatement by submitting an application (attention: +Office of the Chief Accountant) to resume appearing or practicing before the +Commission as: +a. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission. Such an application must satisfy the Commission that +Rainis’s work in his practice before the Commission will be reviewed either +by the independent audit committee of the public company for which he +works or in some other acceptable manner, as long as he practices before +the Commission in this capacity; and/or +b. an independent accountant. Such an application must satisfy the +Commission that: +(1) Rainis, or the public accounting firm with which he is associated, is +registered with the PCAOB in accordance with the Sarbanes-Oxley Act +of 2002, and such registration continues to be effective; +(2) Rainis, or the registered public accounting firm with which he is +associated, has been inspected by the PCAOB and that inspection did +not identify any criticisms of or potential defects in his or the firm’s +quality control system that would indicate that Rainis will not receive +appropriate supervision; +(3) Rainis, has resolved all disciplinary issues with the PCAOB, and has +complied with all terms and conditions of any sanctions imposed by the +PCAOB (other than reinstatement by the Commission); and +(4) Rainis acknowledges his responsibility, as long as Rainis appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the PCAOB, +including, but not limited to, all requirements relating to registration, +inspections, engagement quality review, and quality control standards. + + +35 +2. The Commission will consider an application by Rainis to resume +appearing or practicing before the Commission provided that his CPA license is current +and he has resolved all other disciplinary issues with the applicable boards of +accountancy. However, if CPA licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Rainis’s character, integrity, professional conduct, or +qualifications to appear or practice before the Commission. +D. Gerace is denied the privilege of appearing or practicing before the Commission +as an accountant. +1. After one year from the date of this Order, Gerace may request that +the Commission consider his reinstatement by submitting an application (attention: +Office of the Chief Accountant) to resume appearing or practicing before the +Commission as: +a. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission. Such an application must satisfy the Commission that +Gerace’s work in his practice before the Commission will be reviewed +either by the independent audit committee of the public company for which +he works or in some other acceptable manner, as long as he practices before +the Commission in this capacity; and/or +b. an independent accountant. Such an application must satisfy the +Commission that: +(1) Gerace, or the public accounting firm with which he is associated, is +registered with the PCAOB in accordance with the Sarbanes-Oxley Act +of 2002, and such registration continues to be effective; +(2) Gerace, or the registered public accounting firm with which he is +associated, has been inspected by the PCAOB and that inspection did +not identify any criticisms of or potential defects in his or the firm’s +quality control system that would indicate that Gerace will not receive +appropriate supervision; +(3) Gerace, has resolved all disciplinary issues with the PCAOB, and has +complied with all terms and conditions of any sanctions imposed by the +PCAOB (other than reinstatement by the Commission); and +(4) Gerace acknowledges his responsibility, as long as Gerace appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the PCAOB, + + +36 +including, but not limited to, all requirements relating to registration, +inspections, engagement quality review, and quality control standards. +2. The Commission will consider an application by Gerace to resume +appearing or practicing before the Commission provided that his CPA license is current +and he has resolved all other disciplinary issues with the applicable boards of +accountancy. However, if CPA licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Gerace’s character, integrity, professional conduct, or +qualifications to appear or practice before the Commission. +E. Graul is denied the privilege of appearing or practicing before the Commission as +an accountant. +1. After one year from the date of this Order, Graul may request that the +Commission consider his reinstatement by submitting an application (attention: +Office of the Chief Accountant) to resume appearing or practicing before the +Commission as: +a. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission. Such an application must satisfy the Commission that +Graul’s work in his practice before the Commission will be reviewed either +by the independent audit committee of the public company for which he +works or in some other acceptable manner, as long as he practices before +the Commission in this capacity; and/or +b. an independent accountant. Such an application must satisfy the +Commission that: +(1) Graul, or the public accounting firm with which he is associated, is +registered with the PCAOB in accordance with the Sarbanes-Oxley Act +of 2002, and such registration continues to be effective; +(2) Graul, or the registered public accounting firm with which he is +associated, has been inspected by the PCAOB and that inspection did +not identify any criticisms of or potential defects in his or the firm’s +quality control system that would indicate that Graul will not receive +appropriate supervision; +(3) Graul, 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 + + +37 +(4) Graul acknowledges his responsibility, as long as Graul appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the PCAOB, +including, but not limited to, all requirements relating to registration, +inspections, engagement quality review, and quality control standards. +2. The Commission will consider an application by Graul to resume +appearing or practicing before the Commission provided that his CPA license is current +and he has resolved all other disciplinary issues with the applicable boards of +accountancy. However, if CPA licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Graul’s character, integrity, professional conduct, or +qualifications to appear or practice before the Commission. +F. Respondents shall each, within 14 days of the entry of this Order, pay the civil +money penalties indicated below: + +(i) $30,000 for Henaghan; +(ii) $15,000 for Rainis; +(iii) $10,000 for Gerace; +(iv) $10,000 for Graul; and +(v) $10,000 for Hambleton. + +to the Commission for transfer to the general fund of the United States Treasury in accordance +with Exchange Act Section 21F(g)(3). If timely payment is not made additional interest shall +accrue pursuant to 31 U.S.C. § 3717. Payments ordered in this paragraph must be made in one of +the following ways: + +(1) Respondents may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondents may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(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 + + +38 + +Payments by check or money order must be accompanied by a cover letter identifying +Henaghan, Rainis, Graul, Gerace, or Hambleton as a Respondent in these proceedings, and the file +number of these proceedings; a copy of the cover letter and check or money order must be sent to +Timothy Casey, New York Regional Office, Securities and Exchange Commission, 200 Vesey +Street, New York, NY 10281-1022. + + V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by +Respondents, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondents under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondents of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19). + + +By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3695.txt b/raw/aaer/2015/AAER-3695.txt new file mode 100644 index 0000000000000000000000000000000000000000..afc55666390ab12fc6885ec482cb3c30c443fb37 --- /dev/null +++ b/raw/aaer/2015/AAER-3695.txt @@ -0,0 +1,150 @@ + + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75921 / September 15, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3695 / September 15, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16810 + + : + : + : +In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + Edward Parker, CA, : 102(e) OF THE COMMISSION’S RULES OF + : PRACTICE, MAKING FINDINGS, AND + Respondent. : IMPOSING REMEDIAL SANCTIONS + : + : +____________________________________ : + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Edward +Parker (“Respondent” or “Parker”) 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 l aws or of +the rules and regulations thereunder. + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Edward Parker, 42, a citizen and resident of Australia, was Controller of +Computer Sciences Corporation’s Australian subsidiary from 2007 until the company suspended +him in August 2011. He left the company in October 2012. Parker has been a licensed +Chartered Accountant in Australia since 1994. + +2. Computer Sciences Corporation (“CSC”), a Nevada corporation +headquartered in Falls Church, Virginia, sells information technology services. At all relevant +times, CSC’s common stock traded on the New York Stock Exchange. + +3. On June 5, 2015, the Commission filed a complaint in the United States +District Court for the Southern District of New York against Parker in Securities and Exchange +Commission v. Edward Parker, Civil Action Number 15-cv-4341 (ER). On September 9, 2015, +the court entered an order permanently enjoining Parker, by consent, from future violations of +Section 17(a) of the Securities Act of 1933 (the “Securities Act”) and Sections 10(b) and +13(b)(5) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rules 10b-5(a) and +(c) and 13b2-1 promulgated thereunder, and from aiding and abetting violations of Exchange Act +Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 13a-1 and 13a-13 promulgated +thereunder. Parker was also barred from acting as an officer or director of any public company +pursuant to Section 20(e) of the Securities Act and Section 21(d)(2) of the Exchange Act for a +period of five years and ordered to pay $2,800 in disgorgement of ill-gotten gains and $750 in +prejudgment interest. + +4. The Commission’s complaint alleged that Parker fraudulently inflated +CSC’s earnings in its first quarter of fiscal year 2009. Parker manipulated the company’s +earnings by using a series of improper “cookie jar” reserves and by failing to record expenses as +required. Parker’s actions fraudulently overstated CSC’s consolidated pretax income by over +5%. But for Parker’s misconduct, CSC would have missed analysts’ earnings targets for the first +quarter of fiscal year 2009. + + 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 Parker’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Parker is suspended from appearing or practicing before the Commission as an +accountant. + + B. After five years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify any criticisms +of or potential defects in the respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring partner reviews and quality control +standards. + +C. The Commission will consider an application by Respondent to resume +appearing or practicing before the Commission provided that his practicing license is current +and he has resolved all other disciplinary issues with Chartered Accountants Australia and + 4 +New Zealand. However, if licensure is dependent on reinstatement by the Commission, the +Commission will consider an application on its other merits. The Commission’s review may +include consideration of, in addition to the matters referenced above, any other matters +relating to Respondent’s character, integrity, professional conduct, or qualifications to appear +or practice before the Commission. + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3696.pdf b/raw/aaer/2015/AAER-3696.pdf new file mode 100644 index 0000000000000000000000000000000000000000..a4e6576e9f01f0cbd834aa904fed1680cf5488b7 Binary files /dev/null and b/raw/aaer/2015/AAER-3696.pdf differ diff --git a/raw/aaer/2015/AAER-3696.txt b/raw/aaer/2015/AAER-3696.txt new file mode 100644 index 0000000000000000000000000000000000000000..ff66c6fbfc3039b1eb9cd9dba9ce9130120a50c0 --- /dev/null +++ b/raw/aaer/2015/AAER-3696.txt @@ -0,0 +1,176 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75933 / September 16, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3696 / September 16, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16815 + + + + + + In the Matter of + + Joseph F. Apuzzo, 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 Joseph +F. Apuzzo (“Respondent” or “Apuzzo”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules +of Practice.1 + + + + +1 Rule 102(e)(3)(i) provides, in pertinent part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by +order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by +name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her +misconduct in an action brought by the Commission, from violating or aiding and abetting the +violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + +2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting 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. Apuzzo, age 59, was licensed as a certified public accountant in the State of +New York beginning in 1986 until he allowed his license to lapse in 1995. He served as Vice +President of Finance of Terex Corporation (“Terex”) from 1995 to 1996, Comptroller of Terex from +1996 to 1998, and Chief Financial Officer of Terex from October 1998 until September 2002, when +he became President of Terex Financial Services. He resigned from Terex in August 2005. + + 2. Terex was, at all relevant times, a Delaware corporation with its principal +place of business in Westport, Connecticut. Terex is a diversified global manufacturer of a broad +range of equipment primarily for construction, infrastructure and surface to mining industries. At +all relevant times, Terex’s common stock was registered with the Commission pursuant to Section +12(b) of the Securities Exchange Act of 1934 (“Exchange Act”), and trades on the New York Stock +Exchange. + + 3. On December 27, 2007, the Commission filed a complaint against Apuzzo +in SEC v. Joseph F. Apuzzo (Civil Action No. 3:07-cv-01910-AWT). On September 8, 2015, +the court entered an order permanently enjoining Apuzzo, by consent, from violation of Sections +10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and from aiding +and abetting violation of Sections 13(a) and13(b)(2)(A) of the Exchange Act and Rule 13a-1 +thereunder. Apuzzo was also ordered to pay a civil money penalty in the amount of $100,000. + + 4. The Commission’s complaint alleged, among other things, that Apuzzo +knowingly and substantially aided and abetted former officers of United Rentals, Inc. (“URI”) +with URI’s violations of the antifraud, reporting, and books and records provisions of the federal +securities laws, by among other things, improperly recognizing revenue from two fraudulent +sale-leaseback transactions between URI and Terex. In both transactions, URI sold used +equipment to a financing company, General Electric Capital Corporation (“GECC”), and then +leased it back for an 8-month period. The complaint alleges that URI also arranged, through +Apuzzo, for Terex to remarket the equipment at the end of the lease period and to provide GECC +3 + +with a residual value guarantee under which Terex guaranteed that GECC would receive not less +than 96 percent of the purchase price that it had paid URI for the used equipment. For one of the +transactions, URI and Terex also entered into a “backup” remarketing agreement, signed by +Apuzzo, under which URI effectively assumed Terex’s remarketing obligations and guarantees +to GECC and agreed to cover, through guaranteed future purchases, any losses to Terex over the +amount of a $5 million advance payments made by URI. As a result of this fraudulent +accounting, the complaint alleges that the financial statements and results that URI incorporated +into its periodic filings and other materials disseminated to the investing public were materially +false and misleading. The Complaint alleges that Apuzzo knowingly provided substantial +assistance to URI in perpetrating the fraud by helping to conceal URI’s assumption of the risks +and obligations of the transactions from URI’s auditors. The Complaint alleges that Apuzzo also +knew that the price of the equipment being paid by GECC to URI was inflated above fair market +value and would therefore cause Terex to suffer a loss. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Apuzzo’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Apuzzo is suspended from appearing or practicing before the Commission as an +accountant. + + B. After five years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + +1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + +2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify any criticisms +4 + +of or potential defects in the respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring partner reviews and quality control +standards. + +C. The Commission will consider an application by Respondent to resume appearing +or practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Respondent’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission. + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3697.txt b/raw/aaer/2015/AAER-3697.txt new file mode 100644 index 0000000000000000000000000000000000000000..c6435199cd8a994e57e8c4fda54dbc11200aee2e --- /dev/null +++ b/raw/aaer/2015/AAER-3697.txt @@ -0,0 +1,1088 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 9914 / September 17, 2015 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75941 / September 17, 2015 + +INVESTMENT COMPANY ACT OF 1940 +Release No. 31829 / September 17, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3697 / September 17, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16819 + + + +In the Matter of + +PHILIP A. PENDERGRAFT, +KEVIN W. MCALEER, CPA, + THOMAS R. JOHNSON, + and CHARLES W. YANCEY, + +Respondents. + + + + +ORDER INSTITUTING +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT +TO SECTION 8A OF THE SECURITIES +ACT OF 1933, SECTIONS 4C, 15(b), +AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, SECTION +9(b) OF THE INVESTMENT COMPANY +ACT OF 1940, AND RULE 102(e) OF +THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS +AND A CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”), Sections 15(b) +and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), and Section 9(b) of the +Investment Company Act of 1940 (“Investment Company Act”), against Philip A. Pendergraft, +Exchange Act Sections 4C and 21C, and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice + + +2 +against Kevin W. McAleer, CPA, Exchange Act Section 21C against Thomas R. Johnson, and +Exchange Act Section 15(b) against Charles W. Yancey. + +II. + +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (“Offers”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over them and the subject matter of these proceedings, which are +admitted, and except as provided herein in Section V, Respondents consent to the entry of this +Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A +of the Securities Act of 1933, Sections 4C, 15(b), and 21C of the Securities Exchange Act of 1934, +Section 9(b) of the Investment Company Act of 1940, and Rule 102(e) of the Commission’s Rules +of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds1 that + +A. Summary + +1. These proceedings relate to approximately $100 million in failed margin loans made +by now-defunct Penson Financial Services, Inc. (“PFSI”)—which was once the second largest +clearing broker-dealer in the U.S.—to certain of its customers. PFSI made the bulk of these margin +loans between 1999 and 2008 to Christopher J. Hall and his affiliates, including a company named +Call Now, Inc. (“Call Now”), who invested in risky, unrated municipal bonds. Hall was the +Chairman of Call Now’s board of directors, and in 2006 Call Now became a large shareholder of +PFSI’s publicly traded parent company, Penson Worldwide, Inc. (“PWI”). + +2. In the wake of the financial crisis of 2008, PFSI incurred significant losses on these +margin loans to Hall and Call Now because their margin collateral had plummeted in value. A +substantial portion of Hall and Call Now’s margin collateral consisted of distressed municipal bonds +related to a financially struggling horse racetrack in Texas operated by Call Now. Hall and Call +Now failed to satisfy margin calls issued by PFSI because they did not have sufficient assets. Hall +and Call Now’s primary hope of satisfying PFSI’s margin calls rested on speculation that a future +change in Texas gambling laws would allow slot machines at Texas horse racetracks. Nevertheless, +PFSI failed to liquidate these customers’ collateral to satisfy their margin calls because doing so + +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 +would lock in large losses for PFSI and PWI (collectively “Penson”). Instead, in 2009 and 2010 +Penson extended additional loans to these customers, hoping that they would survive financially and +their collateral value would improve in the future so that Penson could reverse the losses on the +margin loans. But these additional loans improperly increased Hall and Call Now’s indebtedness to +PFSI in violation of federal margin regulations, which are designed to prevent the excessive use of +credit by broker-dealers. + +3. Under the accounting standards governing public companies and broker-dealers, +Penson should have recognized losses on the loans as early as 2009, but did not do so until nearly +two years later. As a result, Penson failed to present its financial statements in SEC filings in +conformity with accounting principles generally accepted in the U.S. (“GAAP”), for the annual +periods ended December 31, 2009 and December 31, 2010, and with respect to PWI, the quarterly +periods ended March 31, 2010 through June 30, 2011. In addition, Penson failed to adequately +disclose the nature of the loans in SEC filings for the 2009 and 2010 annual periods in violation of +applicable disclosure requirements. + +4. PWI ultimately recorded more than $60 million in losses for these loans in 2011 and +2012. These losses and other disclosures about the loans beginning in 2011 contributed to a series +of events resulting in PWI and PFSI’s bankruptcies in 2013. + +5. Respondent Philip A. Pendergraft, Penson’s co-founder, Director and CEO of PWI, +and an Executive Vice President (“EVP”) of PFSI, managed Penson’s loans to Hall, Call Now, and +their related entities and exercised substantial control over certain key operations of +PFSI. Pendergraft, along with Respondent Kevin W. McAleer (PWI’s CFO), was responsible for +the improper accounting treatment and disclosure of these loans in PWI and PFSI’s filings with the +Commission. Respondent Thomas R. Johnson, who was a Director of PWI, and a Director and the +President/CEO of Call Now, was a cause of PWI’s improper disclosures as he knew or should have +known that these disclosures were materially misleading when he signed PWI’s filings with the +Commission. Finally, Respondent Charles W. Yancey, PFSI’s President/CEO, failed reasonably to +supervise Pendergraft, an EVP and associated person of PFSI, who managed PFSI’s margin loans to +Hall, Call Now, and their related entities, and directed PFSI’s recordkeeping and financial reporting +with respect to those loans for the relevant periods. + +B. Respondents + +6. Philip A. Pendergraft, age 56, is a resident of Arlington, Texas. Pendergraft was a +co-founder, a Director, and the Chief Executive Officer of PWI, and an Executive Vice President +and associated person of PFSI from May 1995 to July 2012. He held Series 3, 4, 7, 15, 24, 27, 53, +and 63 licenses. + +7. Kevin W. McAleer, CPA, age 64, is a resident of Frisco, Texas. McAleer was +PWI’s Chief Financial Officer from February 2006 to March 2012. McAleer has been a CPA since +1976 and currently is licensed as a CPA by the Texas Board of Accountancy. + + + +4 +8. Thomas R. Johnson, age 48, is a resident of Orleans, Massachusetts. Johnson was +a Director of PWI from August 2003 to May 2011. Johnson also was a Director and the +President/CEO of Call Now, Inc. from November 2001 to approximately November 2011. He held +Series 7, 24, 52, and 63 licenses. + +9. Charles W. Yancey, age 59, is a resident of Colleyville, Texas. He was PFSI’s +President and CEO from August 2005 to February 2012. Yancey currently is associated with a +registered broker-dealer and holds Series 7, 24, 55, and 63 licenses. + +C. Other Relevant Entities + +10. Penson Worldwide, Inc. was a Delaware corporation with its principal place of +business in Dallas, Texas, that provided clearing, execution, and other services to the securities +brokerage industry through its subsidiaries. In October 2012, PWI filed Forms 25 and 15 +voluntarily withdrawing its common stock from listing on the Nasdaq Global Market and +terminating its registration under Exchange Act Sections 12(b) and 12(g). On January 11, 2013, +PWI and its subsidiaries filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the +District of Delaware. + +11. Penson Financial Services, Inc. was a North Carolina corporation with its principal +place of business in Dallas, Texas. PFSI was a wholly owned subsidiary of SAI Holdings, Inc. +(“SAI”), which was a wholly owned subsidiary of PWI. From 2009 to 2011, PFSI was the second +largest clearing broker-dealer in the U.S. based on the number of correspondents. PFSI was +registered as a broker-dealer with the Commission from February 1990 to October 2012, when its +filed Form BDW became effective. On January 11, 2013, PFSI filed for bankruptcy along with +PWI. + +12. Christopher J. Hall, age 56, was the Chairman and controlling shareholder of Call +Now, Inc. for all relevant periods. Hall was a former CFO and financial operations principal of +Howe, Solomon & Hall, Inc., which was registered as a broker-dealer with the Commission from +June 1983 to February 2000. + +13. Call Now, Inc. was a Nevada corporation with its principal place of business in the +City of Selma, Texas. Call Now’s primary business was the operation and management of the +Retama Park horse racetrack owned by the Retama Development Corporation, a municipal +corporation of Selma. Call Now’s common stock was registered under Exchange Act Section 12(g) +until August 1, 2014, when its registration was revoked by the Commission for failure to file +periodic reports since the period ended June 30, 2011. + + + +5 +D. Facts + + Background + +14. PFSI was PWI’s U.S.-based and largest clearing broker-dealer subsidiary. PFSI +generated substantial interest income from its margin lending business—extending credit to +correspondent broker-dealers and customers to purchase securities on margin collateralized by +existing cash or securities in their margin accounts. PFSI’s margin lending business was subject +to, among other things, the margin regulations of the Board of Governors of the Federal Reserve +System (“Federal Reserve Board”) and the Financial Industry Regulatory Authority (“FINRA”).2 +These margin regulations generally require a margin account to maintain minimum equity +(maintenance margin) of at least 25% of the current market value of the marginable securities in +the account. PFSI’s internal margin policies also required a margin account to maintain a 25% +minimum maintenance margin rate. + +15. When the margin equity of a PFSI customer’s margin account fell below the 25% +minimum maintenance margin rate, PFSI’s systems generated a maintenance margin call. PFSI’s +policies required its operations personnel to demand the customer to deposit the required cash or +marginable securities into the account within three days to cure the margin deficiency. PFSI’s +customer margin account agreement required the customer promptly to pay, upon demand, any +margin indebtedness or deficiency. If the customer failed to do so, PFSI typically liquidated +securities or other assets from the customer’s account to redress the margin deficiency. In some +instances PFSI also obtained guarantees or other pledges of collateral from margin customers to +address margin deficiencies. PFSI generally established an allowance for doubtful accounts and +recognized a bad debt expense when the collateral, guarantees, or other rights were insufficient to +cover potential losses on margin loans. + + Penson’s Relationship With Christopher J. Hall and Call Now, Inc. + +16. From 1999 to 2008, PFSI extended substantial margin loans to Christopher J. Hall +and his affiliates, who primarily invested in risky, unrated municipal bonds. By 2008, these +margin loans were maintained in four accounts—Hall’s personal account, The Hemisphere Trust +(“Hemisphere,” a Belize-based trust controlled by Hall), The Global Trust (“Global,” another +Belize-based trust purportedly cross-guaranteed by Hemisphere), and Call Now’s account +(controlled by Johnson) (collectively “Hall/Call Now” or the “Hall/Call Now accounts”). During +this period, Pendergraft was PFSI’s primary relationship manager for Hall/Call Now based on his +prior business relationship with Hall. + + +2 Exchange Act Section 7(c); Regulation T, 12 C.F.R. §§ 220.1 – 220.12; NASD Conduct +Rule 2520 (“NASD Rule 2520”). NASD Rule 2520 was amended and superseded by FINRA +Rule 4210 effective December 2, 2010. + + + +6 +17. One of the key investments in the Hall/Call Now accounts was in unrated municipal +bonds issued by the Retama Development Corporation (“RDC”), which owned the Retama Park +horse racetrack. The RDC had issued $93.9 million in two series of bonds since 1993 to build and +fund Retama Park—$7 million of Series A bonds, secured by Retama Park’s facilities, and $86.9 +million in Series B revenue bonds (“Retama B Bonds”) that paid interest only if Retama Park +generated sufficient revenue. But Retama Park had struggled financially since it opened in 1995 +and the RDC never paid interest on the Retama B Bonds. Retama Park’s primary hope of making +a profit was legislation in Texas that would allow expanded gambling, including slot machines, at +Texas horse racetracks. Since Retama Park opened, however, every bill proposing such legislation +had failed in the Texas Legislature. + +18. Hall and his affiliates, including Call Now, owned the vast majority of the Retama +B Bonds, held in their PFSI accounts, and other Retama Park related assets. Hall and Call Now’s +goal with these investments was to operate Retama Park and lobby the Texas Legislature to pass +enhanced gambling legislation, which purportedly would cause the value of their Retama Park +related assets to appreciate and be sold at a premium to a casino or other gaming company. To +finance portions of this plan, Hall and Call Now withdrew cash from their PFSI margin accounts to +make loans to the RDC, which repeatedly needed money to avoid defaulting on its debts and to pay +its and Retama Park’s operating expenses. Hall and Call Now also obtained substantial additional +margin loans from PFSI for purchasing or carrying hundreds of unrated municipal bonds and other +securities, and Call Now also withdrew cash from its margin account partially to fund its own +operating expenses. + +19. Also, at Penson’s request in 2003, Hall and Johnson (on behalf of Call Now) agreed +to have Call Now purchase $6.6 million of PWI’s convertible notes by borrowing from Call Now’s +PFSI margin account to fund the purchase. At the time, PWI needed capital to grow its business, +and Penson determined that a quick way to raise that capital was to have Call Now buy PWI’s +notes with a margin loan from PFSI. In exchange, PWI agreed to use its best efforts to appoint a +nominee of Call Now to its Board of Directors, and Johnson thereafter was elected to PWI’s Board +in August 2003. In May 2006, PWI completed an initial public offering of its common stock, and +Call Now converted its PWI notes to common stock to become PWI’s fifth largest common +stockholder. Call Now also became a related party of PWI due to Johnson’s dual role as a PWI +director and a Call Now director and officer. + +20. The Hall/Call Now accounts were unusual at PFSI for at least the following +reasons. First, they were direct customer accounts not associated with a correspondent broker, +which was not common at PFSI. Second, the accounts obtained substantial margin loans to +purchase or carry unrated municipal bonds, whereas PFSI generally made margin loans to +customers to purchase equity securities. Finally, Pendergraft was the primary relationship manager +for the Hall/Call Now accounts instead of PFSI’s operations department, which was otherwise +responsible for monitoring margin lending risk and enforcing margin requirements. + + + +7 + PFSI’s Margin Loans to Hall/Call Now Were Troubled by 2009 + +21. By early 2008, the margin equity for Hall and Hemisphere’s accounts had fallen +below FINRA’s and PFSI’s 25% minimum maintenance margin rate for all customer margin +accounts. Instead of issuing margin calls to Hall and Hemisphere per PFSI’s policies, however, +PFSI lowered the minimum maintenance margin rate for the unrated municipal bonds in Hall and +Hemisphere’s accounts from 25% to 7% (which corresponds to FINRA’s minimum maintenance +margin rate for municipal bonds) so that, in effect, no margin call would be issued to the +customers.3 + +22. But during 2008, Hall and Hemisphere’s unrated municipal bonds had further +declined in value, causing their margin equity to fall below the 7% minimum maintenance margin +rate. Pendergraft, throughout 2008, had demanded that Hall deposit additional collateral into Hall +and Hemisphere’s accounts, but Hall failed to deposit sufficient collateral to satisfy the accounts’ +margin deficiency. Although FINRA’s margin rules and PFSI’s policies required PFSI to obtain +the required margin from Hall and Hemisphere within fifteen business days of the date the margin +deficiency occurred, PFSI could not do so because Hall did not have sufficient assets.4 PFSI also +did not request FINRA to grant it additional time to obtain the required margin. PFSI decided not +to liquidate the mostly unrated municipal bonds in Hall and Hemisphere’s accounts because they +could not be sold without locking in substantial losses for PFSI. Because the accounts’ margin +equity was below the minimum maintenance margin rate, PFSI was required to deduct Hall and +Hemisphere’s margin deficiency from its net capital in accordance with the Commission’s net +capital rule.5 By December 31, 2008, PFSI had deducted $14.2 million, as “other deductions +and/or charges” from its net capital for Hall and Hemisphere’s margin deficiency. + + +3 NASD Rule 2520(e)(2)(B) required a minimum maintenance margin rate of 7% of the +current market value of any positions in exempted securities, including municipal bonds. NASD +Rule 2520(f)(1) also required that “[s]ubstantial additional margin must be required in all cases +where the securities carried in ‘long’ or ‘short’ positions are subject to unusually rapid or violent +changes in value, or do not have an active market on a national securities exchange, or where the +amount carried is such that the position(s) cannot be liquidated promptly.” PFSI’s own policies +required a minimum maintenance margin rate of the greater of 15% of the current market value, +or 7% of face value, for investment grade municipal bonds. + +4 NASD Rule 2520(f)(6) required that “[t]he amount of margin or ‘mark to market’ +required by any provision of this Rule shall be obtained as promptly as possible and in any event +within fifteen days from the date such deficiency occurred, unless [the NASD or FINRA] has +specifically granted the member additional time.” PFSI’s policies also stated that if a margin +account’s equity fell below the 25% maintenance rate, PFSI would “liquidate enough securities +to bring the account back to a 25% maintenance rate.” + +5 See Exchange Act Rule 15c3-1(c)(2). + + +8 +23. By early 2009, PFSI’s senior executives, including Yancey, became aware of +irregularities with PFSI’s margin loans to the Hall/Call Now accounts. Hall and Hemisphere’s +accounts repeatedly appeared on PFSI’s exception and risk management reports that tracked large +margin debts, outstanding margin calls, or negative equity (unsecured loan balances). Many PFSI +senior executives were aware that the Hall/Call Now accounts held mostly unrated municipal +bonds, which were distressed or in default, and PFSI generally did not extend margin loans on such +collateral. The executives also knew that PFSI had taken net capital charges for Hall and +Hemisphere’s margin deficiency. But all of PFSI’s executives, including Yancey, deferred to +Pendergraft on the issues raised by these accounts. Pendergraft instructed PFSI executives, +including Yancey, not to get involved with the Hall/Call Now accounts because he was managing +them personally in consultation with certain members of PWI’s Board. Pendergraft, as PFSI’s co- +founder and EVP, exercised substantial control over certain key PFSI operations, including +computations of PFSI’s net capital and management of the Hall/Call Now accounts. PFSI’s senior +executives generally did not challenge Pendergraft’s authority or actions over those matters. + +24. Of all the PFSI executives, only Yancey attempted to address the risks posed by +PFSI’s margin loans to Hall and Hemisphere. Other PFSI executives looked to Yancey to address +those risks. Although Yancey reported to Pendergraft in Pendergraft’s capacity as CEO of PWI, +Yancey supervised Pendergraft in Pendergraft’s capacity as an EVP and associated person of PFSI. +By early 2009, Yancey became more aware of the Hall/Call Now accounts as Hall and +Hemisphere’s accounts became more distressed. Yancey was aware that the Hall/Call Now loan +balances continued to increase, Hall and Hemisphere’s accounts continued to appear on PFSI’s +negative equity reports, and PFSI deducted from its net capital increasing amounts of those +accounts’ margin deficiencies. Yancey told Pendergraft that PFSI should stop extending loans to +the Hall/Call Now accounts and should liquidate their collateral. Yancey also denied requests for +additional loans to those accounts. But Pendergraft rebuffed Yancey’s efforts. Yancey routinely +sought assurances from Pendergraft that the accounts were being properly managed. Pendergraft +assured Yancey on numerous occasions that the accounts’ collateral had substantial value and +would recover in the future, and that Yancey should not worry about the accounts and instead +focus on growing PFSI’s business. Though Yancey repeatedly voiced his concerns about the loans +to Pendergraft thereafter, Yancey did not take additional measures that reasonably would be +expected to address Pendergraft’s management of the Hall/Call Now accounts. + +25. By early 2009, PFSI’s operations personnel effectively ceased monitoring the +Hall/Call Now accounts because of Pendergraft’s control over them. Pendergraft also instructed +PFSI’s margins department to “abate” or close without any action any margin calls generated by +PFSI’s systems for the Hall/Call Now accounts as he would handle margin issues personally with +Hall and Call Now. + +Penson Makes Another Loan to Hall in 2009 to Support His Account + +26. By March 2009, Hall’s personal account had a negative equity balance of $9 +million. Hall also had unmet margin calls in the amount of $15.8 million. At Pendergraft’s +demand, Hall agreed to pledge to Penson his controlling interest of 1.5 million restricted shares of + + +9 +Call Now as additional collateral, but told Pendergraft that he needed to borrow $3.7 million to pay +off purportedly existing liens on the shares. Pendergraft agreed to have Penson lend Hall the +money to do so. + +27. In exchange for Hall’s pledge of 1.5 million Call Now shares to Penson, +Pendergraft, after discussions with certain PWI directors and officers, arranged for a loan to Hall +from SAI (PWI’s subsidiary that owned PFSI) via promissory notes and stock pledge agreements +effective June 2009 (“SAI loan”). The SAI loan to Hall was payable on demand, like a margin +loan, and charged an interest rate of 7.45%, which PFSI had charged on margin loans. Pendergraft +directed PFSI to wire the loan proceeds from PFSI’s bank accounts to a trust account of Hall’s +lawyer in Florida, per Hall’s wiring instructions. After the PFSI wires were received by the trust +account, Hall delivered the Call Now stock certificates to PFSI. PFSI then deposited the shares +into Hall’s margin account, thereby reversing the account’s negative balance of $9 million to a +positive balance by July 2009. + +28. This SAI loan to Hall was made in contravention of Regulation T, which prohibits +the withdrawal of cash from any margin account that creates or increases a margin deficiency, and +PFSI’s own policies, which prohibited the withdrawal of any cash from a margin account that was +subject to a maintenance margin call.6 The SAI loan was effectively a margin loan as it was a +demand loan that charged PFSI’s margin loan interest rate, funded by PFSI, and collateralized by +Hall’s Call Now shares. Although the value of Hall’s Call Now shares deposited into his PFSI +margin account supposedly restored the account to a positive balance, the shares were non- +marginable, and had no effect on his account’s existing margin deficiency. Because the SAI loan +was effectively a margin loan, however, the loan actually had the effect of increasing Hall’s +account’s margin deficiency by $3.7 million. Most PFSI executives, including Yancey, were not +aware of the SAI loan when it was made. + +29. By June 2009, Penson’s loans to Hall/Call Now reached $89 million as unpaid loan +interest continued to accrue and Call Now withdrew cash from its margin account to fund Retama +Park and its own operating expenses, including portions of Hall and Johnson’s Call Now salaries. +Hall and Hemisphere’s margin accounts continued to be subject to daily margin calls that Hall had +failed to meet since 2008. Though Penson and Hall had hoped that the 2009 session of the Texas +Legislature (which meets every odd-numbered year) would result in enhanced gambling +legislation, bills proposing such legislation failed to reach a floor vote before the session adjourned +in June 2009. + + +6 Regulation T, 12 C.F.R. § 220.4(e)(1)(ii), permits the withdrawal of cash or securities +from an account except if “[t]he withdrawal, together with other transactions, deposits, and +withdrawals on the same day, would create or increase a margin deficiency.” + + +10 +FINRA Instructs PFSI to Take a 100% Haircut to Net Capital for the Retama B Bonds + +30. During the summer of 2009, FINRA’s exam staff conducted a cycle examination of +PFSI, and found that PFSI failed to comply with FINRA’s margin rules because the Retama B +Bonds owned by Hall/Call Now were not marginable securities. The FINRA exam staff reached +this conclusion because the Retama B Bonds were unrated, did not have an active market, and had +deferred on interest payments. After discussions with PFSI’s executives and outside counsel, the +FINRA exam staff instructed PFSI to apply a 100% margin maintenance rate or “haircut” to its net +capital for the value of the bonds, issue margin calls to the account holders, and submit a plan of +liquidation of the collateral. The FINRA exam staff reviewed these conclusions in an exit meeting +with all senior PFSI executives in October 2009. + +31. PFSI eventually agreed to treat the bonds as non-marginable, and applied a 100% +haircut for their value, resulting in an additional $20 million deduction to PFSI’s net capital. This +was on top of the nearly $20 million in net capital charges PFSI was already taking for Hall and +Hemisphere’s margin deficiency. By September 30, 2009, PFSI had deducted approximately $40 +million from its net capital for the Hall/Call Now accounts’ margin deficiency, and reported net +capital of $92 million. Though PFSI did not violate minimum net capital requirements, its margin +loans to the Hall/Call Now accounts had substantially reduced its net capital. + +32. On September 24, 2009, pursuant to FINRA’s instructions, PFSI also sent +maintenance margin call letters to Hemisphere, Global, and Call Now. The letters stated that, +based on FINRA’s determination that the Retama B Bonds in their accounts were not marginable, +Hemisphere, Global, and Call Now needed to deposit in their accounts additional margin in the +amounts of $8.25 million, $2.7 million, and $5.3 million, respectively, by September 30, 2009. +Hemisphere, Global, and Call Now failed to deposit any margin in response to these margin calls. + +Penson “Restructures” Hall and Call Now’s Debts to Support Their Accounts + +33. By yearend 2009, Penson’s loans to the Hall/Call Now accounts totaled $91 million +and became severely distressed due to further declines in collateral value and unpaid interest. Hall +and Hemisphere’s accounts had become unsecured by more than $26 million. Margin calls on all +four of the Hall/Call Now accounts remained unpaid for months as the customers lacked “the +wherewithal” to pay. PFSI’s net capital charges for those unpaid margin calls had soared to $56 +million, compared with PFSI’s reported net capital of $95 million at yearend 2009. Penson did not +liquidate or foreclose on the accounts’ illiquid collateral because liquidation would result in +significant losses to Penson, and foreclosure would result in the impractical outcome of Penson +controlling Call Now and Retama Park’s operations. Penson concluded that the only viable option +was to restructure Hall/Call Now’s debts to obtain as much collateral as possible. + +34. In February 2010, Pendergraft, after months of negotiations with Hall and Johnson +(on behalf of Call Now), devised a complex transaction (“restructuring transaction”) involving +Penson, Hall, and Call Now. The purpose of the transaction was to obtain as much collateral as +possible to reduce the unsecured portion of Hall’s margin loan, which was $15.7 million at yearend + + +11 +2009. Because Call Now’s collateral (which included PWI stock) was relatively more liquid than +Hall’s, Penson demanded that Call Now transfer approximately $10 million in additional equity in +cash and other assets to Hall by buying Hall’s illiquid collateral, including certain unrated +municipal bonds and an additional 721,463 Call Now shares. + +35. Because Call Now did not have enough cash or liquid assets to finance this +transaction, Penson again authorized the use of PFSI’s capital, like the SAI loan, to make an +improper loan to Call Now. PWI “converted” Call Now’s $13.9 million outstanding margin loan +at PFSI into a two-year promissory note in favor of PWI, effectively transferring the debt from Call +Now’s margin account and PFSI’s books to PWI. This promissory note, which was collateralized +in part by all of the securities in Call Now’s margin account, ostensibly reset Call Now’s margin +debt to zero and allowed it to borrow on margin again from its PFSI margin account. Then, against +part of the same collateral securing Call Now’s promissory note, Pendergraft directed PFSI to +extend another $5.5 million in margin loans to Call Now so that it could use those proceeds to buy +Hall’s illiquid collateral. While this transaction increased the equity in Hall’s account by +approximately $10 million, Call Now’s overall indebtedness to Penson also increased from $13.9 +million to $19.4 million as a result of this transaction. + +36. Indirectly related to this transaction, Pendergraft directed PFSI to extend another +$500,000 margin loan to Call Now and another $1 million margin loan to Hall in February and +April 2010, respectively, when Call Now and Hall’s accounts were subject to unmet margin calls. +Call Now used the $500,000 to fund its investment and operating expenses for 2010, including +portions of Hall’s and Johnson’s $200,000 annual Call Now salaries. Hall loaned the $1 million to +the RDC for its and Retama Park’s operating expenses. + +37. These extensions of credit, like the SAI loan, were in contravention of Regulation T +and PFSI’s policies. + +FINRA Finds That PFSI Lacked Sufficient Internal Controls on the Hall/Call Now Loans + +38. In the summer of 2010, the FINRA exam staff conducted a cycle examination of +PFSI. The FINRA exam staff concluded that PFSI did not have sufficient controls over its +extension of credit to the Hall/Call Now accounts because the loans continued to be collateralized +by unrated municipal bonds lacking an active market. The FINRA exam staff instructed PFSI to +take a further $15.4 million deduction to its net capital for additional concentrated positions of +unrated municipal bonds collateralizing the loans. The FINRA exam staff also concluded that +Pendergraft’s control over the Hall/Call Now accounts resulted in PFSI’s failure to consider or +identify risk factors such as the marketability and concentration of the collateral, liquidity risk, and +the customers’ creditworthiness. By not adequately considering these risk factors, the FINRA +exam staff concluded, PFSI failed to supervise these credit extensions and materially impaired its +net capital. The FINRA exam staff reviewed these conclusions at an exit meeting with all senior +PFSI executives in October 2010. + + + +12 +39. By yearend 2010, Yancey knew or had reason to know that Pendergraft approved +loans to Hall/Call Now in 2009 and 2010 that contravened Regulation T and PFSI’s own policies +and internal controls. Yancey knew that Pendergraft directed PFSI’s associated persons not to +record losses on the Hall/Call Now loans in PFSI’s books and records and financial statements +because Pendergraft had assured Yancey that he and other PWI executives had determined that the +loans were collectable, following discussions with PWI’s Board and auditor. But Yancey told +Pendergraft that he doubted whether the Hall/Call Now loans were fully collectable because the +loan balances continued to grow from 2009 to 2010, and because PFSI continued to take large +deductions to its net capital for the Hall/Call Now loans since September 2009. Although Yancey +continued to voice concerns to Pendergraft about extending additional credit to Hall/Call Now and +advocated to liquidate their collateral to minimize losses for PFSI, Yancey failed to take additional +measures that reasonably would be expected to prevent and detect Pendergraft’s actions resulting +in PFSI extending credit in contravention of Regulation T, and resulting in PFSI’s failure to +accurately record losses in its ledgers and to file its financial statements in conformity with GAAP. + +Penson’s Improper Accounting of the Hall/Call Now Loans in its 2009 Yearend Filings + +40. PWI and PFSI were required under GAAP to evaluate whether the Hall/Call Now +loans were impaired. Impairment is required to be recognized when information available before +the financial statements are issued indicate that it is “probable” that the creditor will be unable to +collect all amounts due, including principal and interest, in accordance with the loan’s contractual +terms.7 PWI and PFSI were also required, under GAAP, to measure and recognize in their +financial statements the amount of impairment losses associated with such loans, and to disclose +the amount of the impaired loans and loans that were more than ninety days past due and still +accruing.8 These financial statements were included in PWI’s Forms 10-K and 10-Q, and PFSI’s +annual audited reports filed with the Commission. + +41. PWI and PFSI’s accounting policies claimed that they “did not lend money to +customers or correspondents except on a fully collateralized basis.” Those policies also required +PWI and PFSI to record a bad debt expense and an allowance for doubtful accounts if a margin +customer’s collateral value, guarantees, or other rights granted were insufficient to cover any +potential losses. + +42. At yearend 2009, Hall/Call Now collectively owed Penson $91 million, and were +subject to margin calls for $56 million. Hall, Hemisphere, Global, and Call Now were required +under their PFSI customer margin account agreements promptly to pay any indebtedness or +deficiency upon demand from PFSI. Each of these four customers failed to meet PFSI’s demands +for payment by September 30, 2009. + +7 Financial Accounting Standards Board Accounting Standards Codification (“ASC”) +Topic 310-10-35-16. + +8 ASC 310-10-35-22 & 310-10-50-7. + + +13 + +43. Nonetheless, PWI and PFSI, at Pendergraft and McAleer’s direction, concluded +that the Hall/Call Now loans were fully collectable and not impaired because they expected, +without adequate basis, that (a) the real estate market would recover in 2010, or (b) the Texas +Legislature likely would pass enhanced gambling legislation in 2011, either of which would cause +the Hall/Call Now accounts’ collateral value to improve and, at some point in the future, allow the +customers to pay back their loans. For the same reasons, PWI and PFSI concluded that loss +recognition and the establishment of an allowance for doubtful accounts for the Hall/Call Now +loans was not necessary. PWI’s Audit Committee and auditor concurred with these conclusions. + +44. But these conclusions did not comply with GAAP. Because the Hall/Call Now +accounts failed to meet their outstanding margin calls upon demand, it was at least probable at +yearend 2009 that PWI and PFSI would be unable to collect all amounts due in accordance with +the contractual terms of the margin loans. Neither the possible recovery of the real estate market, +the possible enactment of gambling legislation, nor the additional collateral pledged in the +restructuring transaction affected PWI and PFSI’s inability to collect all amounts when due from +the customers at yearend 2009. Further, PWI and PFSI failed to record a bad debt expense for the +Hall/Call Now loans, or even to disclose that the loans were past due for more than ninety days and +still accruing. + +45. As a result, PWI and PFSI failed to properly identify the loans to Hall/Call Now as +impaired, and to measure and recognize the amount of impairment in conformity with GAAP. Had +PWI and PFSI properly identified the loans as impaired and measured the amount of impairment +according to their own internal policies, they would have recorded a loss in the amount of +approximately $19 million for the period ended December 31, 2009. Such a loss would have been +material to PWI and PFSI’s net income of $16 million and $35.3 million, respectively, for the same +period. By failing to recognize this impairment charge, PWI and PFSI’s financial statements, +included in PWI’s 2009 Form 10-K and PFSI’s 2009 annual audited report, were not presented in +conformity with GAAP, and were materially misstated and inaccurate for the period ended +December 31, 2009. Because PWI’s 2009 Form 10-K was incorporated by reference in the +offering memorandum for PWI’s April 2010 unregistered offering of $200 million in Senior +Second Lien Secured Notes Due 2017 (“2010 Offering Memorandum”), PWI’s 2010 Offering +Memorandum also was materially misstated. + +Penson’s Misleading Related Party Disclosures in Yearend 2009 Filings + +46. Under Item 404(a) of Regulation S-K, PWI was required to disclose any transaction +in which PWI was a participant and the amount involved exceeded $120,000, and in which any +related person of PWI had a direct or indirect material interest. Item 404(a) also required PWI to +disclose any other information regarding the transaction or the related person in the context of the +transaction that is material to investors in light of the circumstances of the particular transaction. +Similarly, GAAP required PWI and PFSI to disclose material related party transactions, including +the nature of the relationship involved, a description of the transactions, and such other information + + +14 +deemed necessary to an understanding of the effects of the transactions on their financial +statements.9 + +47. PWI’s 2009 Form 10-K included the following disclosure in a note to the financial +statements about the February 2010 Hall/Call Now restructuring transaction: + +Over the past several years, the Company has, through PFSI, its U.S. securities clearing +broker-dealer subsidiary, extended margin credit to Call Now, among other of the +Company’s related parties. Such credit has been extended in the ordinary course of +business, on substantially the same terms, including interest rates and collateral, as those +prevailing at the time for comparable transactions with unaffiliated third parties and had not +involved more than normal risk of collectability or presented other unfavorable features. + +The Company’s management recently determined that certain municipal bonds +underlying Call Now’s margin position had suffered reduced liquidity, and began working +with Call Now to restructure the margin loan. As part of the restructuring, on February 25, +2010, Call Now converted $[13,922,000] of its outstanding margin loan into a Promissory +Note in favor of the Company accumulating interest at a rate of 10% per year. The +Company’s management currently believes that all amounts due under the Promissory Note +will be collected pursuant to the terms of the Promissory Note. . . . Mr. Thomas Johnson +has no interest in the Call Now margin account or the Promissory Note, except to the extent +of his approximately 3.2% ownership interest in Call Now. Mr. Johnson abstained from +voting on all matters on behalf of the Company. + +48. This disclosure did not comply with GAAP and was materially misleading in +numerous ways. First, it failed to disclose that the true purpose of the transaction was to obtain as +much collateral as possible for Hall’s unsecured debt. Second, it failed to disclose that Call Now +had failed to pay margin calls issued by PFSI because it determined, at FINRA’s instruction, that +the Retama B Bonds held by Call Now were not marginable collateral. Third, the loans to Call +Now were not made in the ordinary course—Call Now received favorable treatment from Penson +because it was a related party. Fourth, it omitted the fact that Penson premised collectability of the +loan on speculation as to the recovery of the real estate market and gambling legislation. Finally, it +omitted the fact that Johnson, on behalf of Call Now, had obtained loans from PFSI to Call Now to +fund its operating expenses, including portions of his and Hall’s annual $200,000 salaries. + +49. These materially misleading disclosures were also substantially included in PFSI’s +2009 annual audited report, and PWI’s 2010 definitive Proxy Statement on Schedule 14A, which +was used to solicit votes to reelect Pendergraft and Johnson as PWI Directors through 2013. The +disclosures also were incorporated by reference in PWI’s April 2010 Offering Memorandum. As a +result, PFSI’s 2009 annual audited report, and PWI’s 2010 Schedule 14A and April 2010 Offering +Memorandum also contained materially misleading disclosures and were inaccurate. + +9 ASC 850-10-50. + + +15 + + Penson’s Accounting and Disclosure Errors in 2010 + +50. In PWI’s quarterly reports on Forms 10-Q for the periods ended from March 31, +2010 to September 30, 2010, PWI continued to fail to identify the Hall/Call Now loans as impaired +and to measure and recognize impairment losses on those loans. PWI also continued to fail to +disclose the amount of loans over ninety days past due and still accruing. As a result, PWI’s +quarterly financial statements for these periods were not presented in conformity with GAAP and +were materially misstated. + +51. By yearend 2010, Penson’s loans to Hall/Call Now had reached $95 million, and +the customers continued to fail to meet outstanding margin calls. The real estate market did not +recover in 2010 to improve the collateral value underlying the loans. The possibility of gambling +legislation in 2011 was Penson’s main hope for collecting on the loans. + +52. Penson placed Hall and Hemisphere’s loans on nonaccrual status and ceased to +accrue interest on them beginning in March 2010. Effective January 1, 2011, Penson placed all of +the Hall/Call Now loans on nonaccrual status and ceased to accrue interest on them, indicating that +Penson no longer believed that it would collect all amounts due under the terms of the loan +agreements with these customers. + +53. In its 2010 Form 10-K, PWI disclosed that it had $97.4 million in loans or +receivables “primarily from customers and correspondents” for which interest income was +recorded when received. PWI did not disclose that the vast majority of these receivables were the +$95 million in loans to Hall/Call Now, who were direct customers of PFSI not introduced through +a correspondent broker-dealer. Even though Penson ceased to accrue interest on the Hall/Call Now +loans, Penson continued to treat the loans as fully collectable. PFSI’s 2010 annual audited report +did not make any disclosures about these loans being placed on nonaccrual status. + +54. As a result, PWI and PFSI failed to properly identify the loans to Hall/Call Now as +impaired, and to measure and recognize the amount of impairment of the loans as required by +GAAP. Had PWI and PFSI properly identified the loans as being impaired and measured the +amount of impairment according to their own internal policies, they would have recorded +cumulative losses of at least $18 million for the period ended December 31, 2010. This amount +would have been material to both PWI’s reported net loss of $19.8 million and PFSI’s reported net +income of $23.6 million for the same period. By failing properly to account for and adequately to +disclose the nature of the Hall/Call Now loans, PWI and PFSI’s financial statements, included in +PWI’s 2010 Form 10-K and PFSI’s 2010 annual audited report, were not presented in conformity +with GAAP and were materially misstated and inaccurate for the period ended December 31, 2010. + +55. PWI’s 2010 Form 10-K, PWI’s 2011 definitive Proxy Statement on Schedule 14A, +and PFSI’s 2010 annual audited report contained essentially the same related party disclosure +about the Call Now loan as in their respective 2009 Form 10-K, 2010 Schedule 14A, and 2009 +annual audited report. For the reasons described above in connection with the disclosures in PWI’s + + +16 +2009 Form 10-K, PWI’s 2010 Form 10-K and Schedule 14A, and PFSI’s 2010 annual audited +report were materially misleading and inaccurate. + + PWI’s Accounting Errors in its 2011 Quarterly Reports + +56. In its Form 10-Q for the period ended March 31, 2011, PWI again failed to identify +and measure any impairment on the loans to Hall/Call Now as required by GAAP. Had PWI done +so, it would have recorded cumulative losses totaling at least $20 million for the period. + +57. But PWI did, in its Form 10-Q, disclose that it had approximately $97 million in +“Nonaccrual Receivables” —almost entirely the Hall/Call Now loans—of which approximately +$43 million were collateralized by RDC bonds and related assets. The Form 10-Q further +disclosed that, should expanded gambling legislation not be enacted in 2011, it is possible that the +collateral underlying the receivables might be impaired, resulting in a write down of a portion of +the receivables that could be material in amount. The Form 10-Q, however, failed to disclose the +nature of the remaining $54 million in Nonaccrual Receivables and whether they were adequately +collateralized. Nevertheless, three days after this Form 10-Q was filed, PWI’s stock price had +dropped by approximately 40%, and Johnson resigned as a Director of PWI. + +58. Three months later, in its Form 10-Q for the period ended June 30, 2011, PWI +finally disclosed that the carrying value of the Nonaccrual Receivables collateralized by the RDC +bonds and related assets were not fully collectable and recorded an impairment charge of $43 +million—PWI’s biggest losses ever. However, PWI should have recognized in prior periods at +least $20 million of impairment losses on the Hall/Call Now loans. PWI disclosed that one factor +underlying the decision to record an impairment charge was the Texas Legislature’s adjournment +in June 2011 without passing enhanced gambling legislation. PWI also began to foreclose on +certain collateral underlying the Hall/Call Now accounts. PWI ultimately recorded approximately +$60 million in losses on these loans by the first quarter of 2012. + +59. Pendergraft, McAleer, and Johnson each signed PWI’s annual reports on Forms 10- +K for the periods ended December 31, 2009, and December 31, 2010. Pendergraft and McAleer +also signed PWI’s quarterly reports on Forms 10-Q for the periods ended from March 31, 2010 to +June 30, 2011, and certified each periodic report identified above. + + Penson’s Demise + +60. In PWI’s August 5, 2011 earnings conference call, Pendergraft admitted that the +company had made mistakes in extending credit to Hall/Call Now: “Our mistake—really a couple +of mistakes here—one was not bringing these accounts into line with our new policies and +procedures [on credit extension]. And second—was not just going out and liquidating the accounts +when we [began] to see illiquidity in the underlying assets.” + +61. PWI’s disclosures and impairment of the loans to Hall/Call Now in 2011 +contributed to a series of events that ultimately led to Penson’s demise in 2013. In 2011, PWI’s + + +17 +clearing businesses were already experiencing lower trading commissions and interest revenues +due to the weak global economy and market volatility. The losses on the loans to Hall/Call Now in +2011 seriously undermined confidence in PWI’s ability to operate as a going concern. PWI’s +creditors restricted credit lines that were vital to its operations, correspondents and customers +ceased doing business with PFSI, and investors sold millions of PWI shares at depressed prices. +These events caused a liquidity crisis that prohibited PWI from servicing or restructuring more +than $260 million in outstanding debts. As a result, PWI was forced to sell its clearing broker- +dealer subsidiaries, including PFSI’s clearing business, and file for bankruptcy protection in 2013. + +E. Violations + +62. Securities Act Section 17(a)(2) prohibits any person from obtaining money or +property in the offer or sale of securities by means of any untrue statement of a material fact or any +omission to state a material fact necessary in order to make the statements made, in light of the +circumstances under which they were made, not misleading. Securities Act Section 17(a)(3) +prohibits any person from engaging in any transaction, practice, or course of business which +operates or would operate as a fraud or deceit upon the purchaser in the offer or sale of securities. + +63. Exchange Act Section 7(c) prohibits a broker or dealer, directly or indirectly, from +extending or maintaining credit or arranging for the extension or maintenance of credit to or for +any customer in violation of rules and regulations prescribed by the Federal Reserve Board. +Regulation T, prescribed under Section 7(c), prohibits, among other things, the withdrawal of cash +or securities from a margin account that creates or increases a margin deficiency. 12 C.F.R. § +220.4(e)(1)(ii). + +64. Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 require every issuer of a +security registered pursuant to Exchange Act Section 12 to file with the Commission annual and +quarterly reports as the Commission may require. Rule 13a-14 mandates, among other things, that +an issuer’s principal executive and financial officers certify each periodic report. Rule 12b-20 +requires that the issuer’s filings contain such further material information as may be necessary to +make the required statements, in the light of the circumstances under which they were made, not +misleading. + +65. Exchange Act Section 13(b)(2)(A) requires issuers to make and keep books, +records, and accounts which, in reasonable detail, accurately and fairly reflect their transactions +and dispositions of their assets. Section 13(b)(2)(B) requires issuers to devise and maintain a +system of internal accounting controls sufficient to provide reasonable assurances that, among +other things, transactions are recorded to permit the preparation of financial statements in +conformity with GAAP. Section 13(b)(5) prohibits any person from knowingly circumventing or +knowingly failing to implement a system of internal accounting controls, and from knowingly +falsifying any book, record, or account under Section 13(b)(2). Rule 13b2-1 prohibits any person +from directly or indirectly falsifying or causing to be falsified any book, record or account subject +to Section 13(b)(2)(A). + + + +18 +66. Exchange Act Section 14(a) requires issuers that solicit any proxy or consent or +authorization in connection with any security registered pursuant to Section 12 of the Exchange +Act (other than an exempted security) to comply with such rules as the Commission may +promulgate. Rule 14a-9 prohibits the use of proxy statements containing materially false or +misleading statements or materially misleading omissions. + +67. Exchange Act Section 15(b)(4)(E) requires a broker or dealer reasonably to +supervise, with a view to preventing violations of the federal securities laws, another person who +commits such violation, if such other person is subject to its supervision. Exchange Act 15(b)(6) +incorporates by reference Section 15(b)(4)(E) and allows for the imposition of sanctions against +persons associated with a broker or dealer for failing reasonably to supervise. + +68. Exchange Act Section 17(a) requires each broker-dealer to make and keep records +and make and disseminate such reports as the Commission may prescribe. Rule 17a-3(a)(2) +requires broker-dealers to maintain ledgers reflecting assets and liabilities, income and expense and +capital accounts. Exchange Act Section 17(e) and Rule 17a-5 require broker-dealers to file with +the Commission annual audited reports containing, among other things, financial statements +prepared in conformity with GAAP. The records and reports required by these rules must be +accurate. + +69. Exchange Act Section 4C(a)(3) and Rule 102(e)(1)(iii) of the Commission’s Rules +of Practice provide, in pertinent part, that “[t]he Commission may censure a person or deny, +temporarily or permanently, the privilege of appearing or practicing before it in any way to any +person who is found . . . [t]o have willfully violated . . . any provision of the Federal securities laws +or the rules and regulations thereunder.” 17 C.F.R. § 201.102(e)(1)(iii). + +70. As a result of the conduct described above, Pendergraft willfully10 violated +Securities Act Sections 17(a)(2) and 17(a)(3), Exchange Act Section 13(b)(5), and Exchange Act +Rules 13a-14 and 13b2-1. Pendergraft also willfully aided and abetted and caused PWI’s +violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a), and Rules 12b-20, +13a-1,13a-13, and 14a-9. Pendergraft also willfully aided and abetted and caused PFSI’s violations +of Exchange Act Sections 7(c), 17(a), and 17(e), Exchange Act Rules 17a-3(a)(2) and 17a-5, and +Regulation T. + + +10 A willful violation of the securities laws means merely “‘that the person charged with the +duty knows what he is doing.’” Wonsover v. S.E.C., 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting +Hughes v. S.E.C., 174 F.2d 969, 977 (D.C. Cir. 1949)). There is no requirement that the actor +“‘also be aware that he is violating one of the Rules or Acts.” Id. (quoting Gearhart & Otis, Inc. +v. S.E.C., 348 F.2d 798, 803 (D.C. Cir. 1965)). + + + +19 +71. As a result of the conduct described above, McAleer willfully11 violated Exchange +Act Section 13(b)(5), and Rules 13a-14 and 13b2-1 within the meaning of Section 4C(a)(3) and +Rule 102(e)(1)(iii). McAleer also caused PWI’s violations of Exchange Act Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B), and Rules 12b-20, 13a-1, and 13a-13. + +72. As a result of the conduct described above, Johnson caused PWI’s violations of +Exchange Act Sections 13(a), 13(b)(2)(A), and 14(a), and Rules 12b-20, 13a-1, and 14a-9. + +73. As a result of the conduct described above, Yancey failed reasonably to supervise +Pendergraft, an associated person of PFSI, within the meaning of Exchange Act Section 15(b)(6), +incorporating by reference Section 15(b)(4)(E), with a view to preventing and detecting +Pendergraft’s aiding and abetting and causing PFSI’s violations of Exchange Act Sections 7(c), +17(a), and 17(e), Exchange Act Rules 17a-3(a)(2) and 17a-5, and Regulation T. + +F. Undertakings + +74. Respondents Pendergraft, McAleer, Johnson, and Yancey have undertaken to +cooperate fully with the Commission in any and all investigations, litigation, administrative or other +proceedings commenced by the Commission or to which the Commission is a party relating to or +arising from the matters described in the Order. In connection with such investigations, litigation, +administrative or other proceedings, Respondents agree to the following: (i) to produce, without +service of a notice or subpoena, any and all documents and other materials and information as +reasonably requested by the Commission; (ii) to appear and testify without service of a notice or +subpoena in such investigations, interviews, depositions, hearings and trials, at such times and +places as reasonably requested by the Commission; and (iii) to respond promptly to all inquiries +from the Commission. Respondent Yancey also has undertaken to provide to the Commission, +within fifteen (15) days after the end of the six-month suspension period described below, an +affidavit that he has complied fully with the sanctions applicable to him described in Section IV +below. + +IV. + + In view of the foregoing, the Commission deems it appropriate, in the public interest to +impose the sanctions agreed to in Respondents’ Offers. + + Accordingly, pursuant to Section 8A of the Securities Act, Sections 4C, 15(b), and 21C of +the Exchange Act, Section 9(b) of the Investment Company Act and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice, it is hereby ORDERED that: + + +11 See id. + + +20 +A. Philip A. Pendergraft + +1. Respondent Pendergraft shall cease and desist from committing or causing any +violations and any future violations of Securities Act Sections 17(a)(2) and 17(a)(3), and Exchange +Act Sections 7(c), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 14(a), 17(a), and 17(e), Exchange Act +Rules 12b-20, 13a-1, 13a-13, 13a-14, 13b2-1, 14a-9, 17a-3(a)(2), and 17a-5, and Regulation T. + +2. Pendergraft be, and hereby is: + +a. barred from association with any broker, dealer, investment adviser, +municipal securities dealer, municipal advisor, transfer agent, or nationally recognized +statistical rating organization; + +b. prohibited from serving or acting as an employee, officer, director, member +of an advisory board, investment adviser or depositor of, or principal underwriter for, a +registered investment company or affiliated person of such investment adviser, depositor, or +principal underwriter; and + +c. barred from participating in any offering of a penny stock, including: acting +as a promoter, finder, consultant, agent or other person who engages in activities with a +broker, dealer or issuer for purposes of the issuance or trading in any penny stock, or +inducing or attempting to induce the purchase or sale of any penny stock. + +3. Any reapplication for association by Pendergraft will be subject to the applicable +laws and regulations governing the reentry process, and reentry may be conditioned upon a number +of factors, including, but not limited to, the satisfaction of any or all of the following: (a) any +disgorgement ordered against Pendergraft, whether or not the Commission has fully or partially +waived payment of such disgorgement; (b) any arbitration award related to the conduct that served +as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a +customer, whether or not related to the conduct that served as the basis for the Commission order; +and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct +that served as the basis for the Commission order. + +4. Pendergraft shall pay a civil money penalty in the amount of $100,000 to the +Commission. Payment shall be made in $20,000 installments within 15, 90, 180, 270, and 360 +days of the date of entry of this Order. If any payment is not made by the date the payment is +required by this Order, the entire outstanding balance of civil penalties, plus any additional interest +accrued pursuant to 31 U.S.C. 3717, shall be due and payable immediately, without further +application. Payments must be made as set forth in paragraph E below. + +5. Pendergraft shall comply with the undertaking in Section III, paragraph 74, above. + + + +21 +B. Kevin W. McAleer + +1. Respondent McAleer shall cease and desist from committing or causing any +violations and any future violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and +13(b)(5), and Exchange Act Rules 12b-20, 13a-1, 13a-13, 13a-14, and 13b2-1. + +2. McAleer is denied the privilege of appearing or practicing before the Commission +as an accountant. + +3. After one year from the date of this Order, McAleer may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the Chief +Accountant) to resume appearing or practicing before the Commission as: + +a. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission. Such an +application must satisfy the Commission that McAleer’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public +company for which he works or in some other acceptable manner, as long as he practices +before the Commission in this capacity; and/or + +b. an independent accountant. Such an application must satisfy the +Commission that: + +1) McAleer, or the public accounting firm with which he is associated, +is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to +be effective; + +2) McAleer, or the registered public accounting firm with which he is +associated, has been inspected by the Board and that inspection did not identify any +criticisms of or potential defects in the respondent’s or the firm’s quality control +system that would indicate that the respondent will not receive appropriate +supervision; + +3) McAleer has resolved all disciplinary issues with the Board, and has +complied with all terms and conditions of any sanctions imposed by the Board +(other than reinstatement by the Commission); and + +4) McAleer 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. + + + +22 +4. The Commission will consider an application by McAleer 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 McAleer’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission. + +5. McAleer shall pay a civil money penalty in the amount of $25,000 to the +Commission. Payments shall be made in $5,000 installments within 15, 90, 180, 270, and 360 +days of the date of entry of this Order. If any payment is not made by the date the payment is +required by this Order, the entire outstanding balance of civil penalties, plus any additional interest +accrued pursuant to 31 U.S.C. 3717, shall be due and payable immediately, without further +application. Payments must be made as set forth in paragraph E below. + +6. McAleer shall comply with the undertaking in Section III, paragraph 74, above. + +C. Thomas R. Johnson + +1. Respondent Johnson shall cease and desist from committing or causing any +violations and any future violations of Exchange Act Section 13(a), 13(b)(2)(A), 14(a), and +Exchange Act Rules 12b-20, 13a-1, and 14a-9. + +2. Johnson shall pay a civil money penalty in the amount of $25,000 to the +Commission. Payment shall be made in $5,000 installments within 15, 90, 180, 270, and 360 days +of the date of entry of this Order. If any payment is not made by the date the payment is required +by this Order, the entire outstanding balance of civil penalties, plus any additional interest accrued +pursuant to 31 U.S.C. 3717, shall be due and payable immediately, without further application. +Payments must be made as set forth in paragraph E below. + +3. Johnson shall comply with the undertaking in Section III, paragraph 74, above. + +D. Charles W. Yancey + +1. Respondent Yancey be, and hereby is, suspended from association in a supervisory +capacity with any broker, dealer, investment adviser, municipal securities dealer, municipal +advisor, transfer agent, or nationally recognized statistical rating organization for a period of six (6) +months, effective on the date of entry of this Order. + +2. Yancey, shall, within fifteen (15) days of the entry of this Order, pay a civil money +penalty in the amount of $25,000 to the Commission. If timely payment is not made, additional +interest shall accrue pursuant to 31 U.S.C. § 3717. Payment must be made as set forth in paragraph +E below. + + + +23 +3. Yancey shall comply with the undertakings in Section III, paragraph 74, above. + +E. Respondents may make payments in the following ways: + +1. By transmitting payment electronically to the Commission, which will provide +detailed ACH transfer/Fedwire instructions upon request; + +2. By making direct payment from a bank account via Pay.gov through the SEC +website at http://www.sec.gov/about/offices/ofm.htm; or + +3. 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 + +4. Payments by check or money order must be accompanied by a cover letter +identifying each payor 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 Gerald W. +Hodgkins, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + +F. The Commission will hold funds paid pursuant to this Section in an account at the United +States Treasury pending a decision whether the Commission, in its discretion, will seek to +distribute funds or, subject to Exchange Act Section 21F(g)(3), transfer them to the general fund of +the United States Treasury. The Commission may distribute civil money penalties collected in this +proceeding if, in its discretion, the Commission orders the establishment of a Fair Fund pursuant to +15 U.S.C. § 7246, Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended. Regardless of +whether the Commission in its discretion orders the creation of a Fair Fund for the penalties +ordered in this proceeding, amounts ordered to be paid as civil money penalties pursuant to this +Order shall be treated as penalties paid to the government for all purposes, including all tax +purposes. To preserve the deterrent effect of the civil penalty, Respondents agree that in any +Related Investor Action, they shall not argue that they are entitled to, nor shall they benefit by, +offset or reduction of any award of compensatory damages by the amount of any part of +Respondents’ payment of a civil penalty in this action (“Penalty Offset”). If the court in any +Related Investor Action grants such a Penalty Offset, Respondents agree that they shall, within 30 +days after entry of a final order granting the Penalty Offset, notify the Commission’s counsel in +this action and pay the amount of the Penalty Offset to the 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 + + +24 +behalf of one or more investors based on substantially the same facts as alleged in the Order +instituted by the Commission in this proceeding. + + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondents under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondents of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3702.txt b/raw/aaer/2015/AAER-3702.txt new file mode 100644 index 0000000000000000000000000000000000000000..4b0fa08db5caf6b2f72ba168062ccec6f7f8c0a7 --- /dev/null +++ b/raw/aaer/2015/AAER-3702.txt @@ -0,0 +1,1109 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9920 / September 18, 2015 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 75950 / September 18, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3702 / September 18, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16821 + + +In the Matter of + +CHRISTOPHER D. WHETMAN, CPA, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE AND +DESIST PROCEEDINGS PURSUANT +TO SECTION 8A OF THE SECURITIES +ACT OF 1933 AND SECTIONS 4C AND +21C OF THE SECURITIES EXCHANGE +ACT OF 1934, AND RULE 102(e) OF +THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS +AND A CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted pursuant to Section 8A of the Securities Act, Sections 4C, and 21C of the Securities +Exchange Act, and Rule 102(e) of the Commission’s Rules of Practice against Christopher D. +Whetman (“Whetman” or “Respondent”). + +II. + + Respondent has submitted an Offer of Settlement (the “Offer”), which the Commission has +determined to accept. Solely for the purpose of these proceedings and any other proceedings +brought by or on behalf of the Commission, or to which the Commission is a party, and without +admitting or denying the findings herein, except as to the Commission’s jurisdiction over him and +the subject matter of these proceedings, which are admitted, Respondent consents to the entry of +this Order, as set forth below. + +2 + + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +SUMMARY +1. On or about July 17, 2012, Whetman consented to the inclusion of an audit report +reflecting an audit he conducted of La Paz Mining Corp.’s (“La Paz”) financial statements in a +Form S-1 registration statement filed with the Commission. This audit report falsely stated that +“[w]e conducted our audit in accordance with the standards of the Public Company Accounting +Oversight Board (United States)” and that the financial statements present La Paz’s financial +position “in conformity with U.S. generally accepted accounting principles.” Additionally, in or +about November 2012, while auditing La Paz’s interim financial statements, Whetman failed to +appropriately respond to an employee’s concerns that La Paz was part of a fraudulent scheme. As +described below, the audit Whetman conducted was so deficient that it amounted to no audit at all, +and Whetman ignored red flags that La Paz was part of a fraud. +2. Whetman also engaged in improper professional conduct by failing to comply with +Public Company Accounting Oversight Board (“PCAOB”) Standards when leading certain of his +firm’s audits of Idle Media, Inc.’s (“Idle Media”) 2010 and 2011 fiscal year-end consolidated +financial statements, which Idle Media restated multiple times. +3. On January 15, 2015, the Commission instituted public administrative and cease- +and-desist proceedings captioned In the Matter of John Briner, Esq., et al., Admin. Proc. File No. +3-16339 against Whetman (the “Briner Action”), among others, in connection with Whetman’s +audit of La Paz’s financial statements, described above. The Commission dismissed Whetman +from that proceeding in connection with instituting the instant proceeding that makes findings of +fact concerning Whetman’s audits of both La Paz and Idle Media and imposes remedial sanctions. +RESPONDENTS +4. Whetman, 47, of Las Vegas, Nevada, is a CPA licensed in the state of Nevada and +a partner at De Joya Griffith, LLC (“De Joya”). Whetman served as the engagement partner for an +audit of La Paz Mining Corp. (“La Paz”). Whetman also served as the audit manager for De +Joya’s original audit of Idle Media’s 2010 fiscal year-end financial statements and for De Joya’s +quarterly review of Idle Media’s financial statements for the quarter ended December 31, 2010. +After March 2012, when Whetman became partner at De Joya, Whetman served as De Joya’s +engagement partner on all later engagements to perform audits and quarterly reviews of Idle +Media’s financial statements, including all engagements to audit or review Idle Media’s restated +financial statements. + + 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 + +RELEVANT ENTITIES AND INDIVIDUALS +5. John Briner (“Briner”), 35, is an attorney and a Canadian citizen who resides in +Vancouver, British Columbia. Briner’s law firm was MetroWest Law Corporation (“MetroWest”). +Briner also controlled Jervis Explorations Inc. (“Jervis”), a British Columbia corporation. In 2010, +to resolve a Commission action against him alleging a pump-and-dump and market manipulation +scheme, Briner consented to the entry of a federal court judgment that enjoined him from violating +the antifraud and securities registration provisions of the federal securities laws; barred him for five +years from participating in penny stock offerings; and ordered him to disgorge ill-gotten gains of +$52,488.32 plus prejudgment interest and pay a civil penalty of $25,000. SEC v. Golden Apple Oil +and Gas, Inc., et al., 09-Civ-7580 (S.D.N.Y.) (HB). The Commission subsequently suspended +Briner from appearing or practicing before it as an attorney, with a right to apply for reinstatement +after five years. John Briner, Exchange Act Release No. 63371, 2010 WL 4783445 (Nov. 24, +2010). +6. Diane Dalmy (“Dalmy”), 58, is an attorney who resides in Denver, Colorado and is +admitted to practice law in Colorado. Dalmy issued opinion letters for eighteen issuers referred to +her by Briner. +7. Jervis is a British Columbia corporation whose sole director is John Briner. Jervis +purportedly sold certain British Columbia mineral claims to twenty issuers, including La Paz. +8. De Joya Griffith is a registered public accounting firm based in Henderson, +Nevada. De Joya issued audit reports for nine issuers referred to it by Briner. For all relevant +times, Whetman was a partner of De Joya. De Joya has also been Idle Media’s auditor from +December 2010 to the present. De Joya also performed quarterly reviews for Idle Media. +9. La Paz is a Nevada corporation organized in November 2011. On July 19, 2012, +La Paz filed a Form S-1 registration statement with the Commission seeking to register +management’s common shares for resale in a $20,000 public offering. On September 25, 2012, La +Paz filed an amendment to its Form S-1 registration statement. La Paz’s registration statement +states that it has its principal offices in Peoria, Arizona. + +10. Idle Media is a Nevada corporation based in Leesport, Pennsylvania. Idle Media +develops and operates several websites focusing on music, music videos and gaming. Idle Media +became a publicly traded company in May 2010 through a reverse merger with another +corporation. Idle Media’s stock was voluntarily registered with the Commission pursuant to +Section 12(g) of the Exchange Act from August 2012 to December 2013. During that period, Idle +Media’s stock was quoted on the OTC Bulletin Board under the ticker symbol “IDLM.” The stock +is currently quoted on the OTC Link, which is operated by OTC Markets Group Inc. +Approximately 65% of Idle Media’s outstanding stock is owned by its parent company, Zoeter +(f/k/a Idle Media, LLC). + +11. Marcus Frasier, 30, is a resident of Shoemakersville, Pennsylvania. Frasier is the +founder of Idle Media and is its CEO. Frasier also owns Zoeter and is its only member. + +4 + +WHETMAN CONDUCTED A MATERIALLY DEFICIENT AUDIT OF LA PAZ +Background +12. Beginning in or about November 2011, Briner contacted De Joya to conduct audits +of nine issuers’ financial statements that were to be included in Form S-1 registration statements. +Whetman was the engagement partner for the audit of La Paz, one of the nine issuers, from March +2012 through June 2013 (when De Joya resigned from the engagement). +13. Whetman knew that Briner did the accounting and created the financial statements +to be used in La Paz’s Form S-1 registration statement. Whetman also knew that Briner +maintained all of La Paz’s purported funds “in trust” in an account Briner controlled (the “Master +Trust Account”). +14. Briner and his assistant were the exclusive contacts between De Joya and La Paz’s +sole officer. Whetman did not directly communicate with La Paz’s sole officer. Whetman knew +that Briner provided all of the information concerning La Paz and all of the supporting evidence for +its audit. +15. La Paz’s two largest transactions consisted of the officer’s purchase of La Paz stock +for $30,000 and the La Paz’s purchase of a British Columbia mineral claim for $20,000 from +Jervis. +16. Whetman conducted La Paz’s audit, including auditing the above transactions, and +consented to the inclusion of De Joya’s audit report in La Paz’s Form S-1 registration statement +filed with the Commission on or about July 17, 2012. De Joya was paid a total approximately +$4,000 for the La Paz audit. La Paz’s audit report stated that “[w]e conducted our audit in +accordance with the standards of the Public Company Accounting Oversight Board (United +States)” and that the financial statements present La Paz’s financial position “in conformity with +U.S. generally accepted accounting principles.” As described below, the audit was so deficient that +it amounted to no audit at all, and Whetman ignored red flags. +Whetman Failed to Appropriately Identify and Assess Risks in +Accepting and Continuing with La Paz as a Client +17. Under PCAOB Auditing Standard No. 12 (Identifying and Assessing Risks of +Material Misstatement) (“AS 12”), auditors should “evaluate whether information obtained from +the client acceptance and retention evaluation process or audit planning activities is relevant to +identifying risks of material misstatement” (¶ 41).2 +18. Also, auditors must meet PCAOB standard AU Section 230 (Due Professional Care +in the Performance of Work) (“AU 230”), which requires that auditors “exercise professional +skepticism” (at .07), “consider the competency and sufficiency of the evidence” (at .08), and +“neither assume[] that management is dishonest nor assume[] unquestioned honesty” (at .09). + + 2 The PCAOB standards referenced herein are the standards that were in effect during the +time of relevant conduct. + +5 + +19. De Joya’s client acceptance policy instructed its staff to “confirm individuals” and, +if there was something to report, to “summarize findings, site [sic] sources, and email Partner.” In +practice, such check consisted of a simple Internet search. +20. Whetman failed to sufficiently question or otherwise investigate La Paz’s +management, which would have revealed Briner’s undisclosed role as a control person. Nor did he +conduct a background check of Briner or Dalmy, which at minimum would have turned up, among +other things, the Commission’s complaint alleging fraud and suspension order against Briner, and +that Briner had been on the OTC Market’s Prohibited Attorney List since March 15, 2006, and that +Dalmy had also been on the list since September 25, 2009. +21. For the above reasons, Whetman failed to meet AS 12 and AU 230. +Whetman Disregarded Red Flags that La Paz’s Stock Sale to Its Officer Was a Sham +22. Under PCAOB Auditing Standard No. 15 (Audit Evidence) (“AS 15”), “[i]f audit +evidence obtained from one source is inconsistent with that obtained from another, or if the auditor +has doubts about the reliability of information to be used as audit evidence, the auditor should +perform the audit procedures necessary to resolve the matter and should determine the effect, if +any, on other aspects of the audit” (¶ 29 ). Under AS 12, the auditor should obtain “an +understanding of the nature of the company include[ing]…the sources of funding of the company’s +operations” (¶ 10) and “[w]hen the auditor obtains audit evidence during the course of the audit +that contradicts the audit evidence on which the auditor originally based his or her risk assessment, +the auditor should revise the risk assessment and modify planned audit procedures or perform +additional procedures in response to the revised risk assessments” (¶ 74). Further, under PCAOB +Auditing Standard No. 14 (Evaluating Audit Results) (“AS 14”), auditors should consider “[t]he +sufficiency and appropriateness of the audit evidence obtained” (¶ 4.f.). In meeting these +standards, auditors must apply professional skepticism and due care consistent with AU 230. +23. Whetman failed to resolve significant contradictions and inconsistencies in the +audit evidence supporting La Paz’s stock sale to its officer in violation of these standards. +24. Specifically, Whetman received contradicting accounting support as to who paid +$30,000 for La Paz’s stock. On or about May 29, 2012, Briner sent a purported schedule for La +Paz (prepared by Briner purportedly reflecting cash attributable to La Paz in the Master Trust +Account) that conflicted with the stock purchase agreement for La Paz stock. The schedule +showed that the $30,000 for the purchase of La Paz stock was paid for by an entity called +“Hyperion [Management].” The stock purchase agreement (and La Paz’s registration statement), +by contrast, described the stock purchase as a transaction between La Paz and La Paz’s officer. +Despite this red flag, Whetman never resolved the issue of who paid for the La Paz stock. +25. In fact, the back-up documentation Briner provided to support the stock purchase +further confused the issue. It showed that another entity apparently provided the funds for the +stock purchase. On July 4, 2012, in response to De Joya staff requests for support for the stock +purchase, Briner sent an email with information reflecting an alleged deposit into the Master Trust +Account on December 29, 2011 for $39,280.60 from an entity referred to as Ft-Green Omega, Inc. +In the email, Briner stated that “$30,000 was earmarked for the project [i.e., La Paz].” + +6 + +26. The La Paz audit team then requested the corresponding bank statements. In +response, on July 11, 2012, Briner sent an email containing what appear to be computer screen +shots reflecting transactions in the Master Trust Account. Briner indicated these screen shots were +“bank statements.” No actual bank statements were received by De Joya in connection with the La +Paz audit. The computer screen shot Briner provided appeared to show a deposit by Ft-Green +Omega, Inc. on December 29, 2011 for $39,280.60. In this same email, Briner also sent a revised +schedule for La Paz changing the date of the stock purchase from November 23, 2011 to December +29, 2011, apparently to make it consistent with the computer screen shots. Briner left the name +“Hyperion [Management]” in this later version of the La Paz schedule. Despite the contradicting +evidence regarding who paid for (and owned) La Paz’s stock, Whetman took no further action with +respect to the stock purchase. +27. For these reasons, Whetman failed to meet AS 14, AS 15, AS 12, and AU 230. +Whetman Disregarded Red Flags that La Paz’s Mineral Claim Purchase Was a Sham +28. Like the evidence supporting the stock purchase, the La Paz schedule and the +computer screen shots Briner provided to Whetman in support of the mineral claim purchase (the +same documents used to support the stock purchase) conflicted with one another. As described +below, Whetman failed to resolve these conflicts and therefore violated AS 15, AS 12, and AU +230. +29. First, the La Paz schedule Briner provided to De Joya described the mineral claim +purchase as a $20,000 wire transfer occurring on December 12, 2011. The transaction in the +computer screen shots was a $20,000 debit (not a wire) occurring on December 30, 2011. Further, +in the computer screen shot also provided by Briner, this transaction is characterized in the +description as “Business Investment Savings.” No mention in the description was made to Jervis +or how the cash was transferred. From this, it is impossible to determine whether La Paz actually +paid Jervis for the mineral claim. Moreover, if the funds were in fact transferred via a wire, there +is no sufficient explanation for the discrepancy between December 12 (the date listed in the La Paz +schedule that funds were sent) and December 30 (the date listed in the computer screen shots that +funds were sent). Later, in an apparent attempt to cover up the date discrepancies, Briner changed +the dates of the mineral claim purchase from December 12 to December 30, 2011 when he sent De +Joya a revised schedule for La Paz (like he did for the dates of the alleged stock purchase). +30. Second, on July 17, 2012, Whetman requested additional support for La Paz’s +mineral claim purchase. In response, on July 18, 2012, Briner provided a check, numbered 350, +that was from MetroWest to Jervis for $20,000 and was dated December 30, 2011. “La Paz +Mining” was written in the memo line. Briner included copies of both the front and back of the +check, but the back of the check was obscured such that it was impossible to tell whether the check +had been cashed. The $20,000 transaction listed in the computer screen shots that Briner indicated +was for the mineral claim purchase, however, did not reference a check number 350, or any check +for $20,000. The check numbers on the computer screen shots ranged from 1 to 253. Whetman +failed to question this discrepancy, despite the fact that the computer screen shots reference +approximately thirty other transactions that each appear to identify the check numbers associated +with cashed checks. + +7 + +31. Finally, Briner provided evidence to Whetman indicating that La Paz’s mineral +claim purchase may not have been the result of arms-length negotiation because Briner appeared to +have been behind the sale. Specifically, the purchase agreement Whetman relied on to support La +Paz’s mineral claim purchase contained an invoice for the claim listing Briner’s name (in typeface) +as the signatory on behalf of Jervis. Whetman did not do any additional investigation into whether +the purchase was a related party transaction. +32. In this regard, Whetman also violated PCAOB standard AU Section 334 (Related +Parties) (“AU 334”) (because Briner appeared to control Jervis and Whetman failed to, among +other things, “review the extent and nature of business transacted with [Jervis] for indications of +previously undisclosed relationships” (.08(e))), and PCAOB Auditing Standard No. 13 (The +Auditor’s Responses to the Risks of Material Misstatement) (“AS 13”), which states that “[t]he +auditor’s responses to the assessed risks of material misstatement, particularly fraud risks, should +involve the application of professional skepticism in gathering and evaluating audit evidence” (¶ +7). +Whetman Failed to Resolve Discrepancies in the +Audit Evidence Supporting the Officer’s Fee +33. Whetman accepted evidence that purported to support fees paid to La Paz’s officer +that did not in fact provide support. On or about October 28, 2012, a De Joya staff accountant +asked for documents reflecting the payment of fees to, among others, La Paz’s officer. The next +day, Briner’s assistant sent documents appearing to reflect wire transfers from MetroWest to, +among others, Crown Capital Partners for $6,000. The La Paz schedule indicated that its officer +was paid $2,000 and does not mention Crown Capital Partners. Although Briner’s assistant +indicated in an email that the wire to Crown Capital Partners was for La Paz’s officer (for services +to three companies), she did not provide any other evidence of this or how the $6,000 was +allocated. And Whetman did not ask La Paz’s officer whether he was paid his fee or how the +$6,000 was allocated among the issuers he served as the officer. Nonetheless, Whetman accepted +these documents as support for La Paz’s officer’s fees. +34. Whetman failed to resolve these conflicts or obtain sufficient appropriate audit +evidence to support De Joya’s opinion and therefore violated AS 15, AS 12, and AU 230. +Whetman Failed to Properly Audit La Paz’s Cash +35. Under PCAOB standard AU Section 330 (The Confirmation Process) (“AU 330”), +when “information about the respondent’s [i.e., the person or entity from which a confirmation is +requested] competence, knowledge, motivation, ability, or willingness to respond, or about the +respondent’s objectivity and freedom from bias with respect to the audited entity comes to the +auditor’s attention, the auditor should consider the effects of such information on designing the +confirmation request and evaluating the results” and, in circumstances where “the respondent is the +custodian of a material amount of the audited entity’s assets,” the auditor should exercise “a +heightened degree of professional skepticism” and “should consider whether there is sufficient +basis for concluding that the confirmation request is being sent to a respondent from whom the +auditor can expect the response will provide meaningful and appropriate audit evidence” (at .27). + +8 + +36. Additionally, under AS 15, “[t]he auditor must plan and perform audit procedures +to obtain sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion” +(¶ 4). To be appropriate, audit evidence must be both relevant and reliable in providing support for +the conclusions on which the auditor’s opinion is based. “The reliability of evidence depends on +the nature and source of the evidence and the circumstances under which it is obtained” (¶ 8). +Under AS 13, “[t]he auditor’s responses to the assessed risks of material misstatement, particularly +fraud risks, should involve the application of professional skepticism in gathering and evaluating +audit evidence” (¶ 7). +37. Whetman exhibited no concern about Briner’s handling of La Paz’s alleged cash. +Whetman knew that Briner held all of La Paz’s purported funds in his Master Trust Account and +that La Paz did not have its own bank account. Whetman also knew that Briner was a “consultant” +to La Paz and that MetroWest was a law firm. Whetman did not seek any appropriate audit +evidence about what, if any, limitations governed Briner’s use of the cash in his Master Trust +Account. Nor did he ask for a reconciliation between Briner’s Master Trust Account and the +schedules Briner provided purportedly showing how much cash in his account was attributable to +La Paz. +38. In addition, Whetman violated the above standards by failing to apply professional +skepticism in gathering and evaluating the evidence obtained, such as Briner’s confirmation of La +Paz’s cash, and consider Briner’s “objectivity and freedom from bias with respect to the audited +entity” in relation to the cash confirmation Briner provided. +Whetman Disregarded Red Flags that Briner’s Services +to La Paz Were Not Given Accounting Recognition +39. Under AU 334, transactions that are indicative of the existence of related parties +include, among other things, “transactions [that] are occurring, but are not being given accounting +recognition, such as receiving or providing accounting, management or other services at no +charge” (at .08(f)). Further, under AS 15, “[i]f audit evidence obtained from one source is +inconsistent with that obtained from another, or if the auditor has doubts about the reliability of +information to be used as audit evidence, the auditor should perform the audit procedures +necessary to resolve the matter and should determine the effect, if any, on other aspects of the +audit” (¶ 29). Finally, auditors must exercise professional skepticism throughout the course of the +engagement consistent with standard AU 230. +40. During the La Paz audit, the audit team requested details concerning Briner’s fee +arrangement with La Paz. In a November 29, 2012 email response, Briner indicated that he would +charge between $10,000 and $25,000 for his services, but was not “comfortable” estimating his bill +because he told his “client” he “would work out a fair bill at the end of the project and [his client] +would find interim billing in the financials without their prior approval to be offensive.” Whetman +failed to investigate further and allowed this material liability to remain undisclosed. +41. For the above reasons, Whetman failed to meet AU 334, AS 15, and AU 230. + +9 + +Whetman Failed to Adequately Respond to Concerns that +Briner and Dalmy May Have Been Engaging in Fraud +42. In early November 2012, while Whetman was reviewing La Paz’s interim financial +statement, a De Joya staff member raised concerns to Whetman and another De Joya partner, who +was auditing the other eight Briner-referred issuers, that Briner and Dalmy may be engaging in +fraud with respect to the issuers they were auditing, including La Paz. +43. Under AS 12, “[t]he auditor’s assessment of the risks of material misstatement, +including fraud risks, should continue throughout the audit. When the auditor obtains audit +evidence during the course of the audit that contradicts the audit evidence on which the auditor +originally based his or her risk assessment, the auditor should revise the risk assessment and +modify planned audit procedures or perform additional procedures in response to the revised risk +assessments” (¶ 74). +44. Further, under AS 13, “[t]he auditor’s responses to the assessed risks of material +misstatement, particularly fraud risks, should involve the application of professional skepticism in +gathering and evaluating audit evidence [including] . . . modifying the planned audit procedures to +obtain more reliable evidence regarding relevant assertions and (b) obtaining sufficient appropriate +evidence to corroborate management’s explanations or representations concerning important +matters, such as through third-party confirmation, use of a specialist engaged or employed by the +auditor, or examination of documentation from independent sources” (¶ 7). +45. Whetman failed to (a) properly consider the risks associated with La Paz’s audit, +(b) apply professional skepticism in evaluating audit evidence indicating Briner and Dalmy may be +engaging in fraud, and (c) re-evaluate his risk assessments for the La Paz audit in light of such +evidence in violation of AS 12 and AS 13. +46. On or about November 5, 2012, a De Joya staff member became concerned that +Briner might be engaging in fraud in connection with the issuers referred from Briner. Her +concern stemmed from conversations she had with certain issuers’ officers in which nearly all her +questions about the issuers were deferred to Briner. These conversations caused her to conduct an +internet search on Briner. She found, among other things, the Commission’s complaint against +him. Additional searches yielded news articles describing Briner and Dalmy as repeat securities +fraud offenders. +47. As a result, the De Joya staff member sent four emails over three days sharing the +negative information she found concerning Briner and Dalmy. First, on November 5, 2012, she +sent Whetman and the other De Joya partner an email containing links to the Commission’s +complaint against Briner (SEC v. Golden Apple Oil and Gas, Inc., et al., 09-Civ-7580 (S.D.N.Y.) +(HB)) and a Canadian news article stating, among other things, that the British Columbia Securities +Commission issued an order (reciprocal to the Commission’s order suspending Briner) banning +Briner from trading shares in British Columbia or “acting in a management or consultative +capacity in any securities related matter.”3 In the email, she asked Whetman and the other De Joya +partner to “review the links” and stated that she “will call [the other De Joya partner] tonight.” + +3 http://www.canadianjusticereviewboard.ca/article-securities%20lawyer.htm + + +10 + +48. Second, that same day, the De Joya staff member sent another email to Whetman +and the other De Joya partner with a link to an article posted on Pumpsanddumps.com stating that +Briner and Dalmy “together and apart, the pair has been involved in dozens of schemes on the +Vancouver market as well as the Pink sheets and OTC Bulletin Board, writing many a dubious +legal opinion resulting in millions of dollars lost by thousands of investors.”4 +49. Third, on November 7, 2012, the De Joya staff member sent yet another email to +Whetman and the other De Joya partner attaching an article about a De Joya client, MoneyMinding +International Corp., and its counsel, Dalmy, who was described as having “a reputation for helping +scoundrel promoters take dubious companies public on the U.S. over-the-counter markets.” The +article also specifically mentions De Joya as having “similarly helped many dubious companies go +public on the bulletin board.”5 +50. Finally, the same day, the De Joya staff member forwarded the email and article to +one of De Joya’s two managing partners stating, “I thought I should forward this to you as well. I +was doing research on Diane Dalmy and John Briner as we are working on some of their jobs and +that’s how I can [sic] across this article.” The managing partner then forwarded her email with the +attached article to De Joya’s other managing partner without comment. +51. In light of the negative background the De Joya staff member found and the +officers’ apparent inability to answer questions about the issuers, the staff member found it +suspicious that Briner and Dalmy were working together on eight of the nine De Joya issuers. The +staff member discussed her concerns with the other De Joya partner. Whetman and that De Joya +partner then discussed the staff member’s concerns and resolved that the other De Joya partner +would raise them with De Joya’s two managing partners, which he did. +52. Whetman did not follow-up with the De Joya partner on the matter, nor did he do +anything further regarding the La Paz audit, such as considering whether to withdraw the audit +reports on La Paz’s financial statements that had been filed. Nor did Whetman do anything further +with respect to La Paz’s interim financial statements, which he was reviewing at the time. +Whetman, therefore failed to meet PCAOB standard AU Section 561 (Subsequent Discovery of +Facts Existing at the Date of the Auditor’s Report) (“AU 561”), which provides that “[w]hen the +auditor becomes aware of information which relates to financial statements previously reported on +by him, but which was not known to him at the date of his report, and which is of such a nature and +from such a source that he would have investigated it had it come to his attention during the course +of his audit, he should, as soon as practicable, undertake to determine whether the information is +reliable and whether the facts existed at the date of his report” (at .04). +53. None of the above purported discussions were documented in any workpaper, or +otherwise, in violation of PCAOB Auditing Standard No. 3 (Audit Documentation) (“AS 3”), +which provides that auditors “must document significant findings or issues, actions taken to + +4 http://www.pumpsanddumps.com/2011/06/all-that-glitters-is-not-greenwood-gold.html + +5 http://blogs.vancouversun.com/2011/03/17/david-baines-two-victoria-startups-wade- +into-bulletin-board-swamp/ + + +11 + +address them (including additional evidence obtained), and the basis for the conclusions reached in +connection with each engagement” (¶ 12). +WHETMAN CONDUCTED MATERIALLY DEFICIENT AUDITS OF IDLE MEDIA +Background + +54. In 2005, Marcus Frasier formed Zoeter, a company he wholly owned, to hold and +run certain web development projects he created. Zoeter held datpiff.com, a website that enabled +customers to upload and share music. In 2008, Frasier formed Datpiff, LLC (“Datpiff”), to hold +and run the datpiff.com website. + +55. Although Frasier intended Datpiff to operate separately from Zoeter, Frasier used +accounts in Zoeter’s name to receive cash and pay expenses for Datpiff. + +56. In May 2010, Idle Media was formed following a reverse merger with a shell +company. At the same time, Frasier made Datpiff a wholly-owned subsidiary of Idle Media. +Zoeter received 40 million shares of Idle Media stock, representing a 65% share, and thereby +became the parent company of Idle Media. After the merger, Frasier continued to own 100% of +Zoeter, and he became Idle Media’s chief executive officer. Datpiff was the primary revenue +generating business of Idle Media. + +57. Following Idle Media’s formation, Zoeter and Datpiff continued to share +employees, including Frasier, and commingled their funds in Zoeter accounts. Payroll expenses +for shared employees and certain operating expenses for both companies were paid using Zoeter +accounts. + +58. In December 2010, Idle Media engaged De Joya to perform independent public +accountant services. The company filed its Form 10-K for the fiscal year ended September 30, +2010 on January 13, 2011, and its Form 10-Q for the quarter ended December 31, 2010 on +February 22, 2011. Six days after issuing the Form 10-Q, on February 28, 2011, Idle Media filed +a Form 8-K announcing that its previously issued financial statements should not be relied upon +due to unspecified accounting errors that may require adjustments. + +59. These accounting errors stemmed from Idle Media’s misallocation of revenue and +expenses between Datpiff and Zoeter. + +60. Whetman served as the audit manager on the engagements to audit or review the +financial statements contained in the filings referenced in the February 28, 2011 Form 8-K. +During the quarterly review for the quarter ended December 31, 2010, Idle Media informed +Whetman that it had failed to record certain of Datpiff’s revenue and expenses that were +processed through Zoeter’s accounts. Around the same time, through discussions with Idle +Media’s bookkeeper, Whetman became aware of Idle Media’s significant books and records +deficiencies in allocating revenue and expenses between Idle Media and Zoeter as a result of their +failure to segregate funds, among other things. + + +12 + +61. More than a year later, and without having issued restated financial statements, +Idle Media filed a Form 15 on March 8, 2012, terminating its voluntary SEC registration. Also +in March 2012, De Joya promoted Whetman from manager to partner. Whetman became the +new engagement partner for Idle Media engagements. + +62. Three months later, Idle Media filed a Form 10 to recommence its voluntary +registration. In this Form 10, filed on June 13, 2012, the company issued restated financial +statements for the fiscal year ended September 30, 2010 and for the first time issued financial +statements for its fiscal year ended September 30, 2011. + +63. In the Form 10, the company did not correct its accounting deficiencies resulting +from the misallocation of revenue and expenses between Datpiff and Zoeter. Rather, the +company stated that the balances it reported in its financial statements consolidated Zoeter’s +financial statements with those of Idle Media because Zoeter was a VIE and Idle Media was its +primary beneficiary. On July 31, 2012, September 25, 2012, September 26, 2012, and October +29, 2012, Idle Media issued amendments to the Form 10 on Forms 10/A for various reasons, but +each included Idle Media’s financial statements consolidating Zoeter. Through Whetman, De +Joya consented to the inclusion of its audit report for each of these filings opining that Idle +Media’s consolidated financial statements were presented fairly, in all material respects, in +conformity with GAAP (hereafter collectively referred to as the “Consolidation Timeframe +Audits”). + +64. Idle Media’s consolidated financial statements in its Form 10 and in its first Form +10/A amended filing did not consolidate Zoeter’s accounts despite purporting to do so. In +addition, when presenting the amount of the consolidated company’s net income that belonged to +Idle Media’s shareholders, Idle Media’s income statement improperly added, rather than +subtracted, the amount of net income attributable to Zoeter’s owner. Idle Media’s second Form +10/A filing on September 25, 2012, restated the presentation of the consolidated financial +statements to correct these fundamental errors. + +65. Despite issuing consolidated financial statements in its Form 10 and in four Forms +10/A, each audited by Whetman, Idle Media filed a Form 8-K on January 15, 2013, announcing +it would restate its financial statements again, this time to deconsolidate Zoeter. Idle Media +acknowledged that its consolidation of Zoeter had never been proper. Almost a year after this +announcement, Idle Media filed restated financial statements deconsolidating Zoeter in a fifth +amendment to the Form 10, filed on December 30, 2013, for its fiscal years 2010 and 2011 and +related quarterly periods. This amendment to the Form 10 was also audited by Whetman. The +restatement demonstrated that, as a result of Idle Media’s improper consolidation of Zoeter and +revenue and expense allocation errors, the company had materially misstated revenue and net +income by 18% and 24%, respectively, for 2010. Idle Media had also materially misstated net +income by 24% for 2011. + +66. For the Consolidation Timeframe Audits, the engagement team consisted of +Whetman as the engagement partner and a staff auditor. There was also a concurring review + +13 + +partner.6 The staff auditor performed the audit fieldwork and created the workpapers for the +Consolidation Timeframe Audits. As the engagement partner, Whetman was responsible for +planning and performing the audits to obtain reasonable assurance about whether Idle Media’s +financial statements were free of material misstatement. Since no manager was assigned to the +engagement team, Whetman also directly supervised the staff auditor and was responsible for her +work. At the time of the first Consolidation Timeframe Audit, the staff auditor had barely a year +of audit experience and had not yet earned a CPA license. Whetman was fully aware of the staff +auditor’s inexperience. + +Whetman’s Deficient Audits of Idle Media’s Consolidation +Approach Under VIE Accounting Standards + +67. The GAAP standards for consolidation of a VIE are contained in Accounting +Standards Codification (“ASC”) 810, Consolidation. Under ASC 810, among other +requirements, three conditions must be met in order for a reporting entity to consolidate another +entity as a VIE: (1) the reporting entity must hold a variable interest in the other entity; (2) that +other entity must be a VIE; and (3) the reporting entity must be the primary beneficiary of that +VIE. + +68. Whetman appreciated the significance of the VIE consolidation issue and +characterized it as a “critical audit objective” during the planning stage of the Consolidation +Timeframe Audits. He continued to characterize the VIE consolidation issue as a “critical +matter” throughout the course of the Consolidation Timeframe Audits. + +69. Among other things, in the audit of Idle Media’s consolidation of Zoeter’s +financial statements, Whetman considered the conclusions that: (1) Idle Media held a variable +interest in Zoeter because of a related party receivable; (2) Zoeter was a VIE because it required +Idle Media’s subordinated financial support; and (3) Idle Media was the primary beneficiary of +Zoeter. As explained below, Whetman failed to perform sufficient procedures to obtain +sufficient evidence about any of these conclusions. + +Whetman Did Not Perform Adequate Procedures +to Assess the Conclusion that Idle Media Held a +Variable Interest in Zoeter + +70. Pursuant to ASC 810-10, the reporting company must hold a “variable interest” in +an entity before that entity is subject to potential consolidation as a variable interest entity. +Generally, a variable interest arises from an ownership, or other contractual or pecuniary, interest +which requires the holder to absorb fluctuations in value of that entity that are exclusive of +fluctuations in the ownership or contractual interest. + + + 6 PCAOB Auditing Standard No. 7 (Engagement Quality Review) did not become effective until Idle +Media’s fiscal year 2011, which began October 1, 2010. Beginning on this date, the concurring review function was +performed by an “engagement quality review” partner. + + +14 + +71. At the time Idle Media consolidated Zoeter’s financial statements, Idle Media +held a purported related party receivable for amounts due from Zoeter. Whetman’s audit +identified this related party receivable as Idle Media’s variable interest in Zoeter. + +72. The purported related party receivable balance was asserted to be a result of +material transactions between Zoeter and Idle Media’s subsidiary, Datpiff. Because this related +party receivable was Idle Media’s singular variable interest in Zoeter identified by Whetman, it +was fundamental to the variable interest entity consolidation analysis. + +73. Whetman knew that Zoeter and Datpiff commingled their funds in Zoeter +accounts, that no promissory note existed between Zoeter and either Datpiff or Idle Media, and +that Zoeter had no obligation to use its future profits to pay back any funds it received from +Datpiff or Idle Media. However, during the audit, Whetman’s procedures confirmed only that +the receivable’s balance eliminated in consolidation. Whetman failed to perform any procedures +to determine the purpose, nature, and extent of the transactions making up the purported related +party receivable, nor did he obtain sufficient, competent evidence to show that a receivable +actually existed. + +74. Had Whetman performed sufficient audit procedures, he would have likely +discovered that Idle Media had improperly recorded these amounts on its balance sheet as a +receivable. In fact, when Whetman later re-audited Idle Media’s fiscal year-end 2010 financial +statements upon Idle Media’s deconsolidation of Zoeter, Whetman concluded that Idle Media +had properly reclassified these amounts as Idle Media’s expenses and not a receivable due from +Zoeter. + +75. As a result of the above failures, Whetman’s procedures provided no reasonable +basis for concluding that the related party receivable existed. The existence of the receivable as +a variable interest was the fundamental basis Whetman relied upon to support that Idle Media +should potentially consolidate Zoeter’s financial statements. As a result, Whetman obtained +insufficient evidence to assess the conclusion that Idle Media indeed held a variable interest in +Zoeter. + +Whetman Did Not Perform Adequate +Procedures to Assess the Conclusion +That Zoeter was a VIE + +76. Whetman’s procedures to test the conclusion that Zoeter qualified as a variable +interest entity also were inadequate. Whetman concluded that Zoeter was a variable interest entity +under ASC 810-10-15-14a because, by design, the total equity investment at risk was not sufficient +to permit Zoeter to finance its activities without additional subordinated financial support provided +by Idle Media or Datpiff. When testing the assertion that Zoeter was a VIE, Whetman considered +whether Zoeter required subordinated financial support: (1) as of the date of Datpiff’s inception in +September 2008; and (2) during subsequent fiscal periods. + +77. With respect to the first analysis, Whetman failed to adequately test whether, by +design, Zoeter required subordinated financial support as of September 2008. In fact, financial + +15 + +information included in Whetman’s audit workpapers indicated that Zoeter earned sufficient +revenue to support its own activities at that time. + +78. With respect to the second analysis, Whetman concluded that subsequent transfers +of funds between Zoeter and Datpiff, as evidenced by the purported related party receivable, +demonstrated Zoeter’s continuing need for financial support. However, Whetman’s audit did not +provide adequate support for these conclusions since Whetman did not test whether Zoeter’s +revenue was sufficient to cover its expenses or, as discussed above, whether the related party +receivable existed. Indeed, since Idle Media had not accurately allocated revenue and expenses +between Zoeter and Idle Media at the time of the Consolidation Timeframe Audits, the conclusion +that Zoeter required Datpiff’s financial support was not substantiated. + +Whetman Did Not Perform Adequate Procedures to Assess +the Conclusion That Idle Media Was the Primary +Beneficiary of Zoeter + +79. Whetman’s procedures to test whether Idle Media was the primary beneficiary of +Zoeter similarly were inadequate. In order for Idle Media to be the primary beneficiary and +therefore consolidate Zoeter under the VIE consolidation guidance, Idle Media must have had both +(1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic +performance and (2) the obligation to absorb losses or the right to receive benefits of the VIE that +could potentially be significant. ASC 810-10-05 and ASC 810-10-15-14b. + +80. Whetman did not obtain sufficient evidence to determine whether Idle Media had +an obligation to provide potentially significant funding to Zoeter or to determine whether Idle +Media had the right to potentially benefit significantly from Zoeter’s activities. Whetman did +not test whether Idle Media had power over the most significant economic activities of Zoeter. +Finally, it was evident to Whetman that Idle Media and Zoeter were under the common control +of Frasier, which should have resulted in additional testing. As a result, Whetman failed to +obtain sufficient competent evidence supporting the conclusion that Idle Media was the primary +beneficiary of Zoeter. + +Whetman’s Deficient Audit of the Noncontrolling Interest + +81. Notwithstanding the flaws in the consolidation analysis described above, Idle +Media’s presentation of consolidated financial statements was not in conformity with GAAP. +Whetman missed these clear presentation errors in certain audits of Idle Media’s financial +statements, as discussed below. + +Whetman Failed to Sufficiently Test Whether Idle Media’s +Revenue, Expenses, and Net Income Were Reported as +Consolidated Amounts + +82. A reporting company’s revenue, expenses, and net income should “be reported in +the consolidated financial statements at the consolidated amounts, which include the amounts +attributable to the owners of the parent and the noncontrolling interest.” ASC 810-10-45-19. + +16 + +Accordingly, when Idle Media claimed to consolidate Zoeter’s financial results, it should have +combined Zoeter’s account balances within the appropriate line items of the consolidated income +statement and then separately reported the noncontrolling interest of the net income or loss. + +83. When Idle Media first presented consolidated financial statements in the Form 10 +filed on June 13, 2012 and in the first Form 10/A filed on July 31, 2012, Idle Media failed to +combine Zoeter’s account balances within the appropriate line items of its consolidated income +statement, including the consolidated net income line item. Instead, Idle Media reported account +balances for Idle Media only. + +84. When auditing the financial statements contained in these two filings, Whetman +reviewed the audit workpaper containing the company’s consolidating trial balance. However, +Whetman failed to perform a fundamental audit procedure: that is, recalculation to verify that +the rows of numbers were properly totaled. Had Whetman simply added up rows of numbers on +the workpaper, he would have noticed that the totals for the consolidated amounts improperly +excluded Zoeter’s accounts. Since he failed to perform this fundamental procedure, Whetman +failed to identify the fact that the account balances Idle Media reported in its consolidated +financial statements did not actually include Zoeter’s accounts and thus did not reconcile with +the supporting documents. Whetman also failed to properly supervise his staff auditor by not +addressing these important omitted procedures. + +85. Whetman failed to identify these fundamental misstatements despite reviewing a +different audit workpaper that stated that “[Zoeter] is not included [in these line items] because +they are reported separately within the income statement as part of VIE reporting requirements.” +This workpaper specifically highlighted the fact that Zoeter’s revenue and expenses were +excluded from the applicable line items of the consolidated financial statements. + +Whetman Failed to Test Whether Idle Media’s Consolidated +Net Income Was Properly Apportioned Between Idle Media’s +Shareholders and the Noncontrolling Interest + +86. GAAP requires that, after a company reports its consolidated net income, the +“[n]et income or loss… shall be attributed to the parent and the noncontrolling interest.” ASC +810-10-45-20. Accordingly, after presenting the net income for the consolidated company on its +income statement, Idle Media should have then subtracted the portion of the consolidated net +income belonging to Zoeter’s owner (Frasier) as being allocated to the noncontrolling interest +since Idle Media did not own Zoeter. Idle Media should have then shown the remaining portion +of the consolidated net income as belonging to Idle Media’s shareholders. + +87. In the financial statements included in its Form 10 filed on June 13, 2012 and its +first Form 10/A filed on July 31, 2012, Idle Media reported a consolidated net income amount +that did not include Zoeter’s net income. Below the consolidated net income line, Idle Media +presented Zoeter’s net income as an amount attributable to the noncontrolling interest. Idle +Media then added this figure to the net income amount, rather than subtracting it, when Idle +Media reported the amount of net income attributed to Idle Media’s shareholders. These clear, + +17 + +fundamental errors resulted in a substantial overstatement of the consolidated net income +apportioned to Idle Media’s shareholders. + +88. Whetman’s procedures failed to identify these errors even though the income +statement reported that the net income allocated to Idle Media shareholders was substantially +greater than the total consolidated net income – a treatment that was clearly not in conformance +with GAAP. + +89. Whetman’s deficient procedures relating to the allocation of revenue and +expenses between Zoeter and Idle Media also impacted his ability to audit the amount of income +Idle Media apportioned to the noncontrolling interest. Since Whetman did not perform sufficient +procedures to assess the accuracy of Zoeter’s accounts, Whetman’s procedures could not provide +a reasonable basis for assessing the accuracy of the net income Idle Media attributed to the +noncontrolling interest. + +Whetman’s Deficient Documentation of the Idle Media Audits + +90. In addition to the failures discussed above, Whetman failed to adequately +document and retain requisite documentation related to certain of his audits. + +Whetman Failed to Prepare Adequate Audit Documentation + +91. On December 30, 2013, Idle Media filed a Form 10/A containing restated +financial statements to correct: 1) errors relating to the allocation of revenue and expenses +between Zoeter and Datpiff, and 2) the improper consolidation of Zoeter’s financial statements. +Whetman’s audit workpapers relating to the deconsolidation stated that “V.I.E. consolidation was +not appropriate since Zoeter, LLC did not need subordinated financial support to fund its +activities[.]” However, the workpapers did not present any analysis or reference evidence to +support this revised conclusion that no subordinated financial support was needed. For example, +the workpapers did not demonstrate that the auditor had examined any evidence indicating that +Zoeter generated sufficient revenue to fund its level of activity at the assessment date. + +92. At the time of Idle Media’s deconsolidation of Zoeter, the audit workpaper +referenced a change in the date for the transfer of the datpiff.com website as support for Idle +Media’s deconsolidation decision. However, to the extent the transfer date for the datpiff.com +website was significant to the deconsolidation decision, Whetman’s audit workpapers did not +explain that significance. While the audit workpapers explained how the new date impacted the +allocation of revenue and expenses between Zoeter and Datpiff, the workpapers notably failed to +analyze why the new date impacted the separate issue of whether Idle Media should consolidate +Zoeter. Moreover, the workpapers showed multiple inconsistencies regarding what the transfer +date actually was. + +93. Whetman’s deconsolidation workpaper also quoted Idle Media’s disclosure that “it +is no longer able to conclude that Zoeter constitutes a variable interest entity, necessitating the +restatement of its financial statements” under GAAP. However, the workpapers did not clarify, +much less explain, whether Zoeter had previously been a VIE but was no longer a VIE going + +18 + +forward, or whether Zoeter had never been a VIE. This analysis would have been necessary in +order to determine whether it was appropriate for Idle Media to restate its historical financial +statements. + +94. Whetman also failed to properly supervise his audit staff with respect to +procedures to evaluate and document the deconsolidation analysis. + +Whetman Failed to Retain Audit Documentation + +95. When preparing workpapers for the Consolidation Timeframe Audits, Whetman’s +audit team incorporated, but did not retain, the workpapers from the original audit of Idle Media’s +fiscal year 2010 financial statements. As a result, workpapers which reflect the planning and +performance of the work and the procedures performed, the evidence obtained, and the conclusions +reached as of the time that De Joya issued its audit report on January 12, 2011 no longer exist. + +Whetman’s Violations of Professional Standards In Performing the Idle Media Audits + +Failure to Exercise Due Professional Care + +96. AU 230 requires that “[d]ue professional care is to be exercised in the planning and +performance of the audit and the preparation of the report” (at .01). The engagement partner should +know, at a minimum, the relevant professional accounting and auditing standards and should be +knowledgeable about the client. The engagement partner is responsible for the assignment of tasks +to, and supervision of, the members of the engagement team (at .06). Also, “[d]ue 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” (at .07). “Gathering and +objectively evaluating audit evidence requires the auditor to consider the competency and +sufficiency of the evidence. Since evidence is gathered and evaluated throughout the audit, +professional skepticism should be exercised throughout the audit process” (at .08). “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” (at .09). + +97. As the engagement partner, Whetman was responsible for each of the relevant audit +engagements and their performance, for proper supervision of the work of the engagement team +members, and for compliance with PCAOB standards. + +98. Whetman violated AU 230 by conducting the Consolidation Timeframe Audits +without exercising due professional care or professional skepticism. Whetman did not perform +sufficient procedures or analysis to support his audit conclusions that Idle Media’s consolidation of +Zoeter conformed with GAAP. Whetman also violated AU 230 when he failed to notice that Idle +Media had not actually consolidated Zoeter’s accounts in the first set of consolidated financial +statements it filed, and that Idle Media had clearly improperly presented the amount of the +consolidated company’s net income attributable to Idle Media’s shareholders. He also failed to +exercise due professional care in failing to document the analysis and conclusions supporting the +deconsolidation approach for Idle Media’s deconsolidated financial statements. Additionally, + +19 + +Whetman failed to supervise his audit staff with respect to the sufficiency of the procedures +performed and whether those procedures were adequately documented. + +Failure to Obtain Sufficient Competent Evidential Matter + +99. PCAOB standard AU Section 326, (Evidential Matter) (“AU 326”) requires that +“[s]ufficient competent evidential matter is to be obtained through inspection, observation, +inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial +statements under audit” (at .01). “The auditor tests underlying accounting data by (a) analysis and +review, (b) retracing the procedural steps followed in the accounting process and in developing the +allocations involved, (c) recalculation, and (d) reconciling related types and applications of the +same information… Additionally, the auditor’s substantive procedures must include reconciling +the financial statements to the accounting records” (at .19). “To be competent, evidence, +regardless of its form, must be both valid and relevant” (at .21). + +100. Whetman violated AU 326 by concluding the Consolidation Timeframe Audits +without obtaining sufficient competent evidential matter through his audit procedures. Notably, +Whetman failed to obtain sufficient, competent evidential matter during his procedures to assess +whether Idle Media’s consolidation conclusions were appropriate under the relevant accounting +standards for VIE consolidation. Whetman also violated AU 326 by failing to obtain sufficient, +competent evidential matter in the form of a correctly totaled consolidating trial balance. +Whetman further failed to recalculate the underlying accounting data contained in the +consolidating trial balance and reconcile this data to the financial statements. Because of this, he +failed to identify Idle Media’s fundamental errors in presenting consolidated financial statements – +by failing to actually consolidate Zoeter’s accounts in its consolidated income statement line items +and by failing to present the noncontrolling interest as a deduction from the consolidated net +income figure -- when Idle Media first filed its consolidated financial statements filed on Form 10 +on June 13, 2012 and the first Form 10/A filed on July 31, 2012. + +Failure to Apply Heightened Scrutiny to Related Party Transactions + +101. AU 334 requires that “[t]he auditor should place emphasis on testing material +transactions with parties he knows are related to the reporting entity” (at .07). “After identifying +related party transactions, the auditor should apply the procedures he considers necessary to +obtain satisfaction concerning the purpose, nature, and extent of these transactions and their +effect on the financial statements. The procedures should be directed toward obtaining and +evaluating sufficient competent evidential matter and should extend beyond inquiry of +management” (at.09). + +102. Whetman violated AU 334 during the Consolidation Timeframe Audits when he +failed to place emphasis on testing material transactions between related parties, including his +failures to apply heightened scrutiny to analysis of the purported related party receivable balance, +Zoeter’s purported need for subordinated financial support from Idle Media, and which related +party would be Zoeter’s primary beneficiary if Zoeter was a VIE. Although the consolidation +analysis as a whole was characterized in the workpapers as both a “critical audit objective” and + +20 + +as a “critical issue,” and involved related party transactions, Whetman failed to apply heightened +scrutiny when he audited any of the three bases for the consolidation conclusion. + +Failure to Maintain Requisite Audit Documentation + +103. AS 3 requires that “[a]mong other things, audit documentation includes records of +the planning and performance of the work, the procedures performed, evidence obtained, and +conclusions reached by the auditor” (¶ 2). “Audit documentation must clearly demonstrate that the +work was in fact performed… 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” (¶ 6). “The auditor must retain audit documentation for 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 (report release date), unless a longer period of time is required by +law” (¶ 14). “Audit documentation must not be deleted or discarded after the documentation +completion date, however, information may be added” (¶ 16). + +104. Whetman violated AS 3 during his audit of the restatement to deconsolidate Zoeter +when he failed to document his analysis in a manner which would allow an experienced auditor +having no previous connection with the engagement to understand the evidence obtained or audit +conclusions. Notably, the workpapers did not explain the analysis underlying the decision to +deconsolidate Zoeter or the decision to restate historical financial statements for the +deconsolidation of Zoeter. Additionally, Whetman violated AS 3 in his failure to retain +workpapers related to the original audit of fiscal year 2010. + +Failure to Issue Accurate Audit Reports + +105. PCAOB standard AU Section 508, Reports on Audited Financial Statements (“AU +508”), states that “[j]ustification for the expression of the auditor’s opinion rests on the conformity +of his or her audit with generally accepted auditing standards and on the findings” (at .03). “The +auditor’s standard report states that the financial statements present fairly, in all material respects, +an entity’s financial position, results of operations, and cash flows in conformity with generally +accepted accounting principles. This conclusion may be expressed only when the auditor has +formed such an opinion on the basis of an audit performed in accordance with generally accepted +auditing standards” (at .07). + +106. Whetman violated AU 508 when he signed, on behalf of his audit firm, audit +reports contained in Idle Media’s Forms 10, 10A/1, 10A/2, 10A/3, 10A/4, and 10A/5, filed on +June 13, 2012, July 31, 2012, September 25, 2012, September 26, 2012, October 29, 2012, and +December 30, 2013, respectively, falsely stating that De Joya had conducted its audits in +accordance with the standards of the PCAOB. The audits referenced in these audit reports were +not conducted in accordance with PCAOB standards, as evidenced by Whetman’s failures to +exercise due professional care in the planning and performance of the audit, to obtain sufficient +competent evidential matter, to apply heightened scrutiny to related party transactions, and to +maintain requisite audit documentation. + + +21 + +WHETMAN VIOLATED SECTION 17(a) OF THE SECURITES ACT, RULE 2-02 OF +REGULATION S-X, AND ENGAGED IN IMPROPER PROFESSIONAL CONDUCT + +107. De Joya falsely stated in its audit report filed with La Paz’s Form S-1 registration +statement that it “conducted [its] audit in accordance with the standards of the Public Company +Accounting Oversight Board (United States)” and that the financial statements present La Paz’s +financial position “in conformity with U.S. generally accepted accounting principles.” Whetman +signed or consented to the filing of this audit report. +108. For this false audit report, De Joya collected approximately $4,000 in fees. +109. Whetman knew, or was reckless in not knowing, that La Paz was a device, scheme, +or artifice to defraud in violation of Section 17(a)(1) of the Securities Act. Further, by providing +La Paz’s audit report, Whetman acted unreasonably and caused La Paz’s violations of Sections +17(a)(1), (2), and (3) of the Securities Act. Whetman also violated Sections 17(a)(2) and (3) of the +Securities Act by falsely claiming that the La Paz audit complied with PCAOB standards. +110. Additionally, for failing to meet the PCAOB audit standards identified above in +auditing La Paz and Idle Media, Whetman engaged in improper professional conduct pursuant to +the Commission’s Rules of Practice Rule 102(e)(1)(ii) by engaging in at least one instance of +highly unreasonable conduct or repeated instances of unreasonable conduct under Rule +102(e)(1)(iv). +111. Whetman also caused a violation of Rule 2-02(b)(1) of Regulation S-X by +consenting to the filing of an audit report included in La Paz’s Form S-1 Registration statement +that falsely states that La Paz’s audit was conducted in accordance with PCAOB standards. +112. Further, as described above, Whetman willfully violated Sections 17(a)(1), (2), and +(3) of the Securities Act thereby engaging in conduct subject to the Commission’s Rules of +Practice Rule 102(e)(1)(iii). +IV. +COMMISSION FINDINGS +Based on the foregoing, the Commission finds that Respondent: +A. willfully violated Sections 17(a)(1), (2), and (3) of the Securities Act; +B. engaged in improper professional conduct pursuant to Section 4C(a)(2) of the +Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice; +C. caused a violation of Rule 2-02(b)(1) of Regulation S-X; and +D. willfully violated Sections 17(a)(1), (2), and (3) of the Securities Act thereby +engaging in conduct subject to Section 4C(a)(3) of the Exchange Act and Practice Rule +102(e)(1)(iii) of the Commission’s Rules of Practice. + +22 + +V. +UNDERTAKINGS +Respondent has undertaken to: +A. appear and be interviewed by Commission staff at such reasonable times and places +as the staff requests upon reasonable notice in connection with the Briner Action; +B. 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 investigation by Commission staff related to the Briner Action; +C. appoint Respondent’s attorney, Sean T. Prosser, as agent to receive service of such +notices and subpoenas; +D. with respect to such notices and subpoenas, waive any objections to such notices +and subpoenas, 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 +E. consent to personal jurisdiction over Respondent in any United States District Court +for purposes of enforcing any such subpoena. +In determining whether to accept Respondent’s Offer, the Commission has considered these +undertakings. +VI. + +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 Sections 4C and 21C of the +Exchange Act, it is hereby ORDERED that: + +A. Respondent shall cease and desist from committing or causing any violations and +any future violations of Sections 17(a)(1), (2), and (3) of the Securities Act and Rule 2-02(b)(1) of +Regulation S-X. +B. Respondent is denied the privilege of appearing or practicing before the Commission +as an accountant. +C. After five years from the date of entry of this Order, Whetman may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the Chief +Accountant) to resume appearing or practicing before the Commission as: +a) a preparer or reviewer, or a person responsible for the preparation or review, + +23 + +of any public company’s financial statements that are filed with the Commission. Such an +application must satisfy the Commission that Respondent’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company for +which he works or in some other acceptable manner, as long as he practices before the Commission +in this capacity; and/or +b) an independent accountant. Such an application must satisfy the +Commission that: +i. A public accounting firm with which Respondent 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. A registered public accounting firm with which Respondent is +associated, has been inspected by the Board and that inspection did not identify any criticisms of or +potential defects in the respondent’s or the firm’s quality control system that would indicate that the +respondent will not receive appropriate supervision; +iii. Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and +iv. Respondent acknowledges his responsibility, as long as Respondent +appears or practices before the Commission as an independent accountant, to comply with all +requirements of the Commission and the Board, including, but not limited to, all requirements +relating to registration, inspections, concurring partner reviews and quality control standards. +D. The Commission will consider an application by Whetman 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 board of accountancy. However, if state +licensure is dependent on reinstatement by the Commission, the Commission will consider his +application on other merits. The Commission’s review may include consideration of, in addition to +the matters referenced above, any other matters relating to Respondent’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission. +E. Whetman shall pay a civil penalty of $15,000.00, to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject to Exchange Act +Section 21F(g)(3), which shall be paid in the following installments: $3,000.00 within 10 days of +the entry of this Order, and $12,000.00 in four installments of $3,000.00 due on October 1, 2015, +January 1, 2016, April 1, 2016, and one year from entry of this Order. If timely payment is not +made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. +F. Payment of civil penalties must be made in one of the following ways: + +a) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; +b) Respondent may make direct payment from a bank account via Pay.gov + +24 + +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +c) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange Commission and hand- +delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying the +Respondent by name in these proceedings, and the file number of these proceedings; a copy of the +cover letter and check or money order must be sent to Lara Shalov Mehraban, Division of +Enforcement, Securities and Exchange Commission, 200 Vesey Street, NY 10281. + +G. The Division of Enforcement (“Division”) may, at any time following the entry of +this Order, petition the Commission to: (1) reopen this matter to consider whether Respondent +provided accurate and complete financial information at the time such representations were made; +and (2) seek an order directing payment of disgorgement and pre-judgment interest. No other issue +shall be considered in connection with this petition other than whether the financial information +provided by Respondent was fraudulent, misleading, inaccurate, or incomplete in any material +respect. Respondent may not, by way of defense to any such petition: (1) contest the findings in this +Order; (2) assert that payment of disgorgement and interest should not be ordered; (3) contest the +amount of disgorgement and interest to be ordered; or (4) assert any defense to liability or remedy, +including, but not limited to, any statute of limitations defense. + +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. + +VII. + + It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S. C. §523, that the findings in this Order are true and admitted + +25 + +by Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree or +settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3704.pdf b/raw/aaer/2015/AAER-3704.pdf new file mode 100644 index 0000000000000000000000000000000000000000..bd247e631c793741809c6dd6b0bc4f45af9175dc Binary files /dev/null and b/raw/aaer/2015/AAER-3704.pdf differ diff --git a/raw/aaer/2015/AAER-3712.txt b/raw/aaer/2015/AAER-3712.txt new file mode 100644 index 0000000000000000000000000000000000000000..d2e0ff2aa55fdc3ebca7718cb21c38821af1c69a --- /dev/null +++ b/raw/aaer/2015/AAER-3712.txt @@ -0,0 +1,1394 @@ + + + + + + + + + + + + + + + + SEC.gov | Ryan Petersen; Arthur Knapp + + + + + + + + !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\/517421","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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Arthur Knapp + + + + + + + + + + + + Ryan Petersen; Arthur Knapp + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 23379 / October 6, 2015 + Accounting and Auditing Release No. 3712 / October 6, 2015 + Securities and Exchange Commission v. Ryan Petersen Civil Action No. 5:15-cv-04599 (N.D. Cal.) + Securities and Exchange Commission v. Arthur Knapp Civil Action No. 5:15-cv-04598 (N.D. Cal.) +   + SEC Charges Former Executives with Accounting Fraud and Other Accounting Failures + + + + + + + SEC Complaint --> + + + The Securities and Exchange Commission today charged two former top executives at OCZ Technology Group, Inc. for accounting failures at the now-bankrupt seller of computer memory storage and power supply devices. + + In a complaint filed in the Northern District of California, the SEC alleges that OCZ's former CEO Ryan Petersen engaged in a scheme to materially inflate OCZ's revenues and gross margins from 2010 to 2012. It separately charged OCZ's former chief financial officer Arthur Knapp for certain accounting, disclosure, and internal accounting controls failures at OCZ. Knapp agreed to settle the SEC's charges without admitting or denying the allegations against him. The SEC's litigation continues against Petersen. + + The SEC's complaints allege that: + + Petersen's scheme included mischaracterizing sales discounts as marketing expenses and having employees create false documentation to conceal the scheme, channel-stuffing OCZ's largest customer by shipping more goods than the customer could sell in the normal course of business, and concealing large product returns from OCZ's finance department and OCZ's auditor so that those returns would not be recorded in OCZ's books and records.   + + OCZ filings that Petersen signed and certified portrayed the company in a way that was a far cry from its true operational and financial condition.   + + + + Petersen personally profited from his misstatements by selling shares of OCZ stock and receiving a bonus during the period when OCZ's public filings contained inflated financial results.   + + + + Knapp instituted or maintained policies that caused OCZ to record transactions in a manner that was not in accordance with U.S. generally accepted accounting principles. These policies included reclassifying costs of goods sold as research and development expenses without sufficient basis for doing so, failing to capitalize labor and overhead costs in OCZ's inventory costs, recognizing revenues upon product shipment rather than upon delivery of the product to OCZ's customers, and understating OCZ's accruals for product returns.   + + + + As CFO, Knapp had responsibility for OCZ's internal accounting controls and procedures. Nevertheless, he failed to implement sufficient internal accounting controls to prevent OCZ from misclassifying sales discounts as marketing expenses and significantly overstating its revenues and gross profits. + + The SEC charged Petersen with violating the antifraud, certification, books and records, internal controls, lying to accountants, and clawback provisions of the federal securities laws and with aiding and abetting OCZ's violations of the reporting, books and records and internal controls provisions.  Specifically, Petersen is charged with violating Section 17(a) of the Securities Act of 1933 ("Securities Act"); Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"); Exchange Act Rules 10b-5, 13a-14, 13b2-1 and 13b2-2; and Section 304(a) of the Sarbanes-Oxley Act of 2002; and aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. The complaint seeks a permanent injunction, disgorgement plus prejudgment interest, a civil penalty, an officer and director bar, and forfeiture of Petersen's stock sales profits and bonus. + + The SEC charged Knapp with violating certain antifraud provisions, and the certification, and internal controls provisions of the federal securities laws, and with aiding and abetting OCZ's violations of the reporting, books and records, and internal controls provisions. Specifically, Knapp is charged with violation Sections 17(a)(2) and (3) of the Securities Act; Section 13(b)(5) of the Exchange Act; and Exchange Act Rules 13a-14 and 13b2-1; and aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act; and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13.  Knapp agreed to be permanently enjoined from violating or aiding and abetting violations of these provisions, to be barred from acting as an officer or director of a public company, to pay a total of $130,000 in disgorgement, prejudgment interest, and civil penalties, and to forego any claims against OCZ for $170,000 in unpaid compensation. The settlement is subject to court approval.  + + The SEC's investigation, which is continuing, has been conducted by Ian Dattner, Michi Harthcock, Jonathan Cowen, and Stacy Bogert under the supervision of Assistant Director Lisa Deitch. The litigation will be handled by Kevin Lombardi and Ian Dattner. + + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2015/AAER-3716.pdf b/raw/aaer/2015/AAER-3716.pdf new file mode 100644 index 0000000000000000000000000000000000000000..dc073346cda2c6d6b595848fe2c0aae733795392 Binary files /dev/null and b/raw/aaer/2015/AAER-3716.pdf differ diff --git a/raw/aaer/2015/AAER-3716.txt b/raw/aaer/2015/AAER-3716.txt new file mode 100644 index 0000000000000000000000000000000000000000..7fb9536ff8b4644e3db177002ac20c7b67ccb1f7 --- /dev/null +++ b/raw/aaer/2015/AAER-3716.txt @@ -0,0 +1,603 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES ACT OF 1933 +Release No. 9967 / October 27, 2015 +SECURITIES EXCHANGE ACT OF 1934 +Release No. 76275 / October 27, 2015 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3716 / October 27, 2015 +ADMINISTRATIVE PROCEEDING +File No. 3-16927 + +In the Matter of +THE ST. JOE COMPANY, +Wm. BRITTON GREENE, +WILLIAM S. McCALMONT, +JANNA L. CONNOLLY, CPA, +J. BRIAN SALTER, CPA, and +PHILLIP B. JONES, CPA, +Respondents. +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND +CEASE-AND-DESIST +PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES +ACT OF 1933, SECTIONS 4C AND 21C +OF THE SECURITIES EXCHANGE +ACT OF 1934, AND RULE 102(e) OF +THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL +SANCTIONS, CEASE-AND-DESIST +ORDERS AND PENALTIES + +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A +of the Securities Act of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of +1934 (“Exchange Act”) against The St. Joe Company, Wm. Britton Greene, William S. McCalmont, +Janna L. Connolly, CPA, J. Brian Salter, CPA, and Phillip B. Jones, CPA (collectively, +2 + +“Respondents”), and additionally as to McCalmont, Connolly, Salter and Jones, pursuant to +Exchange Act Section 4C1 and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice.2 +In anticipation of the institution of these proceedings, Respondents have submitted Offers of +Settlement (“Offers”), which the Commission has determined to accept. Solely for the purpose of +these proceedings and any other proceedings brought by or on behalf of the Commission, or to which +the Commission is a party, and without admitting or denying the findings herein, except as to the +Commission’s jurisdiction over them and the subject matter of these proceedings, which are admitted, +and except as provided in Section V. herein, 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, +Cease-and-Desist Orders and Penalties (“Order”), as set forth below. +II. +On the basis of this Order and Respondents’ Offers, the Commission finds +3 that: +A. Overview +The St. Joe Company, an NYSE-listed real estate developer, timberland owner, and resort +operator, its former senior management, and others, committed or caused violations of the federal +securities laws, resulting in materially overstated earnings and assets during 2009 and 2010.4 The +underlying improper conduct comprised, first, failing in two respects to comply with Generally +Accepted Accounting Principles (“GAAP”) in the impairment testing of the Company’s real estate +development assets; second, after discovering the broader of the aforementioned GAAP lapses in +October 2010, (i) failing to identify or correct any resulting errors in prior-period financial statements +and (ii) improperly using assumptions based on conditions not existing as of the quarter ended + +1 Section 4C provides, in relevant part, that: +The Commission may … deny, temporarily or permanently, to any person the privilege of appearing or +practicing before the Commission in any way, if that person is found . . . (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or the rules and regulations +thereunder. +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: +The Commission may … deny, temporarily or permanently, the privilege of appearing or practicing before it . . . +to any person who is found . . . to have willfully violated, or willfully aided and abetted the violation of any +provision of the Federal securities laws or the rules and regulations thereunder. +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any other +person or entity in this or any other proceeding. +4 These violations stemmed from the Company’s historical accounting and disclosure practices relating to its +valuation and impairment of real estate development assets which occurred prior to the 2011 replacement of the +Company’s Board of Directors and resignation of the Chief Executive Officer, Chief Financial Officer, and +Chief Accounting Officer. +3 + +September 30, 2010 in conducting that quarter’s impairment testing for certain real estate +developments; third, applying an unreasonable sales price assumption to undeveloped beachfront +land in one of the Company’s largest real estate developments in the fourth quarter of 2010; and +fourth, failing to specifically disclose, in its 2010 Form 10-K, that the Company had decided not to +proceed with the material development and planning of two of its largest real estate developments, +and had instead determined to bulk-sell the related undeveloped land in the future. In the course of +the foregoing, and by their respective acts and omissions detailed below, the Respondents committed +or caused various respective violations of the antifraud, internal controls, books-and-records, periodic +reporting and other provisions of the federal securities laws. +B. Respondents + +The St. Joe Company (“St. Joe” or “the Company”) is a Florida corporation headquartered in +WaterSound, Florida. The Company is a residential and commercial real estate developer, rural and +timberland owner, and resort operator. St. Joe’s common stock is registered with the Commission +pursuant to Section 12(b) of the Exchange act and listed on the New York Stock Exchange (“NYSE”) +under the ticker symbol “JOE.” At all relevant times, St. Joe’s fiscal year coincided with the calendar +year. +Wm. Britton Greene (“Greene”), age 61, resides in Winter Park, Florida. He served as St. +Joe’s Chief Operating Officer (“COO”) from August 2006, and its Chief Executive Officer (“CEO”) +from May 2008, until his resignation on February 25, 2011. +William S. McCalmont (“McCalmont”), age 59, resides in Santa Rosa Beach, Florida. He +served as St. Joe’s Chief Financial Officer (“CFO”) from May 2007 until his resignation on April 11, +2011. McCalmont has never been a Certified Public Accountant (“CPA”), but obtained a Chartered +Financial Analyst designation (“CFA”) in 1986, which is now inactive. From 2000 until October 19, +2015, McCalmont served on the Audit Committee of another public company. +Janna L. Connolly (“Connolly”), age 59, resides in Destin, Florida. She served as St. Joe’s +Chief Accounting Officer (“CAO”) from 1996 until April 11, 2011, when she succeeded McCalmont +as the Company’s CFO, and continued in that position until her resignation on May 7, 2012. +Connolly has been licensed as a CPA by the State of Florida since 1980. +J. Brian Salter (“Salter”), age 45, resides in WaterSound, Florida. He was St. Joe’s Manager +of Finance from 2005 until July 2, 2010, when he was promoted to Director of Accounting and +Finance. Salter continued in that position until May 17, 2011, when he was promoted to Vice +President of Finance and Accounting. Salter is currently the Company’s Senior Vice President of +Finance and Investments. Salter has been licensed as a CPA by the State of Florida since 1996. +Phillip B. Jones (“Jones”), age 46, resides in Jacksonville, Florida. He was St. Joe’s Director +of Accounting from 2006 until leaving the Company on June 30, 2010. Jones has been licensed as a +CPA by the State of Florida since 2002. He is currently employed as Vice President of Revenue for a +private company. + + +4 + +C. FACTS +1. Applicable GAAP and Controls Environment +Throughout the period relevant to this Order, i.e. January 1, 2009 through March 3, 2011 (the +“Relevant Period”), St. Joe was one of the largest real estate development companies in Florida. With +virtually all of its assets, income and revenue tied to real estate, it was, during the Relevant Period, of +central importance that those responsible for St. Joe’s financial reporting and internal accounting +controls have a command of, and properly apply, the GAAP applicable to its real estate assets (in +addition, of course, to all other relevant GAAP). Accounting Standards Codification 360-10 +(formerly FAS 144) (“ASC 360”) provides that long-lived assets to be held and used, including assets +under development, be tested for impairment whenever events or changes in circumstances indicate +that such an asset’s carrying amount may not be recoverable (“Triggering Events”);5 ASC-360 also +specifies both how to carry out, and how to apply the results of, such testing. +During the Relevant Period and pursuant to St. Joe’s internal accounting controls and policies +and procedures, responsibility for impairment testing was shared among Respondents Greene, +McCalmont, Connolly, Salter and/or Jones. For their part, during the Relevant Period and pursuant to +the Company’s policies, former CEO Greene, former CFO McCalmont, and former CAO Connolly +were each required to review and approve the impairment testing that was used for financial reporting +purposes. As Directors of Accounting and pursuant to the Company’s controls, Jones (for all of 2009 +as well as the first six months of 2010) and Salter (from July 2, 2010 through the balance of the +Relevant Period) were responsible for testing St. Joe’s long-lived real estate developments for +impairment on a quarterly basis.6 +In addition, Greene, McCalmont and Connolly,7 as members of St. Joe’s Investment +Committee, were responsible for approving all business assumptions and forecasted undiscounted +cash flows that were, among other things, used in the Company’s impairment testing. Throughout the +Relevant Period, St. Joe’s business plans and forecasted undiscounted cash flows for specific +residential real estate developments were captured in comprehensive “economic models” which +reflected assumptions concerning the future plans for each development, including annualized +pricing, appreciation rates, specific costs, and detailed expected sales time frames for specific types of +home sites. Pursuant to the Company’s internal policy, these economic models were updated at least +annually by the Company’s finance department and real estate development project managers. + + + +5 Such events or changes in circumstances include, among other things, a significant adverse change in business +climate impacting the relevant assets. See ASC 360-10-35-2. These events were present across all of St. Joe’s +developments during the Relevant Period, due to, among other things, economic recession, a significant +downturn in the Florida real estate market, and a major oil spill in the Gulf of Mexico. +6 During the Relevant Period, St. Joe conducted quarterly impairment testing because it considered the financial +crisis and the 2010 Gulf oil spill to be ongoing Triggering Events. +7 Connolly became a member of the Investment Committee in Q1 2010. +5 + +2. St. Joe Deviated From GAAP + During 2009 and 2010, the Company failed in two respects to conform with GAAP—with +one lapse impacting multiple periods and the other a single project and period—and each resulting in +an overstatement of the Company’s earnings and assets at the time. +a. Failure to Include all Necessary Costs in Impairment Testing +During all of 2009 and continuing through its second quarter of 2010, the Company’s +impairment testing failed to include all cash outflows necessary to develop, and that were expected to +arise as a direct result of the use and disposition of, St. Joe’s real estate developments.8 In particular, +the Company based its impairment testing on what it termed “Relative Sales Value” worksheets, or +“RSVs,” which were a partial summary of the cash flows found in the Company’s more +comprehensive approved economic models. Thus, using the RSVs as the basis for the Company’s +impairment testing resulted in the exclusion of certain necessary non-capitalized cash outflows +associated with its real estate developments. Had these additional required cash outflows been +included in the Company’s impairment testing, the Company would have been required to take +impairment charges on three of its largest real estate developments during the Relevant Period, +namely, the projects called Victoria Park, Southwood, and WaterColor. Combined, the impairments +not taken on these projects amounted to at least $55 million in Q1 2009 and $19 million in Q4 2009, +and resulted in materially misstated financial statements during those same periods, which continued +through the remainder of the Relevant Period.9 +As Directors of Accounting, Jones (during all of 2009 as well as the first six months of 2010), +and Salter (from July 2, 2010 through the balance of the Relevant Period) were responsible for +preparing the Company’s quarterly impairment testing in connection with the Company’s preparation +of annual and quarterly financial statements. Each should have known that the Company’s quarterly +impairment testing failed to comply with GAAP because the RSVs did not include all cash outflows +necessary to develop each project. +For their part, Greene, McCalmont and Connolly were responsible for reviewing and +approving the Company’s quarterly impairment testing. Additionally, as members of the Investment +Committee, Greene, McCalmont and Connolly were also responsible for reviewing and approving all +updates to the detailed business assumptions and cash flows in each of St. Joe’s real estate +development projects’ economic models. Greene, McCalmont and Connolly each failed to prevent or +detect the inconsistencies between the cash flows used in the RSVs for impairment testing and the +corresponding complete cash flows in the economic models. Each also failed to ensure that all +necessary costs be considered in the impairment testing which each reviewed and approved. As a +result, each failed to prevent the overstatements in earnings and assets that resulted from the +Company’s use of incomplete cash outflows in its impairment testing. + +8 ASC 360-10-35-29; ASC 360-10-35-34. +9 The Company reported a $67.8 million impairment in connection with the sale of its Victoria Park real estate +asset in Q4 2009. Accordingly, had the Company properly taken a $55 million impairment on the Victoria Park +asset in Q1 2009, its reported Q4 2009 impairment of Victoria Park would have been reduced. +6 + +b. Failure to Consider Alternative Courses of Action +The Company failed to apply the pertinent GAAP in another respect in the Fall of 2009, with +this lapse materially impacting a single project and reporting period. In particular, in performing and +approving the Company’s quarterly impairment testing of its Victoria Park project as a long-lived +asset to be held and used in connection with preparing the Company’s Q3 2009 financial statements, +Greene, McCalmont, and Connolly gave no consideration to the likelihood of selling that project in +bulk by December 31, 2009.10 They each omitted any such consideration despite St. Joe having made +substantial efforts to pursue and achieve a sale. Instead, the Q3 2009 impairment test of Victoria Park +was improperly performed using only the estimated cash flows expected from the long-term +development of the project. +In the Spring of 2009, the Company’s Investment Committee (which then included Greene +and McCalmont) approved the sale of Victoria Park in bulk at a substantial loss if such a transaction +could be closed by December 31, 2009.11 Immediately thereafter, the Company began pursuing the +sale of Victoria Park and, during its third quarter (which encompassed June through September), +received numerous letters of intent from buyers offering to purchase the property for prices ranging +from $9 million to $15 million. Before the end of the quarter, St. Joe decided to pursue a sale to +Company A, while maintaining contact with another interested party (hereinafter “Company B”) as a +potential back-up buyer. On October 1, 2009, during St. Joe’s quarter-end close process for Q3 2009, +Company A signed a contract to purchase Victoria Park for $15 million. On October 30, 2009, +however, Company A withdrew from the transaction, at which time McCalmont informed St. Joe’s +independent auditor and Audit Committee of Company A’s withdrawal. As a result of Company A’s +disengagement, St. Joe immediately pursued its contingency plan with the back-up buyer, Company +B. Only one day after Company A’s withdrawal, St. Joe scheduled a meeting with Company B to +negotiate the sale of the development, and only four days after Company A’s withdrawal, St. Joe sent +Company B a draft purchase agreement. Further, in anticipation of a sale and in order to accelerate +the timing of a sale, St. Joe had, by October 2009, prepared documentation that it felt would likely be +requested by a buyer. As a result of St. Joe’s maintaining Company B as a potential contingency +purchaser, early preparation of documentation, and immediate follow-up with Company B, Company +B entered into a purchase and sale agreement, subject to diligence, to purchase Victoria Park for $11 +million on November 12, 2009, two weeks after Company A withdrew. The transaction closed on +December 15, 2009, and on that day the Company filed a Form 8-K announcing the sale of Victoria +Park. +During the four days between Company A’s withdrawal from the transaction on October 30th +and St. Joe’s November 3, 2009 filing of its Q3 2009 Form 10-Q, St. Joe performed impairment +testing on Victoria Park as an asset to be held and used (under development) without considering the + +10 In performing an impairment test, estimated undiscounted cash flows should consider the likelihood of all +possible outcomes associated with any alternative courses of action under consideration for asset. ASC +360-10-35-30. +11 St. Joe was pursuing this sale in order to take advantage of a tax-loss carryback benefit then available to the +Company for losses occurring before the end of 2009. This tax-loss carryback benefit could have been obtained +only if the sale of Victoria Park were completed before the end of the 2009 calendar year. +7 + +likelihood of a potential sale of the project by the end of 2009.12 Instead, St. Joe considered only the +single course of action of St. Joe’s fully developing the property through 2026. Had St. Joe +considered the undiscounted cash flows associated with even a small likelihood of selling Victoria +Park by year end 2009, and had it—pursuant to ASC 360—incorporated such likelihood into its +impairment testing, it would have been required to impair Victoria Park by at least $55 million in its +Q3 2009 filing, a material amount.13 +In performing procedures related to the Company’s Q3 2009 impairment testing for Victoria +Park, the Company’s independent auditors relied on representations made by Greene, McCalmont, +and Connolly in a management representation letter associated with their Q3 2009 review that the +probability of selling Victoria Park by year end 2009 was “highly improbable, such that it [was] +essentially nil.” While McCalmont informed the independent auditors of the existence of Company B +as a potential back-up buyer, neither he, nor any of the other executives, informed the auditors of the +extensive steps St. Joe had taken towards consummating a sale with Company B, including the fact +that a draft purchase agreement was sent to Company B on the same day that Greene, McCalmont, +Connolly signed the management representation letter. Accordingly, St. Joe’s failure to perform the +Q3 2009 impairment testing of Victoria Park in accordance with GAAP went undetected by the +Company’s independent auditors. +3. Failures in the Wake of Discovering the Incorrect Accounting +On October 13, 2010, a short-seller gave a public presentation alleging that St. Joe was +overvaluing its real estate development assets and failing to take material impairment charges. +Following the presentation, there was increased focus within the Company on its impairment testing. +Although the Company’s impairment testing, as prepared by Salter and reviewed and approved by +Greene, McCalmont and Connolly, had continued—up to and including the day of the short-seller +presentation—to improperly utilize RSVs, Salter at some point came to realize that this RSV-based +method of impairment testing had been improper because it failed to include all necessary cash +outflows. Salter subsequently caused the Company to change its impairment testing methodology +going forward to one properly based on cash flows in the Company’s comprehensive economic +models, which included additional necessary cash outflows. Greene, McCalmont, Connolly and +Salter nonetheless did not identify or correct any errors in St. Joe’s prior-period financials that +resulted from the faulty methodology. Salter also improperly used assumptions generated after the +quarter ended September 30, 2010 in connection with at least one real estate development in +conducting that particular quarter’s impairment testing. +a. Failure to Review Prior Periods +Greene, McCalmont, Connolly and Salter failed to review or effectively cause a review of St. +Joe’s accounting for prior periods, and also failed to identify, correct or cause to be corrected the + +12 The updated Victoria Park model was not subjected to the Company’s established Investment Committee or +impairment testing processes, as Greene, McCalmont, and Connolly knew. +13 The $67.8 million Victoria Park impairment charge (referenced in note 9, supra ), was taken by St. Joe in Q4 +2009 to reflect the finalized sale of Victoria Park to Company B at a significant loss. +8 + +resulting errors in previously issued financial statements.14 While Salter recognized past flaws in St. +Joe’s impairment testing process and changed the Company’s impairment testing methodology to one +properly including additional necessary cash outflows, he failed to review the impairment accounting +for prior periods. For his part, Greene also had concerns over prior period impairment testing +independent of Salter’s discovery of the improper accounting. Greene expressed these concerns to +McCalmont and Connolly within a few days following the short-seller presentation, and asked +McCalmont to confirm that St. Joe’s impairment procedures were compliant in prior periods before +St. Joe filed its Q3 2010 financials. McCalmont nevertheless did not review prior periods, and +Greene failed to follow up with McCalmont on the issue. For her part, Connolly also failed to +conduct any review of prior period accounting. +Had Salter, McCalmont or Connolly reviewed the impairment testing for prior periods, or had +Greene caused such a review to take place, they would have discovered that St. Joe had improperly +failed to record at least $74 million in impairments, as described above, associated with three of its +real estate developments from approximately Q1 2009 through at least Q2 2010. As a result, the +aforementioned errors were not corrected in the Company’s relevant previously issued financial +statements. +b. Failure to Use Existing Approved Assumptions For Q3 2010 Impairment +Testing +As noted above, the Company’s faulty RSV-based impairment testing had persisted until the +very day of the short-seller presentation. In particular, on October 13, 2010, Greene, McCalmont and +Connolly had performed the final management review of St. Joe’s Q3 2010 impairment testing, which +Salter had prepared using the improper RSV methodology. Had this impairment testing been +performed properly during the October 13, 2010 review, however, by including all necessary future +cash outflows, a material impairment would have been required for at least one of the Company’s real +estate developments. +Following the short-seller presentation, the Company’s auditors asked for all of St. Joe’s +economic models for its real estate developments in connection with the auditors’ review of, among +other things, St. Joe’s impairment testing for the quarter ended September 30, 2010. In response, +Salter sent at least one economic model reflecting materially updated assumptions adopted +subsequent to the Company’s internal October 13, 2010 impairment review.15 These updated +assumptions should not have been used in conducting the impairment testing associated with +preparing the third quarter financial statements because the assumptions were based on conditions not +existing as of September 30, 2010.16 Had St. Joe tested the economic models with assumptions + +14 See ASC 250-10-45-23. +15 The updated economic model was not subjected to the Company’s established Investment Committee process, +as Salter knew. +16 Evidence about conditions that did not exist at the balance sheet date should not be recognized in the financial +statements issued as of the balance sheet date. Instead, the entity should consider whether the nature of the new +evidence should be disclosed to keep the financial statements from being misleading. See ASC 855-10-25-3 and +ASC 855-10-50-2. +9 + +adopted as of September 30, 2010, it would have been required to account for approximately $15 +million in impairments in its Q3 2010 Form 10-Q.17 +4. Applying Unreasonably High Beachfront Pricing for Impairment Purposes +Windmark Beach II (“Windmark II”), located in Port St. Joe, Florida, was St. Joe’s largest real +estate development in terms of capital expenditures during 2009 and 2010, with a book value in St. +Joe’s public filings of over $165 million, including commercial and resort operations. Windmark II +was also a primary target of the October 13, 2010 short-seller presentation, which heavily criticized +the project’s lack of development and stated that Windmark II was overvalued. +In Q4 2010, St. Joe adopted a new business plan for the Windmark II development, referred to +as a “bulk sale” strategy, whereby St. Joe would cease all material development of the project, retain +all undeveloped land until 2020, and sell it in bulk at that time. The new bulk-sale economic model, +however, also assigned an unreasonably high valuation to certain undeveloped beachfront land in +Windmark II. Specifically, the new valuation of the undeveloped beachfront land was based on a +price of $6,000 per-linear foot as of 2010. The valuation’s future bulk-sale price, in the year 2020, +was over $7,600 per-linear foot, or $1.4 million per acre, based on an assumed annual appreciation of +3%. Greene approved these prices despite evidence then existing and known to him indicating a +substantially lower value. +18 The Company’s Vice President of Development refused to sign the +portion of the Windmark II model with an undeveloped beachfront price above $3,500 per linear foot. +As a result, Greene signed off on the Windmark II bulk undeveloped beachfront portion of the +updated Windmark II economic model. For their part, although McCalmont and Connolly were both +members of the Investment Committee approving economic models at the time and had responsibility +for approving quarterly impairment testing, neither raised any concerns or otherwise took any steps to +test the reasonableness of this pricing assumption. +The unreasonable $6,000 per-linear foot undeveloped beachfront pricing in the revised +Windmark II economic model had the effect of generating sufficient notional cash flows to render the +project recoverable and thus not require any impairment charge in Q4 2010. Had St. Joe performed +an impairment test using, instead, a reasonable valuation based on comparable sales and other +available evidence, the Windmark II real estate development would not have been recoverable, and +the Company would have been required to take an impairment charge of at least $80 million in Q4 +2010. + + + +17 Moreover, St. Joe’s independent auditors were not made aware of the fact that the updated economic model +employed assumptions not based on conditions existing as of the end of the third quarter 2010. +18 During 2010, there were only two beachfront home site sales in Windmark II. Both sales had a +price-per-linear-foot of less than $2,000. Furthermore, St. Joe personnel assembled comparable property sales +from other non-St. Joe projects, and, out of the 21 sales in question, only one was priced at or above $6,000 per +linear foot, and only one was priced greater than $1 million per acre. It does not appear that any of this +evidence—all available at the time—was considered in estimating cash flows for the impairment test for +Windmark II. +10 + +5. Failing to Disclose Significant Change in Business Strategy +St. Joe’s 2010 Form 10-K contained material misstatements and omissions concerning its +development plans for two of its largest real estate projects, Windmark II and Southwood. In Q4 +2010, St. Joe’s Investment Committee (then consisting of Greene, McCalmont and Connolly) +adopted new “bulk sale” strategies and economic models for both these developments. These new +strategies constituted a significant shift for the Company that halted all material future development at +both sites and instead consisted of long term retention of the undeveloped land and selling it, +undeveloped, in the future. +St. Joe’s disclosures concerning the Windmark II and Southwood developments in relevant +sections of its 2010 10-K, however, failed to mention this significant change in strategy. Instead, as to +Windmark II, St. Joe represented (Item 1, Business of the Company), that “[p]lans for [Windmark II] +include approximately 1,516 residential units and 76,000 square feet of commercial space,” and that +the community would include “approximately 14 miles of walkways and boardwalks, including a 3.5 +mile boardwalk.” By contrast, the Company’s approved economic model for Windmark II, as of +December 31, 2010, provided for total residential development of 191 home sites – comprising just +13% of the development promised in the 10-K. +As to Southwood, St. Joe’s 2010 10-K represented (in Item 1, Business of the Company) that +Southwood remained “[p]lanned to include approximately 4,770 residential units.” By contrast, the +Company’s approved economic model for Southwood, as of December 31, 2010, called for ceasing +all future material parcel development and selling the undeveloped land through 2020.19 +Greene and McCalmont, in certifying the Company’s 2010 Form 10-K in their capacities as +CEO and CFO, respectively, and during a time of heighted public scrutiny over St. Joe’s real estate +development assets, should have known that the Company’s disclosures concerning continued +development plans at Windmark II and Southwood were misleading because they failed to disclose +the Company’s Investment Committee-approved plans to cease material residential development and +sell undeveloped land in bulk. Further, in their Sarbanes-Oxley 302 certifications, Greene and +McCalmont both represented that they reviewed the Form 10-K and that, based on their knowledge, +the report did not contain any material misstatements and omissions. +6. Inadequate Books and Records +During the Relevant Period, St. Joe failed to maintain adequate books-and-records concerning +its impairment testing of real estate developments. Specifically, during the Relevant Period, St. Joe +failed to sufficiently perform the following: maintain adequate records of quarterly impairment +testing reviewed as part of its quarterly and annual accounting close process; document support for +assumptions used in undiscounted cash flows used in impairment testing; document its processes and +procedures concerning impairment testing; maintain the integrity of the economic models and RSVs +used in connection with past impairment testing; and document identified errors in past impairment +testing. Importantly, St. Joe’s books-and-records failures during the Relevant Period adversely + +19 The remaining development planned for Southwood was the building of “backbone” roads and connections to +general utility services—development that was required as a condition of the Community Development District +loans that St. Joe had received for the project. +11 + +impacted the SEC investigation leading to this Order, including causing unreasonably prolonged +uncertainty concerning the Company’s historic impairment testing procedures and causing +substantial delays to, and otherwise unnecessary steps in, that investigation.20 +7. Later Developments +Following the Relevant Period, St. Joe made significant changes in personnel at both the +management and Board of Directors level, referenced in note 4 above. In addition, in the fourth quarter +of 2011, with Salter’s assistance, St. Joe’s new Board and management (which included Connolly as +CFO at the time), citing the adoption of a new business strategy, recognized aggregate impairment losses +of over $374 million associated with its investments in real estate. These impairments included more +than $126 million to Windmark II and more than $17 million to Southwood. Collectively, the +impairments taken by the Company in Q4 2011 resulted in reductions to St. Joe’s investment in real +estate, and to its total asset value, of more than 50% and more than 35%, respectively. +Findings +Based on the foregoing, the Commission finds that Respondent The St. Joe Company violated +Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and (B), and +Exchange Act Rules 12b-20, 13a-1. 13a-11 and 13a-13. +Based on the foregoing, the Commission further finds: (1) that Respondent Greene violated +and Respondents McCalmont, Connolly and Salter willfully21 violated Securities Act Sections +17(a)(2) and (3), Exchange Act Section 13(b)(5), and Exchange Act Rules 13b2-1 and 13b2-2; (2) +that Respondents Greene, McCalmont, Connolly, Salter and Jones caused St. Joe’s violations of +Exchange Act Sections 13(a), 13(b)(2)(A) and (B), and Exchange Act Rules 12b-20, 13a-1, 13a-11 +and 13a-13; (3) that Respondent Greene violated and Respondent McCalmont willfully violated +Exchange Act Rule 13a-14; (4) that Respondents McCalmont, Connolly, Salter and Jones also +willfully violated the federal securities laws or rules and regulations thereunder pursuant to Section +4C of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice; and (5) that +Respondent Jones willfully violated Exchange Act Rule 13b2-1 and caused St. Joe’s violation of +Securities Act Section 17(a)(2). +III. +In determining to accept Respondent St. Joe’s Offer, the Commission considered remedial +steps taken by the Company since the conduct detailed herein, including enhancements to its + +20 Since the Relevant Period, the Company, under the direction of its newly constituted Board and senior +management, has undertaken significant measures to strengthen its policies and procedures for maintaining +books and records. +21 The use of the word “willful” (both here and throughout the Findings section of this Order) does not reflect a +finding that the Respondents acted with the intention to violate the law or knowledge that they were doing so. As +used in the governing provisions of law, “willfully” means only that the actor “intentionally committed t he act +which constitutes the violation.” Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965); see also Wonsover v. SEC, 205 F.3d +408, 414 (D.C. Cir. 2000). “There is no requirement that the actor also be aware that he is violating one of the +Rules or Acts . . . .” Tager, 344 F.2d at 8. +12 + +impairment testing, accounting, internal controls, and books-and-records policies and procedures, +together with its replacement of its executive officers and Board. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed +to in Respondents’ Offers. +Accordingly, it is hereby ORDERED, effective immediately, that: +A. Pursuant to Securities Act Section 8A, Respondents St. Joe, Greene, McCalmont, +Connolly, and Salter shall cease and desist from committing or causing any violations and any +future violations of Securities Act Sections 17(a)(2) and (3), and Respondent Jones shall cease +and desist from committing or causing any violations and any future violations of Securities +Act Section 17(a)(2). +B. Pursuant to Exchange Act Section 21C, Respondents St. Joe, Greene, McCalmont, +Connolly, Salter and Jones shall cease and desist from committing or causing any violations +and any future violations of Exchange Act Sections 13(a), 13(b)(2)(A) and (B), and Exchange +Act Rules 12b-20, 13a-1, 13a-11 and 13a-13; Respondents Greene, McCalmont, Connolly +and Salter shall further cease and desist from committing or causing any violations and any +future violations of Exchange Act Section 13(b)(5) and Exchange Act Rules 13b2-1 and +13b2-2; Respondents Greene and McCalmont shall further cease and desist from committing +or causing any violations and any future violations of Exchange Act Rule 13a-14; and, finally, +Respondent Jones shall further cease and desist from committing or causing any violations +and any future violations of Exchange Act Rule 13b2-1. +C. Respondent St. Joe shall, within ten (10) days of the entry of this Order, pay a civil +money penalty in the amount of $2,750,000, to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If payment of this civil penalty is not timely made, additional interest shall accrue +pursuant to 31 U.S.C. § 3717. +D. Respondent Greene shall, within ten (10) days of the entry of this Order, pay (i) +disgorgement of $400,000 plus prejudgment interest of $52,300, for a total of $452,300, and +(ii) a civil money penalty in the amount of $120,000, to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3). If payment of disgorgement is not timely made, additional +interest shall accrue pursuant to SEC Rule of Practice 600. If payment of the civil penalty is +not timely made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. +E. Respondent McCalmont shall, within ten (10) days of the entry of this Order, pay +(i) disgorgement of $180,000 plus prejudgment interest of $22,868, for a total of $202,868, +and (ii) a civil money penalty in the amount of $120,000, to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3). If payment of disgorgement is not timely made, additional +interest shall accrue pursuant to SEC Rule of Practice 600. If payment of the civil penalty is +not timely made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. +13 + +F. Respondent Connolly shall, within ten (10) days of the entry of this Order, pay (i) +disgorgement of $60,000 plus prejudgment interest of $10,896, for a total of $70,896, and (ii) +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 payment of disgorgement is not timely made, additional interest shall accrue +pursuant to SEC Rule of Practice 600. If payment of the civil penalty is not timely made, +additional interest shall accrue pursuant to 31 U.S.C. § 3717. +G. Respondent Salter shall, within ten (10) days of the entry of this Order, pay a civil +money penalty in the amount of $25,000, to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If payment of this civil penalty is not timely made, additional interest shall accrue +pursuant to 31 U.S.C. § 3717. +H. All payments required by this Order must be made in one of the following ways: +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; +(2) Respondent may make direct payment from a bank account via Pay.gov through +the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission +and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying +Respondent as a Respondent in these proceedings, and the file number of these +proceedings. A copy of the cover letter and check or money order, or documentation of +whatever other form of payment is used, must be simultaneously sent to Stephen L. +Cohen, Associate Director, Division of Enforcement, Securities and Exchange +Commission, 100 F St., N.E., Washington, DC 20549. +I. Respondents McCalmont, Connolly, Salter and Jones are each denied the privilege +of appearing and practicing before the Commission as an accountant. +J. After three (3) years from the date of this Order, Respondents Connolly and Salter +may, and after two (2) years from the date of this Order, Respondent Jones may request that +the Commission consider his or her reinstatement by submitting an application (Attention: +Office of the Chief Accountant) to resume appearing or practicing before the Commission as: +(1) A preparer or reviewer, or a person responsible for the preparation or review, of +any public company’s financial statements that are filed with the Commission. +14 + +Such an application must satisfy the Commission that Respondent’s work in +his/her practice before the Commission will be reviewed either by the independent +audit committee of the public company for which he/she works or in some other +acceptable manner, as long as he/she practices before the Commission in this +capacity; and/or +(2) An independent accountant. Such an application must satisfy the Commission that: + +(a) Respondent, or the public accounting firm with which he/she is associated, is +registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration +continues to be effective; +(b) Respondent, or the registered public accounting firm with which he/she is +associated, has been inspected by the Board and that inspection did not identify +any criticisms of or potential defects in the respondent’s or the firm’s quality +control system that would indicate that the respondent will not receive +appropriate supervision; +(c) Respondent has resolved all disciplinary issues with the Board, and has +complied with all terms and conditions of any sanctions imposed by the Board +(other than reinstatement by the Commission); and +(d) Respondent acknowledges his/her responsibility, as long as Respondent +appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, including, but +not limited to, all requirements relating to registration, inspections, concurring +partner reviews and quality control standards. +K. The Commission will consider an application by Respondents Connolly, Salter, +and Jones to resume appearing or practicing before the Commission provided that his/her state +CPA license is current and he/she has resolved all other disciplinary issues with the applicable +state boards of accountancy. However, if state licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to the applying Respondent’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission. +L. After two (2) years from the date of this order, Respondent McCalmont 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. +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 Greene, McCalmont, Connolly and Salter, and further, any debt for disgorgement, +prejudgment interest, civil penalty or other amounts due by each of the aforementioned Respondents +15 + +under this Order or any other judgment, order, consent order, decree or settlement agreement entered +in connection with this proceeding, is a debt for the violation by said Respondent of the federal +securities laws or any regulation or order issued under such laws, as set forth in Section 523(a)(19) of +the Bankruptcy Code [11 U.S.C. §523(a)(19)]. +By the Commission. + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3717.txt b/raw/aaer/2015/AAER-3717.txt new file mode 100644 index 0000000000000000000000000000000000000000..64b37fe717375b7c9c6b03f5bbd5fd288a691149 --- /dev/null +++ b/raw/aaer/2015/AAER-3717.txt @@ -0,0 +1,409 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 76401 / November 9, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3717 / November 9, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16952 + + + +In the Matter of + +Larry D. Liberfarb, P.C., + +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 Larry D. +Liberfarb, P.C. (“Liberfarb” or “Respondent”) pursuant to Sections 4C1 and 21C of the Securities + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character +or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the securities +laws or the rules and regulations thereunder. + +2 + +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice.2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this the Order Instituting +Public Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making +Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + + This matter concerns violations of the Commission’s auditor independence rules by +Liberfarb. Liberfarb audited the annual financial statements that were filed with the Commission +for 20 broker-dealer audit clients for the fiscal years ending January 1, 2010 through September 30, +2011. For at least one audit of each of these broker-dealer audit clients, Liberfarb was not +independent under auditor independence criteria established by the Commission and made +applicable by Exchange Act Rule 17a-5(f)(3) to audits of brokers and dealers.4 As a result of this + +2 Rule 102(e)(1)(ii) provides, in relevant part, that: + + The Commission may censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have engaged in unethical +or improper professional conduct. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +4 The provisions of Exchange Act Rule 17a-5 referred to herein are those in effect during, and applicable to, the +relevant conduct. On July 30, 2013, the Commission adopted certain amendments to Rule 17a-5. See Broker- +Dealer Reports, SEC Exchange Act Release No. 34-70073 (July 30, 2013), 78 Fed. Reg. 51910 (Aug. 21, +2013). Among other things, the amendments to Rule 17a-5 require that audits of brokers and dealers be +performed in accordance with Public Company Accounting Oversight Board standards, effective for audits of +fiscal years ending on or after June 1, 2014. The auditor independence requirement of Rule 2-01 of +Regulation S-X applied to broker-dealer audits both before and after the July 30, 2013 amendments. At the + +3 + +conduct, Liberfarb engaged in improper professional conduct, violated the auditor independence +rules, and caused each of the broker-dealers’ failure to file an annual report audited by an +independent accountant. + +B. RESPONDENT + + Respondent Liberfarb, a professional corporation, is an accounting and auditing firm +registered with the Public Company Accounting Oversight Board (“PCAOB”). Liberfarb has one +shareholder, Larry D. Liberfarb, and is located in Norwood, Massachusetts. During the Relevant +Period, Liberfarb also employed, on a part-time basis, a Certified Public Accountant who assisted +the firm with audit engagements. + +C. FACTS + + 1. Lack of Independence + + a. During fiscal years ending January 1, 2010 through September 30, 2011 (the +“Relevant Period”), Liberfarb served as the independent public accountant for 20 broker-dealer +audit clients. In connection with at least one audit performed for each of these broker-dealer audit +clients during the Relevant Period, Liberfarb prepared the financial statements and/or notes to the +financial statements that were filed with the Commission on Form X-17A-5. + +b. For example, Liberfarb audited the annual financial statements for Broker-Dealer +A for the fiscal year ending September 30, 2011. During the audit, Liberfarb was provided with +financial documents generated by Broker-Dealer A, including a balance sheet and a profit and +loss statement. Liberfarb reviewed and tested these documents, and the financial data contained +therein, as part of the audit. + +c. Liberfarb then utilized the information contained in these documents to create and +revise a set of financial statements to be filed with the Commission. In particular, using the prior +year’s financial statements as a template, Liberfarb personnel working on Liberfarb computers +typed and updated the new set of financial statements, including the notes to the financial +statements. Liberfarb then provided the set of financial statements it had prepared to Broker- +Dealer A’s management for approval. + +d. In November 2011, Broker-Dealer A filed with the Commission a Form X-17A-5 +Part III for the fiscal year ended September 30, 2011. Included in that filing is an audit report +signed by Liberfarb and stating, among other things, that Liberfarb’s audit of Broker-Dealer A +was conducted “in accordance with auditing standards generally accepted in the United States of +America.” + + +time of the relevant conduct, prior to the amendments, that requirement was set out in Rule 17a-5(f)(3). It is +now set out in Rule 17a-5(f)(1). +4 + +e. Liberfarb engaged in substantially similar conduct in connection with at least one +audit for 19 additional broker-dealer clients during the Relevant Period. + + 2. Violations + +a. Section 17(e)(1)(A) of the Exchange Act requires that every registered broker or +dealer “annually file with the Commission a balance sheet and income statement certified by an +independent public accounting firm, or by a registered public accounting firm if the firm is +required to be registered under the Sarbanes-Oxley Act of 2002, prepared on a calendar or fiscal +year basis, and such other financial statements (which shall, as the Commission specifies, be +certified) and information concerning its financial condition as the Commission, by rule may +prescribe as necessary or appropriate in the public interest or for the protection of investors.” +b. Exchange Act Rule 17a-5(e)(1)(i) states: “An audit shall be conducted by a public +accountant who shall be in fact independent as defined in paragraph (f)(3) of this section herein, +and he shall give an opinion covering the statements filed pursuant to paragraph (d) . . . .” +Exchange Act Rule 17a-5(f)(3) further states that, for such audits, “[a]n accountant shall be +independent in accordance with the provisions of Rule 2-01(b) and (c) of Regulation S-X.” + +c. Exchange Act Rule 17a-5(g) requires that “[t]he audit shall be made in accordance +with generally accepted auditing standards” and Exchange Act Rule 17a-5(i) requires that “[t]he +accountant’s report shall . . . [s]tate whether the audit was made in accordance with generally +accepted auditing standards.” Generally accepted auditing standards (“GAAS”) require auditors to +maintain strict independence from their audit clients; an auditor “must be free from any obligation +to or interest in the client, its management or its owners.” See Statement on Auditing Standard No. +1, Section 220.03. Accordingly, if an auditor’s report states that its audit was performed in +accordance with GAAS when the auditor was not independent, then it has violated Exchange Act +Rule 17a-5(i). See In the Matter of Rosenberg Rich Baker Berman & Company and Brian Zucker, +CPA, Exchange Act Release No. 69765 at p. 5 (June 14, 2013). +d. Rule 2-01(c)(4) of Regulation S-X provides that an accountant is not independent +if, at any point during the audit and professional engagement period, the accountant provides +prohibited non-audit services to an audit client. Rule 2-01(c)(4)(i) of Regulation S-X provides that +prohibited non-audit services include bookkeeping or other services related to the accounting +records or financial statements of the audit client, and defines such services as: + +Any service, unless it is reasonable to conclude that the results of these services will +not be subject to audit procedures during an audit of the audit client’s financial +statements, including: +(A) Maintaining or preparing the audit client’s accounting records; + +(B) Preparing the audit client’s financial statements that are filed +with the Commission or that form the basis of financial +statements filed with the Commission; or +5 + + +(C) Preparing or originating source data underlying the audit client’s +financial statements. + +e. Rule 2-01(c)(4)(i) of Regulation S-X specifically prohibits an audit firm from +preparing an audit client’s financial statements that are filed with the Commission. In this context, +preparing financial statements includes but is not limited to: aggregating line items from internal +books and records to the financial statements; changing line item descriptions; drafting or editing +notes to the financial statements; and converting FOCUS reports or bookkeeping software program +reports into financial statements. With respect to the audit of Broker-Dealer A, and the additional +audits in which Liberfarb engaged in substantially similar conduct, Liberfarb engaged in one or +more of the above prohibited actions. + +f. As a result of Liberfarb’s conduct in preparing the financial statements, including +the notes thereto, Liberfarb was not independent of its broker-dealer audit clients under the +independence criteria established by Rule 2-01(c)(4) of Regulation S-X, which Exchange Act Rule +17a-5 made applicable to the audits of broker-dealer financial statements. As the Commission +explained in adopting Rule 2-01(c)(4), providing such services for an audit client “impairs the +auditor’s independence because the auditor will be placed in the position of auditing the firm’s +work when auditing the client’s financial statements. . . . In addition, keeping the books is a +management function, the performance of which leads to an inappropriate mutuality of interests +between the auditor and the audit client.” Revision of the Commission’s Auditor Independence +Requirements, Exchange Act Release No. 43602, at IV.D.4.b(i) (November 21, 2000). See also +Strengthening the Commission’s Requirements Regarding Auditor Independence, Exchange Act +Release No. 47265 (“keeping the books is a management function, which also is +prohibited”)(January 28, 2003). + + g. Liberfarb violated Exchange Act Rule 17a-5(i) by representing in its audit reports +that it had performed the audits of the broker-dealers’ financial statements in accordance with +GAAS when in fact, because of the independence impairment described above, the audits had not +been performed in accordance with GAAS. + +h. Exchange Act Section 17(a) and Rule 17a-5 require broker-dealers to file annual +reports containing financial statements audited by independent public accountants. No showing of +scienter is necessary to establish a violation of Exchange Act Section 17(a)(1). See In the Matter +of Orlando Joseph Jett, Exchange Act Release No. 49366 at n.45 (March 5, 2004) (citing SEC v. +Drexel Burham Lambert Inc., 837 F. Supp. 587, 610 (S.D.N.Y. 1993); Stead v. SEC, 444 F.2d 713, +716-17 (10th Cir. 1971), cert denied, 404 U.S. 1059 (1972)). +i. Under Section 21C of the Exchange Act, a person is a “cause” of another’s primary +violation if the person knew or should have known that his act or omission would contribute to the +primary violation. Negligence is sufficient to establish “causing” liability under Section 21C when +a person is alleged to have caused a primary violation that does not require scienter. In re KPMG +6 + +Peat Marwick, Exchange Act. Rel. No. 43862 (Jan. 19, 2001), aff’d, KPMG v. SEC, 289 F.3d 109 +(D.C. Cir. 2002). +j. Liberfarb caused its broker-dealer audit clients to violate Exchange Act Section +17(a) and Rule 17a-5. Liberfarb, an audit firm registered with the PCAOB and operated by a +Certified Public Accountant, knew or should have known that its conduct contributed to its audit +clients’ violations of Exchange Act Section 17(a) and Rule 17a-5. +k. Rule 102(e) of the Commission’s Rules of Practice allows the Commission to +censure a person if it finds that such person has engaged in “improper professional conduct.” +Exchange Act § 4C(a)(2); Rule 102(e)(1)(ii). Rule 102(e) defines improper professional conduct, +in part, as: “[a] single instance of highly unreasonable conduct that results in a violation of +applicable professional standards in circumstances in which the registered public accounting firm +or associated person knows, or should know, that heightened scrutiny is warranted.” Exchange Act +§ 4C(b)(2); Rule 102(e)(1)(iv)(B). + l. Questions regarding an auditor’s independence always warrant heightened scrutiny. +See Amendment to Rule 102(e) of the Commission’s Rules of Practice, 63 Fed. Reg. 57164, 57168 +(Oct. 26, 1998) (codified at 17 C.F.R. Part 201). The Commission has defined the “highly +unreasonable” standard as: + +an intermediate standard, higher than ordinary negligence but lower than the +traditional definition of recklessness used in cases brought under Section 10(b) of +the Exchange Act and Rule 10b-5 of the Exchange Act. The highly unreasonable +standard is an objective standard. The conduct at issue is measured by the degree of +the departure from professional standards and not the intent of the accountant. + +Id. at 57,167; see also In the Matter of Ernst & Young LLP, Admin. Proc. File No. 3-10933, SEC +Initial Decision Release No. 249, at 60 (Apr. 16, 2004). + + m. Based on the conduct set forth above, Liberfarb engaged in highly unreasonable +conduct that resulted in violations of applicable professional standards when it knew or should +have known that heightened scrutiny was required. + + 3. Findings + + a. Based on the foregoing, the Commission finds that Liberfarb engaged in improper +professional conduct pursuant to Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice. + +b. Based on the foregoing, the Commission finds that Liberfarb committed violations +of Exchange Act Rule 17a-5(i) and caused 20 broker-dealers’ violations of Section 17(a) and Rule +17a-5 promulgated thereunder. + + +7 + + 4. Respondent’s Remedial Efforts + + In determining to accept the Offer, the Commission considered remedial acts promptly +undertaken by Respondent. + + 5. Undertakings + + Liberfarb undertakes: + +a. within ninety (90) days from the date of the Order, to establish written policies and +procedures, or to revise and/or supplement existing written policies and procedures, for the purpose +of providing Liberfarb with reasonable assurance of compliance with applicable independence +requirements, including those requirements of Rule 2-01 of Regulation S-X applicable to an SEC +Registered Broker-Dealer Engagement (defined to mean an engagement to provide a report – +whether an audit report, an examination report, or a review report – required under Exchange Act +Rule 17a-5(d)(1)(i)(C), as amended); + +b. within ninety (90) days from the date of the Order, to establish a policy of ensuring +training, whether internal or external, on an annual or more frequent regular basis, concerning +applicable independence requirements, including those requirements of Rule 2-01 of Regulation S- +X applicable to an SEC Registered Broker-Dealer Engagement, of any Firm audit personnel who +participate in any way in the planning or performing of any SEC Registered Broker-Dealer +Engagement; + +c. within ninety (90) days from the date of the Order and before Liberfarb’s +commencement of any SEC Registered Broker-Dealer Engagement (or, where Liberfarb by the +date of this Order has already commenced but not completed such an engagement, before +Liberfarb’s release of its report), to ensure training pursuant to the policy described in paragraph +(5)(b) above has been provided on at least one occasion; + +d. to provide a copy of the Order – + + (i) within thirty (30) days from the date of the Order, to all audit personnel +employed by, or associated with (as defined in PCAOB Rule 1001(p)(i)), Liberfarb as of the date +of the Order; and + + (ii) within thirty (30) days from the date of the Order, to any client of Liberfarb +as of the date of the Order for which Liberfarb has performed or has been engaged to perform an +SEC Registered Broker-Dealer Engagement; + +e. to certify, in writing, compliance with the undertakings set forth above in +paragraphs 5(a) through 5(d)(ii). The certification shall identify the undertakings, provide written +evidence of compliance in the form of a narrative, and be supported by exhibits sufficient to +demonstrate compliance. The Commission staff may make reasonable requests for further +8 + +evidence of compliance, and Respondent agrees to provide such evidence. The certification and +supporting material shall be submitted to Stephen L. Cohen, Associate Director, Division of +Enforcement, Securities and Exchange Commission, 100 F Street, N.E., Washington, DC 20549- +5553, with a copy to the Office of Chief Counsel of the Enforcement Division, no later than one +hundred twenty (120) days from the date of the Order. + + +IV. + + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Liberfarb’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Liberfarb is hereby censured. + +B. Liberfarb shall cease and desist from committing or causing any violations and any +future violations of Section 17(a) of the Exchange Act and Rule 17a-5 promulgated thereunder. + + C. Liberfarb shall comply with the undertakings enumerated in Section (III)(C)(5) +above. + + D. Liberfarb shall pay a civil money penalty in the amount of $30,000 to the Securities +and Exchange Commission for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3). Payment shall be made in the following installments: $7,500 +within ten days of the entry of this Order; $7,500 within 120 days of the entry of this Order; $7,500 +within 240 days of the entry of this Order; and $7,500 within 360 days of the entry of this Order. +If any payment is not made by the date the payment is required by this Order, the entire +outstanding balance of civil penalties, plus any additional interest pursuant to 31 U.S.C. § 3717, +shall be due and payable immediately, without further application. Payment must be made in one +of the following ways: + + (1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + + (2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + (3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + + +9 + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Larry D. Liberfarb, P.C. as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Stephen L. +Cohen, Division of Enforcement, Securities and Exchange Commission, 100 F St., N.E., +Washington, DC 20549-5553. + + E. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3721.txt b/raw/aaer/2015/AAER-3721.txt new file mode 100644 index 0000000000000000000000000000000000000000..5eba8d9279ba4b3ccc1187360419e0c0b2600e85 --- /dev/null +++ b/raw/aaer/2015/AAER-3721.txt @@ -0,0 +1,904 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 76607 / December 10, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3721 / December 10, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16993 + + + +In the Matter of + +PETER MESSINEO, CPA and +MESSINEO & CO., CPAS, +LLC, + +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS +PURSUANT TO SECTIONS 4C AND 21C +OF THE SECURITIES EXCHANGE ACT +OF 1934 AND RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS +AND A CEASE-AND-DESIST ORDER + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that +public administrative and cease-and-desist proceedings be, and hereby are, instituted against +Peter Messineo (“Messineo”) and Messineo & Co., CPAs, LLC (“Messineo & Co.”) (together, +“Respondents”) pursuant to Sections 4C1 and 21C of the Securities Exchange Act of 1934 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character +or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the securities +laws or the rules and regulations thereunder. + +2 + +(“Exchange Act”) and Rule 102(e)(1)(ii) and 102(e)(1)(iii) of the Commission’s Rules of +Practice.2 + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted an +Offer of Settlement (“Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over them and the subject matter of +these proceedings, which are admitted, and except as provided herein in Section V, Respondents +consent to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, +Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a +Cease-and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondents’ Offer, the Commission finds3 that: + +A. SUMMARY + +Messineo & Co. is a small, Florida-based accounting firm. Among other things, it has +performed audits of public companies whose stock is registered with the Commission and who +file audited financial statements with the Commission. Messineo is a partner at and majority +owner of Messineo & Co. Messineo & Co. and Messineo performed deficient audits of public +company clients, which caused those clients to file misleading audited financial statements with +the Commission. To cover up their deficiencies, certain employees of Messineo & Co. +backdated and falsified its audit documentation. Messineo also performed sub-standard +engagement quality reviews for another auditor. In late 2012, Messineo effectively merged his + +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 + +firm with another firm to form DKM Certified Public Accountants, Inc. (“DKM”). The merger +exacerbated Respondents’ on-going violations of the independence rules for accountants +involving DKM’s clients and Messineo. Prior to the merger, Messineo had been the chief +financial officer (“CFO”) of two of DKM’s clients and concurrently the employer of a partner on +DKM’s audit engagement team. After the merger, Messineo was a shareholder of two of DKM’s +clients and DKM was auditing Messineo’s work. Lastly, Messineo failed to timely file with the +Commission Forms 3, 4, or 5 and Schedule 13Ds detailing his beneficial ownership of stock in +these audit clients. + +As a result, Messineo & Co. and Messineo violated auditing standards and independence +rules, caused issuers to file misstatements, and failed to disclose his beneficial ownership. In +addition, Messineo falsely certified annual and quarterly reports as chief financial officer of two +issuers. Respondents’ conduct violated the Federal securities laws and the rules and regulations +thereunder. Respondents’ conduct was willful and constitutes improper professional conduct. + +B. RESPONDENTS + + Messineo & Co., CPAs, LLC (“Messineo & Co.”) is registered with the Public +Company Accounting Oversight Board (“PCAOB”) as a public accounting firm based in +Clearwater, Florida. The limited liability company operated as a sole proprietorship under the +name Peter Messineo, CPA from 2009 until December 17, 2012, when it effectively merged with +Drake & Klein, CPAs PA (“Drake & Klein”) to form DKM Certified Public Accountants, Inc. +(“DKM”). Peter Messineo separated from DKM in April 2013 and began operating Messineo & +Co. again, but under its present name and form. During 2012, Messineo & Co. performed audit +services for over 70 clients, but only had one partner -- sole owner Peter Messineo -- authorized +to sign or issue audit reports. In 2012, Messineo & Co. employed Robin Bigalke and Richard +Confessore and paid Joseph E. Mohr to perform engagement quality reviews (“EQRs”). + + Peter Messineo, age 54, resides in Palm Harbor, Florida and is currently a partner at and +95% owner of Messineo & Co. In 2012, he was the sole owner of Messineo & Co. (then named +“Peter Messineo, CPA”) and CFO of Issuer A and Issuer B (described below). From December +17, 2012 to April 16, 2013, Messineo was a partner and one third owner of DKM and a +shareholder of Issuer A and Issuer B stock. Messineo has been licensed as a certified public +accountant (“CPA”) in New York since 1989 and in Florida since 2007. + +C. OTHER RELEVANT PARTIES + + DKM Certified Public Accountants, Inc. (“DKM”) is a PCAOB-registered public +accounting firm based in Clearwater, Florida. DKM is a Florida corporation and successor to +audit firms: (i) Drake Klein & Messineo CPAs PA and (ii) Drake & Klein. In December 2012, +when Peter Messineo joined DKM, the firm changed its operational name from Drake & Klein to +DKM. From December 2012 through April 2013, DKM had four partners authorized to issue +audit reports on behalf of the firm, including: Messineo, Confessore, and Charles Klein. + +4 + + Ronald R. Chadwick, P.C. (“Chadwick”) was a PCAOB-registered public accounting +firm based in Aurora, CO. From at least September 2010 through October 2013, Messineo +performed engagement quality reviews of audits conducted by Chadwick. In April 2015, the +PCAOB revoked Chadwick’s registration and has barred Mr. Ronald Chadwick from being an +associated person of a registered public accounting firm. The PCAOB imposed those sanctions +on the basis of its findings of violations of the PCAOB’s rules and auditing standards in +connection with the audits of financial statements of five issuer clients for which Messineo +provided the engagement quality review. +Richard Confessore, age 73, resides in Sarasota, Florida and has been a licensed CPA in +Florida since 1970. Confessore is currently a “Quality Review Partner” at DKM. During 2011, +Confessore was the CFO and worked at Issuer C Corporation. During 2012-2013, Confessore +performed engagement quality reviews for the annual audits and interim reviews DKM +performed for Issuers A and B. In addition, from June 2012 – December 2012, Confessore was +an employee for Messineo & Co, then a sole proprietorship owned by Peter Messineo. +Charles U. Klein, age 60, resides in Dunedin, Florida and is currently President of +DKM. From approximately February 2012 through June 2013, Klein was the lead engagement +partner for the services DKM performed for Issuer A and Issuer B, including annual audits and +interim reviews of Issuer B’s and Issuer A’s financial statements. Klein has been a licensed CPA +in Florida since 1985, excluding 1995 to 1998 when his license was inactive. +Joseph E. Mohr, age 49, resides in Spring Hill, Florida and is currently an assistant +professor at a Florida university. From 2009 through 2012, Messineo & Co. hired Mohr to +perform EQRs. At the time, Mohr lived and worked in Florida, but was not licensed as a CPA in +Florida or in any other state. + + Issuer A was incorporated in Delaware in 2005 and is currently headquartered in California. +During 2012 and 2013, Issuer A’s common stock was registered with the Commission pursuant to +Section 12(g) of the Exchange Act. In its most recent Form 10-K filed with the Commission, +Issuer A states that its business offers marketing tools and expertise to advertisers. From February +2010 through November 2012, Messineo served as CFO of Issuer A. In 2012 and 2013, Issuer A +engaged Drake & Klein and then DKM to perform audit services. + + Issuer B was incorporated in Nevada in 2004 and is currently headquartered in St. +Petersburg, FL. During 2012 and 2013, Issuer B’s common stock was registered with the +Commission pursuant to Section 12(g) of the Exchange Act. In its most recent Form 10-K filed +with the Commission, Issuer B states that its business “creates a unified solution path to securely +manage Advanced Metering Infrastructure and other Smart Grid optimization applications such as +substation and distribution automation.” From September 2010 through October 2012, Messineo +served as CFO of Issuer B. In 2012 and 2013, Issuer B engaged Drake & Klein and then DKM to +perform audit services. +Issuer C was incorporated in Colorado in 1981. Currently, it is a Florida corporation +headquartered in Southbury, CT. During 2012 and 2013, Issuer C’s common stock was registered +5 + +with the Commission pursuant to Section 12(g) of the Exchange Act. In its most recent Form 10-K +filed with the Commission, Issuer C states that its business consists of “operating motor freight +carriers, providing truck load service throughout the forty-eight contiguous United States.” +Confessore resigned as CFO of Issuer C on April 12, 2011. In 2012, Issuer C engaged Messineo & +Co. to provide audit services. Messineo & Co. did not complete its audit or issue an audit report +before the formation of DKM. In 2013, Issuer C engaged DKM to provide audit services for the +same period for which Messineo & Co. had been engaged. + +D. MESSINEO & CO. AND MESSINEO ENGAGED IN IMPROPER +PROFESSIONAL CONDUCT BY CONDUCTING AUDITS AND REVIEWS NOT +IN ACCORDANCE WITH PCAOB STANDARDS. + +1. During 2011 and 2012, Messineo & Co. -- at Messineo’s direction -- issued audit +reports to at least 13 issuers without first obtaining the required engagement quality +review (“EQR”) and concurring approval in violation of PCAOB auditing standards. + +2. PCAOB Auditing Standard No. 7 (Engagement Quality Review) (“AS 7”) enumerates +the standards for an EQR or concurring review. An EQR is required for every audit +of an annual report and review of interim financial information for a quarterly report. +See PCAOB AS 7.1. + +3. PCAOB AS 7 provides that “[i]n an audit, the firm may grant permission to the client +to use the engagement report only after the engagement quality reviewer provides +concurring approval of issuance” and “[i]n a review of interim financial information, +the firm may grant permission to the client to use the engagement report (or +communicate an engagement conclusion to its client, if no report is issued) only after +the engagement quality reviewer provides concurring approval of issuance.” See +PCAOB AS 7.13 and AS 7.18. + +4. For some of the 13 engagements, Messineo requested an EQR from Joseph Mohr +after he had already issued the audit report. For other engagements, Messineo +requested the EQR before he issued the audit report, but failed to wait for Mohr to +respond before issuing the audit report and granting permission to use it. + +5. For at least one engagement, Messineo & Co. issued an audit report without even +soliciting an EQR because it erroneously deemed EQRs “unnecessary” for clients +who were “blank check” companies. + +6. By issuing audit reports to the 13 issuers without an EQR and concurring approval, +Messineo & Co. violated PCAOB standards. See PCAOB AS 7. + + + +6 + +E. RESPONDENTS VIOLATED RULE 2-02 OF REGULATION S-X BECAUSE +MESSINEO & CO’S AUDIT REPORTS DID NOT COMPLY WITH PCAOB +STANDARDS. + +7. Rule 2-02(b)(1) of Regulation S-X (Representations as to the Audit included in +Accountants’ Reports) requires an accountant’s report to state “whether the audit was +made in accordance with generally accepted auditing standards.” 17 CFR §210.2- +02(b). These standards include the standards of the PCAOB. “[R]eferences in +Commission rules and staff guidance and in the federal securities laws to [generally +accepted auditing standards “GAAS”] or to specific standards under GAAS, as they +related to issuers, should be understood to mean the standards of the PCAOB plus any +applicable rules of the Commission.” See SEC Release No. 34-49708. + +8. Messineo & Co.’s audit reports for each of these 13 engagements inaccurately stated +that Messineo & Co. had “conducted [its] audit in accordance with the standards of +the Public Company Accounting Oversight Board (United States).” + +9. In fact, Messineo & Co.’s audits were not conducted in accordance with PCAOB +auditing standards because they lacked an EQR and concurring approval of issuance. +See PCAOB AS 7.1 and AS 7.13. + +10. Accordingly, Messineo & Co. violated and Messineo aided and abetted and caused a +violation of Rule 2-02 of Regulation S-X. + +F. RESPONDENTS’ CONDUCT CAUSED VIOLATIONS OF EXCHANGE ACT +SECTIONS 13(a) AND 15(d) AND RULES 13a-1 AND 15d-1 THEREUNDER. + +11. Exchange Act Sections 13(a) and 15(d) and Rules 13a-1 and 15d-1 require an issuer +to file accurate annual reports on Form 10-K. + +12. As detailed above, Messineo & Co. and Messineo issued false audit reports to at least +13 issuers because they lacked an EQR and concurring approval of issuance. Twelve +of the 13 issuers were required to file annual statements under Sections 13(a) and +15(d). In accordance with Messineo & Co.’s and Messineo’s expectations, the 12 +issuers incorporated the false audit reports into their respective annual reports (Form +10-Ks) filed with the Commission. As a result, the issuers’ annual reports contained +material misstatements because they included false audit reports that lacked an EQR +and concurring approval of issuance. + +13. Messineo & Co. and Messineo, therefore, caused at least 12 different issuers to +violate Sections 13(a) and 15(d) of the Exchange Act and Rules 13a-1 and 15d-1 +thereunder. + +7 + +G. RESPONDENTS ENGAGED IN IMPROPER PROFESSIONAL CONDUCT BY +FALSIFYING RECORDS AND BACKDATING DOCUMENTS. + +14. The PCAOB had issued an inspection report to Messineo & Co. in April 2012 and +notified Messineo that it was going to conduct another inspection approximately 12 +months following its report. + +15. In August 2012, Messineo directed Messineo & Co. personnel to review its audit files +to identify and correct deficiencies in its audit documentation. Because Messineo had +issued engagement reports without concurring approval, deficiencies existed in +Messineo & Co.’s EQR documentation. + +16. PCAOB Auditing Standard No. 7 requires that documentation of an EQR should +“contain sufficient information to enable an experienced auditor, having no previous +connection with the engagement, to understand the procedures performed by the +engagement quality reviewer…to comply with the provisions of this standard, +including information that identifies: + +* * * +c. The date the engagement quality reviewer provided concurring +approval of issuance or, if no concurring approval of issuance was +provided, the reasons for not providing the approval. + +See PCAOB AS 7.19. + +17. PCAOB AS 7 also states that “[d]ocumentation of an engagement quality review +should be included in the engagement documentation” and that “[t]he requirements +related to retention of and subsequent changes to audit documentation in PCAOB +Auditing Standard No. 3, Audit Documentation, apply with respect to the +documentation of the engagement quality review.” See PCAOB AS 7.20 and 7.21. + +18. PCAOB Auditing Standard No. 3 (Audit Documentation) (“AS 3”) provides the +requirements for documentation an auditor should prepare and retain for +engagements. Per PCAOB AS 3, audit documentation must document the nature, +timing, and results of the procedures performed. See PCAOB AS 3.6. + +19. PCAOB AS 3 requires an auditor to assemble a complete and final set of audit +documentation no more than 45 days after the report release date (“documentation +completion date”). Audit documentation may not be deleted or discarded following +the documentation completion date. PCAOB AS 3 mandates that any documentation +added after the document completion date “must indicate the date the information was +added, the name of the person who prepared the additional documentation, and the +reason for adding it.” See PCAOB AS 3.15 and AS 3.16. + +8 + +20. To document EQRs, Messineo & Co. used a “Concurring Review Questionnaire,” +otherwise known as a “Form 4.2.” + +21. After completing an EQR, the engagement quality reviewer–typically Mohr–was +supposed to answer the questions on the Concurring Review Questionnaire and then +sign and date the Questionnaire. The date on the form was to indicate when Mohr +provided concurring approval of the issuance of the audit report. Messineo had no +other system of tracking when Mohr completed an EQR other than the Form 4.2. + +22. Mohr then emailed the signed forms to Messineo & Co. where the executed +Concurring Review Questionnaires were included within the firm’s audit files. + +23. Beginning in August 2012, Messineo & Co. identified many engagements for which +either: + +a. it was missing a Concurring Review Questionnaire signed by Mohr; or + +b. the signed Concurring Review Questionnaire was dated after the audit +report had been issued by Messineo & Co., indicating that Messineo & +Co. had issued the audit report prior to Mohr’s completion of his EQR. + +24. As a result, Messineo & Co. personnel under Messineo’s general supervision +requested Mohr backdate his signature on Concurring Review Questionnaires for +multiple public company audit clients. + +25. Mohr complied with many–if not all–of Messineo & Co.’s requests. He knowingly +misrepresented the dates that he completed his EQRs. + +26. Messineo & Co. personnel then inserted the backdated Concurring Review +Questionnaires into Messineo & Co.’s audit files, including into files which should +have been–pursuant to auditing standards–closed because the audit report had been +issued more than 45 days earlier. + +27. In addition, in connection with audits of two clients, Messineo & Co. personnel +completed at some time various audit checklists and forms, including “Audit +Documentation Checklists” and “Supervision, Review, and Approval Forms.” + +28. On the forms, Messineo & Co.’s audit manager signed Peter Messineo’s name and +initials on his behalf thereby certifying that the EQRs for those two audits were +timely and adequately performed and that the audit files contained documentation of +the EQRs. Those representations were false. As of the date indicated on the +respective forms, Mohr had not performed the EQRs for those two audits. These +false documents were included within Messineo & Co.’s audit files. + +9 + +29. The backdating and falsification of audit documentation and the insertion of the false +documents into Messineo & Co.’s audit files constitutes violations of PCAOB AS 3 +and PCAOB AU 230 (Due Professional Care in the Performance of Work). + +30. PCAOB Interim Auditing Standard AU 230 “requires the independent auditor to plan +and perform his or her work with due professional care. Due professional care +imposes a responsibility upon each professional within an independent auditor's +organization to observe the standards of field work and reporting.” See PCAOB AU +230.02. + +H. MESSINEO ENGAGED IN IMPROPER PROFESSIONAL CONDUCT WHEN +HE CONDUCTED ENGAGEMENT QUALITY REVIEWS FOR AN ANOTHER +AUDITOR IN CONTRAVENTION OF PCAOB STANDARDS. + +31. From approximately September 2010 until October 2013, Messineo functioned as +Ronald Chadwick’s engagement quality reviewer. He consented to the issuance of +over 130 audit reports for over 80 different Chadwick issuer clients during that +period. For at least 5 of these engagements, Messineo conducted substandard +reviews. + +32. PCAOB AS 7 requires that “an engagement quality reviewer must have competence, +independence, integrity, and objectivity.” See PCAOB AS 7.4. + +33. Per PCAOB AS 7, in an audit the engagement quality reviewer should review +engagement documentation, and specifically “should”: + + * * * + +10(g). Read other information in documents containing the financial +statements to be filed with the Securities and Exchange Commission +("SEC") and evaluate whether the engagement team has taken +appropriate action with respect to any material inconsistencies with the +financial statements or material misstatements of fact of which the +engagement quality reviewer is aware. + +See PCAOB AS 7.10. + +34. To conduct the EQRs, Messineo relied upon Chadwick to provide him with audit +materials and documents. But Chadwick did not provide him with the requisite +documentation for Messineo to conduct a proper EQR. + +35. For example, for at least five reviews, Chadwick failed to provide a complete draft +filing (Form 10-K, Form S-1, etc.) for Messineo’s review. While Messineo may have +reviewed some form of the financial statements, Messineo did not read -- as required +10 + +by PCAOB AS 7 -- the information in documents containing the financial statements +that were to be filed with the Commission prior to issuing his EQR. Nor could he +evaluate whether Chadwick had taken appropriate action with respect to any material +inconsistencies with the financial statements or material misstatements of fact. + +36. Despite lacking sufficient documentation to conduct a proper EQR, Messineo +approved Chadwick’s issuance of the audit reports in violation of PCAOB auditing +standards. See PCAOB AS 7. + +I. AS CHIEF FINANCIAL OFFICER OF ISSUER A AND ISSUER B, MESSINEO +FALSELY CERTIFIED THEIR ANNUAL AND QUARTERLY REPORTS IN +2012 IN VIOLATION OF SECTION 13(a) OF THE EXCHANGE ACT AND +RULE 13a-14 THEREUNDER AND AIDED AND ABETTED AND CAUSED +ISSUER A AND ISSUER B TO VIOLATE SECTION 13(a) OF THE EXCHANGE +ACT AND RULES 13a-1 AND 13a-13 THEREUNDER. + +37. As Chief Financial Officer of Issuer A, Messineo provided certifications included +with Issuer A’s Forms 10-Qs for the quarters ending June 30, 2012 (filed August 14, +2012) and September 30, 2012 (filed November 14, 2012). + +38. As Chief Financial Officer of Issuer B, Messineo provided certifications included +with Issuer B’s Form 10-K for the annual period ending June 30, 2012 (filed October +15, 2012) and its amended Form 10-K filed October 22, 2012 covering the same +period. + +39. With respect to each report, Messineo certified that: + + “Based on my knowledge, this report does not contain any untrue +statement of a material fact or omit to state a material fact necessary to +make the statements made, in light of the circumstances under which +such statements were made, not misleading with respect to the period +covered by this report.” + +40. Messineo provided certifications for Issuer A and Issuer B pursuant to Rule 13a-14 +under the Exchange Act. + +41. Rule 13a-14(a) under the Exchange Act requires the principal financial officer to +certify that, based on his knowledge, the Form 10-K or 10-Q submitted to the +Commission by the issuer “does not contain any untrue statement of a material fact or +omit to state a material fact necessary to make the statements made, in light of the +circumstances under which such statements were made, not misleading….” 17 CFR +§240.13a-14(a). + +11 + +42. Messineo’s certifications were false because Messineo knew that Issuer A’s and +Issuer B’s auditor, DKM, was not independent as required by Section 13(a) of the +Exchange Act and Rule 10-01(d) of Regulation S-X. See Exchange Act Section 13(a) +(requiring issuers to file annual reports certified by “independent public +accountants”); 17 CFR §210.10-01(d) (requiring that prior to filing, interim financial +statements included in quarterly reports on Form 10-Q “must be reviewed by an +independent public accountant using professional standards and procedures for +conducting such reviews….”). An auditor’s lack of independence is a material fact. + +43. DKM lacked independence because the engagement quality reviewer at DKM for the +Issuer A and Issuer B engagements -- Richard Confessore -- concurrently maintained +a prohibited business relationship with Messineo. + +44. Rule 2-01(b) of Regulation S-X (Qualifications of Accountants) states that the +“Commission will not recognize an accountant as independent, with respect to an +audit client, if the accountant is not…capable of exercising objective and impartial +judgment on all issues encompassed within the accountant’s engagement.” 17 CFR +§210.2-01. + +45. Rule 2-01(c) (3) states certain “business relationships” are inconsistent with +independence: + +Business Relationships. An accountant is not independent if, at any +point during the audit and professional engagement period, the +accounting firm or any covered person in the firm has any direct or +material indirect business relationship with an audit client, or with +persons associated with the audit client in a decision-making capacity, +such as an audit client’s officers, directors, or substantial stockholders. + +17 CFR §210.2-01(c)(3) + +46. Rule 2-01(f)(11) defines “covered person” to include partners, principals, +shareholders, and employees of an accounting firm on the “audit engagement team.” +17 CFR §210.2-01(f)(11). The “audit engagement team” includes the “concurring or +reviewing partner.” 17 CFR §210.2-01(f)(7)(ii)(B). + +47. PCAOB standards also require auditor independence. PCAOB Rule 3520 (Auditor +Independence) requires that, “[a] registered public accounting firm and its associated +persons must be independent of the firm’s audit client throughout the audit and +professional engagement period.” + +48. PCAOB AS 7 requires that “an engagement quality reviewer must have competence, +independence, integrity, and objectivity.” See PCAOB AS 7.4. + +12 + +49. In June 2012, Messineo hired Confessore to work for him at Messineo & Co. +Confessore worked at Messineo & Co. until mid-December 2012. Thus, at the same +time Confessore conducted engagement quality reviews for DKM’s reviews of Issuer +A’s interim financial statements filed August 14, 2012 and November 14, 2012 and +for DKM’s audit of Issuer B’s annual financial statements filed October 15, 2012 and +amended October 22, 2012, Confessore worked under Messineo -- the Chief +Financial Officer of both Issuer A and Issuer B. Confessore’s employment with +Messineo constitutes an improper business relationship and conflict of interest. + +50. As an auditor subject to independence rules, Messineo knew or should have known +that the audits and reviews being performed by DKM with Confessore as the +engagement quality reviewer violated the independence rules and relevant +professional standards. + +51. Despite Confessore’s and, therefore, DKM’s lack of independence, DKM issued an +audit report to Issuer B falsely stating that its audit was performed in accordance with +PCAOB standards. + +52. Despite knowing Confessore and DKM lacked independence, Messineo still certified +Issuer A’s quarterly reports and Issuer B’s annual report and amended annual report +in violation of Rule 13a-14. + +53. Messineo signed and approved for filing Issuer B’s annual report even though it +included DKM’s false audit report and had not been certified by an independent +public accountant. He signed and approved for filing Issuer A’s quarterly reports +even though Issuer A’s interim financial statements had not previously been reviewed +by an independent public accountant + +54. Therefore, Messineo aided and abetted and caused Issuer A’s and Issuer B’s +violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 +promulgated thereunder. + +J. IN 2013, MESSINEO CAUSED DKM NOT TO BE INDPENDENT BY +POSSESSING A DIRECT FINANCIAL INTEREST IN DKM’S AUDIT CLIENTS +ISSUER A AND ISSUER B. + +55. Messineo resigned as Issuer B’s Chief Financial Officer effective October 30, 2012 +and Issuer A’s Chief Financial Officer effective November 15, 2012. + +56. In mid-December 2012, Messineo joined DKM. Messineo was a partner and one- +third owner of DKM. + +57. Issuer A engaged DKM to perform audit services for the annual period ending +December 31, 2012 (Form 10-K filed April 15, 2013). Issuer B engaged DKM to +13 + +perform a review for the quarter ending December 31, 2012 (Form 10-Q filed +February 19, 2013). + +58. Charles Klein continued to be DKM’s lead partner for the Issuer A and Issuer B +engagements and Confessore continued as the engagement quality reviewer. DKM +continued to lack independence from Issuer A and Issuer B because Messineo owned +stock in both companies during the audit and professional engagement periods. + +59. Rule 2-01(c)(1) (Financial Relationships) states that an accountant is not independent +if, at any point during the audit and professional engagement period, the accountant +has a “direct financial interest” in the accountant’s audit client, including when: + +A. The accounting firm [or] any covered person in the firm…has any +direct investment in an audit client, such as stocks, bonds, notes, +options, or other securities. + + * * * +B. Any partner, principal, shareholder, or professional employee of the +accounting firm…has filed a Schedule 13D…with the Commission +indicating beneficial ownership of more than five percent of an audit +client’s securities. + +17 C.F.R. §210.2-01(c)(1)(i)(A)-(B) + +60. Rule 2-01(f)(11) defines “covered person” to include any “other partner, principal, or +shareholder from an ‘office’ of the accounting firm in which the lead audit +engagement partner primarily practices in connection with the audit.” 17 CFR +§210.2-01(f)(11). “Office” means “a distinct sub-group within an accounting firm, +whether distinguished along geographic or practice lines.” 17 CFR §210.2-01(f)(15). + +61. During the professional engagement periods of DKM’s audit of Issuer A and interim +review of Issuer B from January through April 2013, Messineo -- a DKM partner +working in the same small office as Klein -- owned stock in DKM’s clients Issuer A +and Issuer B. As of April 15, 2013, when Issuer A’s Form 10-K was filed, Messineo +owned approximately 6% of the outstanding stock of Issuer A. + +62. DKM was, therefore, not independent of its clients Issuer A and Issuer B with respect +to DKM’s audit and interim review of their public filings made in February 2013 and +April 2013, respectively, because Messineo possessed a direct financial interest (stock +ownership) in those companies during DKM’s professional engagement periods. See +Regulation S-X Rule 2-01(c)(1). + +14 + +K. IN 2013, MESSINEO CAUSED DKM NOT TO BE INDEPENDENT BECAUSE +HE WAS AN OFFICER OF DKM’S AUDIT CLIENTS ISSUER A AND ISSUER B +DURING THEIR RESPECTIVE AUDIT PERIODS. + +63. Rule 2-01(c)(2) (Employment Relationships) states that an accountant is not +independent if, at any point during the audit and professional engagement period, the +accountant has an “employment relationship” with an audit client, including when: + +A former officer, director, or employee of an audit client becomes a +partner, principal, shareholder, or professional employee of the accounting +firm, unless the individual does not participate in, and is not in a position +to influence, the audit of the financial statements of the audit covering any +period during which he or she was employed by or associated with that +audit client. + +17 CFR §210.2-01(c)(2)(iv) (Employment at Accounting Firm of Former Employee of +Audit Client). + +64. From at least January 2013 through April 2013, Messineo had space at DKM’s small +office in Clearwater, Florida along with Charles Klein and approximately 6-8 staff +personnel. Messineo’s office was less than 10 feet away from the offices of those +providing audit services to Issuer A and Issuer B. + +65. From December 2012 through April 2013, Messineo had access to all of DKM’s audit +files, including those for the audit of Issuer A and the interim review of Issuer B. +Messineo supervised the audit staff at DKM, including the audit manager who +worked on the Issuer A audit, in some of DKM’s other engagements. + +66. During a significant portion of the professional engagement period for DKM’s audit +of Issuer A, Messineo possessed Issuer A’s books and records. + +67. DKM was, therefore, not independent of its clients Issuer A and Issuer B with respect +to DKM’s audit and interim review of their financial statements made in February +2013 and April 2013 because Messineo -- a partner and shareholder of DKM -- was +the CFO of Issuer A and Issuer B during the audit period and in a position to +influence DKM’s audit and interim reviews. See Regulation S-X Rule 2-01(c)(2). + +L. MESSINEO CAUSED DKM NOT TO BE INDEPENDENT BY EMPLOYING +ISSUER C’S FORMER CFO TO AUDIT ISSUER C FOR THE PERIOD HE WAS +CFO. + +68. Confessore was the CFO of Issuer C until April 12, 2011. Following his resignation, +Confessore made himself available to Issuer C on a part-time basis to assist with +accounting matters. On June 29, 2011, Issuer C filed a “Notification of Late Filing” +15 + +for its Form 10-K. The notification explained that Issuer C was unable to complete +its accounting at the subsidiary level. Issuer C’s notification identified Confessore as +the person to contact in regard to the notification. + +69. In 2012, Issuer C engaged Messineo & Co. to perform audit services. Messineo +employed Confessore to participate in the year-end March 31, 2012 audit of Issuer C +even though Confessore had been CFO and worked for Issuer C during the audit +period. As a result, Messineo & Co. was not independent of its client Issuer C. + +70. In June 2013, DKM issued an audit report for Issuer C’s financial statements for the +period from April 1, 2011 to March 31, 2012. Prior to his departure from DKM in +April 2013, Messineo was the partner responsible for the engagement and allowed +Confessore to participate despite his prior employment with Issuer C. + +71. As a result of Messineo’s action, DKM was not independent of Issuer C with respect +to its public filings made in June 2013 because Confessore -- a partner of DKM -- +was the CFO of Issuer C during the audit period and participated in the audit. See +Regulation S-X Rule 2-01(c)(2). + +M. MESSINEO VIOLATED SECTIONS 13(d) AND 16(a) OF THE EXCHANGE ACT +AND RULES 13d-1, 13d-2, AND 16a-3 THEREUNDER WHEN HE FAILED TO +TIMELY FILE REQUIRED OWNERSHIP DISCLOSURES. + +72. Messineo failed to file required Commission ownership disclosures, including Forms +3, 4, and 5 and Schedule 13Ds, concerning stock ownership in Issuer A and Issuer B, +within the time period required. + +73. Section 13(d) of the Exchange Act states: + +(1) Any person who, after acquiring directly or indirectly the +beneficial ownership of any equity security of a class which is +registered pursuant to section 12 of this title…, is directly or +indirectly the beneficial owner of more than 5 per centum of such +class shall, within ten days after such acquisition…file with the +Commission, a statement containing such of the following +information….” + +(2) If any material change occurs in the facts set forth in the statement +filed with the Commission, an amendment shall be filed with the +Commission….” + +74. Rule 13d-1 (Filing of Schedule 13D and 13G) requires that a person satisfy his +obligations to file statements with the Commission under Section 13(d) by filing a +Schedule 13D or 13G. +16 + + +75. Rule 13d-2 (Filing of Amendments to Schedules 13D or 13G) directs that: + +(a) If any material change occurs in the facts set forth in the Schedule +13D… including, but not limited to, any material increase of +decrease in the percentage of the class beneficially owned, the +person or persons who were required to file the statement shall +promptly file or cause to be filed with the Commission an +amendment disclosing that change. + +* * * + +[Any change] equal to one percent or more…shall be deemed +“material” for purposes of this rule…. + +76. Section 16(a) of the Exchange Act requires that every officer, director, or beneficial +owner of more than 10% of stock file with the Commission statements disclosing +their holdings and transactions of any stock of the issuer. + +77. The statements shall be filed “within 10 days after he or she becomes such beneficial +owner, director, or officer….” Statements shall also be filed for any change in such +ownership “before the end of the second business day following the day on which the +subject transaction has been executed….” + +78. Rule 16a-3 (Reporting Transactions and Holdings) states that: + +(a) Initial statements of beneficial ownership of equity securities +required by Section 16(a) of the Act shall be filed on Form 3. +Statements of changes in beneficial ownership required by that +section shall be filed on Form 4. Annual statements shall be filed +on Form 5. + +* * * + +(f)(1) A Form 5 shall be filed by every person who at any time during the +issuer’s fiscal year was subject to section 1 of the Act…[and] shall +be filed within 45 days after the issuer’s fiscal year end, and shall +disclose the following holdings and transactions not reported +previously on Forms 3, 4 or 5: + +* * * + +(iii) all holdings and transactions that should have been reported +during the most recent fiscal year, but were not… +17 + + + +79. A Form 4 must be filed to report new acquisitions, and must be “filed before the end +of the second business day following the day on which the subject transaction had +been executed. See Rule 16a-3(g)(1). + +80. In January 2010, Messineo first acquired shares in Issuer A. The following month, +February 2010, he became Issuer A’s CFO. Within 10 days of becoming CFO, +Messineo was obligated to file a Form 3 disclosing his ownership of Issuer A stock. +See Section 16(a) of the Exchange Act; see also Rule 16a-3. Messineo failed to do +so. Instead, Messineo filed an erroneous Form 3 over three years late in 2013, after +he had resigned as CFO. + +81. Messineo acquired 2,000,000 and 70,000,000 shares of Issuer A stock on December +28, 2010 and December 28, 2011, respectively. Messineo failed to file Form 4s after +acquiring the stock or Form 5s for either FY 2010 or 2011 listing all holdings and +transactions that should have been reported previously on Forms 3 and 4. See Section +16(a) of the Exchange Act and Rule 16a-3 thereunder. + +82. By March 2011, Messineo owned 12% of Issuer A’s outstanding stock, and by March +2012 Messineo’s ownership share surpassed 30%. Yet, Messineo never filed a +Schedule 13D with the Commission or any subsequent amendment disclosing his +greater than 5% beneficial ownership. See Section 13(d) of the Exchange Act and +Rules 13d-1 and 13d-2 thereunder. + +83. Messineo became CFO of Issuer B in September 2010 and resigned as Issuer B’s +CFO effective October 30, 2012. Messineo acquired Issuer B stock on November 11, +2010. Messineo has never filed a Form 3, Form 4, or Form 5 with the Commission in +connection with his ownership of Issuer B stock in violation of the securities laws. +See Section 16(a) of the Exchange Act and Rule 16a-3 thereunder. + +N. VIOLATIONS + +84. As a result of the conduct described above, Messineo & Co. and Messineo engaged in +improper professional conduct as defined in Rule 102(e)(1)(iv). Messineo & Co. and +Messineo committed intentional and knowing conduct that resulted in violations of +applicable professional standards and committed repeated instances of highly +unreasonable negligent conduct each resulting in violations of applicable professional +standards that indicate a lack of competence to practice before the Commission. + +85. As a result of the conduct described above, Messineo & Co. willfully violated and +Messineo willfully aided and abetted and caused violations of Rule 2-02 of +Regulation S-X. + +18 + +86. As a result of the conduct described above, Messineo & Co. and Messineo aided and +abetted and caused 12 of its clients to violate Section 13(a) of the Exchange Act and +Rule 13a-1 thereunder or Section 15(d) of the Exchange Act and Rule 15d-1 +thereunder. + +87. As a result of the conduct described above, in his capacity as CFO Messineo willfully +violated Rule 13a-14 promulgated under the Exchange Act. + +88. As a result of the conduct described above, in his capacity as CFO Messineo willfully +aided and abetted and caused Issuer B’s violations of Section 13(a) of the Exchange +Act and Rule 13a-1 and thereunder. + +89. As a result of the conduct described above, in his capacity as CFO Messineo willfully +aided and abetted and caused Issuer A’s violations of Section 13(a) of the Exchange +Act and Rule 13a-13 thereunder. + +90. As a result of the conduct described above, Messineo willfully violated Sections +13(d) and 16(a) of the Exchange Act and Rules 13d-1, 13d-2, and 16a-3 thereunder. + +O. FINDINGS + +91. Based on the foregoing, the Commission finds that Messineo & Co. and Messineo +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. + +92. Based on the foregoing, the Commission finds that Messineo & Co. and Messineo +willfully violated, or willfully aided and abetted the violation of, provisions of the +Federal securities laws or the rules and regulations thereunder pursuant to Section +4C(a)(2) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice. + +93. Based on the foregoing, the Commission finds that Messineo: (a) willfully violated +Sections 13(d) and 16(a) of the Exchange Act, Rules 13a-14, 13d-1, 13d-2, and 16a-3, +(b) willfully aided and abetted and caused a violation of Rule 2-02 of Regulation S-X; +(c) willfully aided and abetted and caused 12 audit clients’ violations of Sections +13(a) and 15(d) of the Exchange Act and Rules 13a-1 and 15d-1 thereunder; and (d) +caused Issuer A’s and Issuer B’s violations of Section 13(a) of the Exchange Act and +Rules 13a-1 and 13a-13 thereunder. + +94. Based on the foregoing, the Commission finds that Messineo & Co.: (a) willfully +violated Rule 2-02 of Regulation S-X; and (b) willfully aided and abetted and caused +12 clients’ violations of Sections 13(a) and 15(d) of the Exchange Act and Rules 13a- +1 and 15d-1 thereunder. + +19 + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents Messineo & Co.’s and Messineo’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Respondents shall cease and desist from committing or causing any violations and +any future violations of Sections 13(a), 13(d), 15(d) and 16(a) of the Exchange Act and Rules +13a-1, 13a-13, 13a-14, 13d-1, 13d-2, and 16a-3 thereunder and Rule 2-02 of Regulation S-X. + +B. Respondents are denied the privilege of appearing or practicing before the +Commission as accountants. + +C. Respondents shall pay civil penalties of $25,000 to the Securities and Exchange +Commission. Payment shall be made in the following installments: + +Within 14 days of the issuance of the Order $10,000.00 +Within 120 days of the issuance of the Order $5,000.00 +Within 210 days of the issuance of the Order $5,000.00 +Within 300 days of the issuance of the Order $5,000.00 + +If any payment is not made by the date the payment is required by this Order, the entire +outstanding balance of civil penalties, plus any additional interest accrued pursuant to SEC Rule of +Practice 600 shall be due and payable immediately, without further application. Payment must be +made in one of the following ways: + + (1) 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 + +20 + +Payments by check or money order must be accompanied by a cover letter identifying +Peter Messineo and/or Messineo & Co., CPAs, LLC as a Respondent(s) in these proceedings, +and the file number of these proceedings; a copy of the cover letter and check or money order +must be sent to John T. Dugan, Associate Regional Director, Boston regional Office, Securities +and Exchange Commission, 33 Arch Street, Boston, MA 02110. + +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 Messineo, 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 Messineo of the federal securities laws or any regulation or order issued under +such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3722.txt b/raw/aaer/2015/AAER-3722.txt new file mode 100644 index 0000000000000000000000000000000000000000..ba88b6e8e815c3f03a85fb375c5c5827725150a8 --- /dev/null +++ b/raw/aaer/2015/AAER-3722.txt @@ -0,0 +1,668 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 76608 / December 10, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3722 / December 10, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16994 + + +In the Matter of + +DKM CERTIFIED PUBLIC +ACCOUNTANTS, INC., +CHARLES U. KLEIN, 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, +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 DKM +Certified Public Accountants, Inc. (“DKM”) and Charles U. Klein (“Klein”) (together +“Respondents”) pursuant to Sections 4C1 and 21C of the Securities Exchange Act of 1934 +(“Exchange Act”) and Rule 102(e)(1)(ii) and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character +or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the securities +laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + + 2 +II. + + In anticipation of the institution of these proceedings, Respondents have submitted an Offer +of Settlement (“Offer”) which the Commission has determined to accept. Solely for the purpose of +these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over them and the subject matter of these proceedings, which are +admitted, and except as provided herein in Section V, Respondents consent to the entry of this +Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to 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 + +DKM is a small, Florida-based accounting firm. Among other things, it has performed +audits of public companies whose stock is registered with the Commission and who file audited +financial statements with the Commission. Klein is a partner at and part owner of DKM. DKM +was not independent of three public company audit clients that they audited in 2012 and 2013. + +In 2012 – 2013, Respondents audited and reviewed the annual and quarterly financial +statements of Issuer A and Issuer B (described below). Klein was the lead engagement partner, and +Richard Confessore was the engagement quality reviewer. During these engagements, Klein caused +DKM to not be independent of Issuer A or Issuer B because of business, employment, and financial +relationships involving Respondents and its clients. + +First, at the same time Confessore performed engagement quality reviews for DKM on the +2012 Issuer A and Issuer B audit and interim reviews, he had a business relationship with Issuer A’s + + 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 +and Issuer B’s Chief Financial Officer (“CFO”), Peter Messineo, who employed Confessore at +Messineo’s own audit firm, Messineo & Co., CPAs, LLC (“Messineo & Co.”). + +Second, in late 2012, Messineo resigned as CFO of Issuer A and Issuer B and became a +shareholder and partner at DKM. DKM continued to provide audit services to both Issuer A and +Issuer B even though: (1) the companies’ former CFO was now a shareholder and partner at DKM +and in a position to influence the audits and reviews, and (2) Messineo had been the CFO during the +audit periods. + +Third, at the time DKM performed the audit and interim review of Issuer A and Issuer B in +early 2013, Messineo owned stock in both Issuer A and Issuer B. Klein knew that Messineo owned +this stock -- more than 5% of Issuer A’s outstanding shares -- when DKM conducted the audit and +review. + +In addition, in 2013, DKM audited Issuer C’s annual financial statement covering the period +from April 1, 2011 – March 31, 2012. Confessore participated in the audit despite having served as +Issuer C’s CFO during the audit period. + +Performing these audits and reviews for Issuer A, Issuer B, and Issuer C violated the +independence rules of the Federal securities laws and the rules and regulations thereunder. DKM’s +and Klein’s conduct was willful and constitutes improper professional conduct. + +B. RESPONDENTS + + DKM Certified Public Accountants, Inc. (“DKM”) is registered with the Public +Company Accounting Oversight Board (“PCAOB”) as a public accounting firm based in +Clearwater, Florida. DKM is a Florida corporation and successor to audit firms: (i) Drake Klein & +Messineo CPAs PA; and (ii) Drake & Klein, CPAs PA (“Drake & Klein”). In December 2012, +when Peter Messineo joined DKM, the firm changed its operational name from Drake & Klein to +DKM. As of December 2012, DKM had four partners authorized to issue audit reports on behalf +of the firm, including Messineo, Confessore, and Charles Klein. +Charles U. Klein, age 60, resides in Dunedin, Florida and is currently President of DKM. +From approximately February 2012 through June 2013, Klein was the lead engagement partner for +the services DKM performed for Issuer A, Issuer B, and Issuer C. These services included annual +audits and interim reviews of the financial statements of Issuer A, Issuer B, and Issuer C. Klein +has been a licensed Certified Public Accountant (“CPA”) in Florida since 1985, excluding 1995 to +1998 when his license was inactive. + +C. OTHER RELEVANT PARTIES + + Issuer A was incorporated in Delaware in 2005 and is currently headquartered in California. +During 2012 and 2013, Issuer A’s common stock was registered with the Commission pursuant to +Section 12(g) of the Exchange Act. In its most recent Form 10-K filed with the Commission, +Issuer A states that its business “offers marketing tools and expertise to advertisers that combine the +quality and power of Flash video, interactive features, the ability to update their information and add + 4 +special events immediately and as frequently as desired.” From February 2010 to November 2012, +Messineo served as CFO of Issuer A. In 2012 and 2013, Issuer A engaged DKM to perform audit +services. + + Issuer B was incorporated in Nevada in 2004 and is currently headquartered in St. +Petersburg, FL. During 2012 and 2013, Issuer B’s common stock was registered with the +Commission pursuant to Section 12(g) of the Exchange Act. In its most recent Form 10-K filed +with the Commission, Issuer B states that its business “creates a unified solution path to securely +manage Advanced Metering Infrastructure and other Smart Grid optimization applications such as +substation and distribution automation.” From September 2010 to October 2012, Messineo served +as CFO of Issuer B. In 2012 and 2013, Issuer B engaged DKM to perform audit services. +Issuer C was incorporated in Colorado in 1981. Currently, it is a Florida corporation +headquartered in Southbury, CT. During 2012 and 2013, Issuer C’s common stock was registered +with the Commission pursuant to Section 12(g) of the Exchange Act. In its most recent Form 10-K +filed with the Commission, Issuer C states that its business consists of “operating motor freight +carriers, providing truck load service throughout the forty-eight contiguous United States.” +Confessore resigned as CFO of Issuer C on April 12, 2011. In 2012, Issuer C engaged Messineo & +Co. to provide audit services. Messineo & Co. did not issue an audit report before DKM was +formed. In 2013, Issuer C then engaged DKM to provide audit services for the same period for +which Messineo & Co. had been retained. +Richard Confessore, age 73, resides in Sarasota, Florida and has been a licensed CPA in +Florida since 1970. Confessore is currently a Director and “Quality Review Partner” at DKM. +During 2011, Confessore was the CFO and worked at Issuer C. During 2012-2013, Confessore +performed engagement quality reviews for the annual audits and interim reviews DKM performed +for Issuers A and B. In addition, from June 2012 to December 2012, Confessore was an employee +for Messineo & Co, then a sole proprietorship owned by Peter Messineo, the CFO for both Issuer +A and Issuer B. + +Peter Messineo, age 54, resides in Palm Harbor, Florida and is currently a partner at and +95% owner of Messineo & Co., which is a PCAOB-registered public accounting firm based in +Clearwater, Florida. In 2012, he was the sole owner of Messineo & Co. (then named “Peter +Messineo, CPA”) and CFO of Issuer A and Issuer B. From December 17, 2012 to April 16, 2013, +Messineo was a partner and one third owner of DKM and a shareholder of Issuer A and Issuer B +stock. Messineo has been licensed as a CPA in New York since 1989 and in Florida since 2007. + +D. IN 2012, AS LEAD ENGAGEMENT PARTNER KLEIN CAUSED DKM (THEN +KNOWN AS DRAKE & KLEIN) NOT TO BE INDEPENDENT WHEN DKM +CONDUCTED AUDITS AND REVIEWS OF ISSUER A AND ISSUER B. + +1. Issuer A engaged DKM to perform reviews for the quarters ending June 30, 2012 (Form +10-Q filed August 14, 2012) and September 30, 2012 (Form 10-Q filed November 14, +2012). Klein was DKM’s lead engagement partner and Confessore was DKM’s +engagement quality review (“EQR”) partner on these engagements. + + 5 +2. During the audit and professional engagement periods for these Issuer A engagements, +Messineo was Issuer A’s CFO. + +3. Issuer B engaged DKM to perform audit services for the annual period ending June 30, +2012 (Form 10-K filed October 15, 2012) and the quarter ending September 30, 2012 +(Form 10-Q filed November 14, 2012). Klein was DKM’s lead engagement partner and +Confessore was DKM’s EQR partner on these engagements. + +4. During the audit and professional engagement periods for these Issuer B engagements, +Messineo was Issuer B’s CFO. + +5. In June 2012, Messineo hired Confessore to work for him at Messineo & Co. +Confessore worked at Messineo & Co. until mid-December 2012. Thus, Confessore +worked under Messineo -- the CFO of both Issuer A and Issuer B -- at the same time +Confessore conducted quality reviews for DKM of: (i) Issuer A’s interim financial +statements filed August 14, 2012 and November 14, 2012; and (ii) Issuer B’s annual +financial statement filed October 15, 2012 (amended October 22, 2012). Confessore +also worked for Messineo during the entire audit period of Issuer B’s interim financial +statements, filed November 14, 2012, which DKM and Confessore reviewed. + +6. Confessore’s employment with Messineo constituted an improper business relationship +and conflict of interest. + +7. Rule 2-01(b) of Regulation S-X (Qualifications of Accountants) states that the +“Commission will not recognize an accountant as independent, with respect to an audit +client, if the accountant is not…capable of exercising objective and impartial judgment +on all issues encompassed within the accountant's engagement.” 17 CFR §210.2-01. + +8. Rule 2-01(c)(3) states certain “business relationships” are inconsistent with +independence: + +Business Relationships. An accountant is not independent if, at any +point during the audit and professional engagement period, the +accounting firm or any covered person in the firm has any direct or +material indirect business relationship with an audit client, or with +persons associated with the audit client in a decision-making capacity, +such as an audit client’s officers, directors, or substantial stockholders. + +17 CFR §210.2-01(c)(3) + +9. Rule 2-01(f)(11) defines “covered person” to include partners, principals, shareholders, +and employees of an accounting firm on the “audit engagement team.” 17 CFR +§210.2-01(f)(11). The “audit engagement team” includes the “concurring or reviewing +partner.” 17 CFR §210.2-01(f)(7)(ii)(B). + + 6 +10. PCAOB standards also require auditor independence. PCAOB Rule 3520 (Auditor +Independence) requires that, “[a] registered public accounting firm and its associated +persons must be independent of the firm's audit client throughout the audit and +professional engagement period.” + +11. PCAOB Auditing Standard No. 7 (Engagement Quality Review) requires that “an +engagement quality reviewer must have competence, independence, integrity, and +objectivity.” See PCAOB AS 7.4. + +12. PCAOB Interim Auditing Standard AU 230 (Due Professional Care in the Performance +of Work) “requires the independent auditor to plan and perform his or her work with due +professional care. Due professional care imposes a responsibility upon each professional +within an independent auditor's organization to observe the standards of field work and +reporting.” See PCAOB AU 230.02. + +13. DKM was not independent of Issuer A and Issuer B with respect to DKM’s audit and +interim reviews of financial statements filed from August 2012 through November +2012 because Confessore -- the engagement quality reviewer -- had a direct business +relationship with Messineo -- the CFO of clients Issuer A and Issuer B -- during +DKM’s audit and professional engagement periods. See Rule 2-01(c)(3) of Regulation +S-X. + +14. As lead engagement partner, Klein was responsible for ensuring DKM was independent +of Issuer A and Issuer B. + +E. IN 2013, AS LEAD ENGAGEMENT PARTNER KLEIN CAUSED DKM NOT TO +BE INDEPENDENT OF ISSUER A AND ISSUER B. + +15. Messineo resigned as CFO of Issuer A effective November 15, 2012 and as CFO of +Issuer B effective October 30, 2012. + +16. In mid-December 2012, Messineo joined DKM. Messineo was a one-third owner of +DKM. While not a shareholder, Confessore was also a partner authorized to issue audit +reports on behalf of DKM. + +17. Issuer A engaged DKM to perform audit services for the annual period ending +December 31, 2012 (Form 10-K filed April 15, 2013). Klein was DKM’s lead +engagement partner and Confessore was DKM’s EQR partner on this engagement. + +18. Issuer B engaged DKM to perform interim review services for the quarter ending +December 31, 2012 (Form 10-Q filed February 19, 2013). Klein was DKM’s lead +engagement partner and Confessore was DKM’s EQR partner on this engagement. +DKM lacked independence because Messineo, Klein’s partner at DKM, had financial +and employment relationships with Issuer A and Issuer B. + + 7 +19. Rule 2-01(c)(1) (Financial Relationships) states that an accountant is not independent +if, at any point during the audit and professional engagement period, the accountant has +a “direct financial interest” in the accountant’s audit client, including when: + +A. The accounting firm [or] any covered person in the firm…has any direct +investment in an audit client, such as stocks, bonds, notes, options, or +other securities. + +* * * +B. Any partner, principal, shareholder, or professional employee of the +accounting firm…has filed a Schedule 13D…with the Commission +indicating beneficial ownership of more than five percent of an audit +client’s securities. + +17 CFR §210.2-01(c)(1)(i)(A)-(B) + +20. Rule 2-01(f)(11) defines “covered person” to include any “other partner, principal, or +shareholder from an ‘office’ of the accounting firm in which the lead audit engagement +partner primarily practices in connection with the audit.” 17 CFR §210.2-01(f)(11). +“Office” means “a distinct sub-group within an accounting firm, whether distinguished +along geographic or practice lines.” 17 CFR §210.2-01(f)(15). + +21. Rule 2-01(c) (2) (Employment Relationships) states that an accountant is not +independent if, at any point during the audit and professional engagement period, the +accountant has an “employment relationship” with an audit client, including when: + +A former officer, director, or employee of an audit client becomes a partner, +principal, shareholder, or professional employee of the accounting firm, +unless the individual does not participate in, and is not in a position to +influence, the audit of the financial statements of the audit covering any +period during which he or she was employed by or associated with that +audit client. + +17 CFR §210.2-01(2)(iv) (Employment at Accounting Firm of Former Employee of +Audit Client). + +22. From December 2012 to April 2013, Messineo worked at DKM’s small office in +Clearwater, Florida along with Klein and approximately 6-8 staff personnel. Messineo’s +office was less than 10 feet away from the offices of those providing audit services to +Issuer A and Issuer B. + +23. From December 2012 to April 2013, Messineo had access to all of DKM’s audit files, +including those for the audit of Issuer A and the interim review of Issuer B. Messineo +supervised the audit staff at DKM, including the audit manager who worked on the +Issuer A audit, in some of DKM’s other engagements. + 8 + +24. During a significant portion of the professional engagement period for DKM’s audit of +Issuer A, Messineo possessed Issuer A’s books and records. + +25. During Messineo’s tenure as a shareholder and partner at DKM, he owned stock in +DKM’s clients Issuer A and Issuer B. As of April 15, 2013, when Issuer A’s Form 10-K +was filed, Messineo owned approximately 6% of the outstanding shares of Issuer A +stock. + +26. Klein knew Messineo owned stock in Issuer A and Issuer B during the audit and +professional engagement periods for those clients. Despite this knowledge, Klein +performed audit services for Issuer A and Issuer B. + +27. DKM was not independent of Issuer A and Issuer B with respect to their public filings +made in February 2013 and April 2013 because Messineo -- a partner and shareholder +of DKM -- possessed a direct financial interest (stock ownership) in clients Issuer A +and Issuer B during DKM’s audit and professional engagement periods. See Rule 2- +01(c)(1) of Regulation S-X. + +28. DKM was not independent of Issuer A and Issuer B with respect to their public filings +made in February 2013 and April 2013 because Messineo -- a partner and shareholder of +DKM -- was the CFO of Issuer A and Issuer B during the audit period and in a position +to influence DKM’s audit and interim reviews. See Rule 2-01(c)(2) of Regulation S-X. + +F. IN 2013, AS LEAD ENGAGEMENT PARTNER KLEIN CAUSED DKM NOT TO +BE INDEPENDENT BY EMPLOYING ISSUER C’S FORMER CFO TO AUDIT +ISSUER C FOR THE PERIOD HE WAS CFO. + +29. Confessore was the CFO of Issuer C until April 12, 2011. Following his resignation, +Confessore made himself available to Issuer C on a part-time basis to assist with +accounting matters. On June 29, 2011, Issuer C filed a “Notification of Late Filing” for +its Form 10-K. The notification explained that Issuer C was unable to complete its +accounting at the subsidiary level. Issuer C’s notification identified Confessore as the +person to contact in regard to the notification. + +30. In 2012, Issuer C engaged Messineo & Co. to perform audit services. Confessore +performed work for Messineo & Co. concerning Issuer C, including the period for +which he had been CFO and worked for Issuer C. + +31. In 2013, DKM agreed to audit Issuer C’s financial statements for the period from April +1, 2011 through March 31, 2012 despite Confessore’s prior position as CFO of Issuer C +during that time period. Klein knew that Confessore had been the CFO of Issuer C. +DKM incorporated Messineo & Co.’s work into its audit of Issuer C, including +Confessore’s work. On behalf of DKM, Klein signed the engagement report issued to +Issuer C in June 2013. + 9 + +32. DKM was not independent of client Issuer C with respect to its public filings made in +June 2013 because Confessore – a partner of DKM – participated in the audit of Issuer +C, which covered the period Confessore had been the CFO and/or worked for Issuer C. +See Rule 2-01(c)(2) of Regulation S-X. + +G. KLEIN AIDED AND ABETTED AND CAUSED DKM’S VIOLATION OF RULE +2-02 OF REGULATION S-X BECAUSE DKM’S AUDIT REPORTS DID NOT +COMPLY WITH PCAOB STANDARDS. + +33. Rule 2-02(b)(1) of Regulation S-X (Representations as to the Audit included in +Accountants’ Reports) requires an accountant’s report to state “whether the audit was +made in accordance with generally accepted auditing standards.” 17 CFR §210.2- +02(b). These standards include the standards of the PCAOB. “[R]eferences in +Commission rules and staff guidance and in the federal securities laws to [generally +accepted auditing standards “GAAS”] or to specific standards under GAAS, as they +related to issuers, should be understood to mean the standards of the PCAOB plus any +applicable rules of the Commission.” See SEC Release No. 34-49708. + +34. DKM issued audit reports for its audits of Issuer C, Issuer A, and Issuer B for fiscal +years ending March 31, 2012, December 31, 2012 and June 30, 2012, respectively. As +lead engagement partner, Klein signed the audit reports on behalf of DKM. The audit +reports incorrectly state that DKM “conducted [its] audit in accordance with the +standards of the Public Company Accounting Oversight Board (United States).” + +35. DKM’s audits were not conducted in accordance with PCAOB auditing standards +because they lacked independence as described above. See PCAOB Rule 3520 +(requiring independence); AS 7 (same). + +36. Accordingly, DKM violated and Klein aided and abetted and caused violations of +Rule 2-02 of Regulation S-X. + +H. RESPONDENTS CONDUCT CAUSED ISSUER A, ISSUER B, AND ISSUER C TO +FILE FALSE OR MISLEADING REPORTS WITH THE COMMISSION IN +VIOLATION OF SECTION 13(a) OF THE EXCHANGE ACT AND RULES 13a-1 +AND 13a-13 PROMULGATED THEREUNDER. + +37. Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 require an issuer to file +accurate annual and quarterly reports on Form 10-K and Form 10-Q, respectively. + +38. Section 13(a) of the Exchange Act requires issuers to file annual reports certified by +“independent public accountants.” Rule 10-01(d) of Regulation S-X requires that +prior to filing, interim financial statements included in quarterly reports on Form 10- +Q “must be reviewed by an independent public accountant using professional +standards and procedures for conducting such reviews….” 17 CFR §210.10-01(d). + 10 + +39. Respondents caused Issuer A, Issuer B, and Issuer C to violate Section 13(a) and +Rule13a-1 thereunder by causing them to file annual reports for the years ended +March 31, 2012, December 31, 2012 and June 30, 2012, respectively not certified by +independent public accountants, and by causing them to file annual reports that +included an audit report that incorrectly stated it had been conducted by an +independent public accounting firm in accordance with the standards of the PCAOB. + +40. Respondents caused Issuer A and Issuer B to violate Section 13(a) and Rule 13a-13 +thereunder by causing them to file quarterly reports which had not previously been +reviewed by independent public accountants. + +I. VIOLATIONS + +41. As a result of the conduct described above, DKM willfully4 violated and Klein willfully +aided and abetted and caused a violation of Rule 2-02 of Regulation S-X. + +42. As a result of the conduct described above, DKM and Klein caused Issuer A, Issuer B, +and Issuer C to violate Section 13(a) of the Exchange Act and Rules 13a-1 thereunder. + +43. As a result of the conduct described above, DKM and Klein caused Issuer A and Issuer +B to violate Section 13(a) of the Exchange Act and Rules 13a-13 thereunder. + +44. As a result of the conduct described above, DKM and Klein engaged in improper +professional conduct as defined in Rule 102(e)(1)(iv) in that DKM and Klein +committed intentional and knowing conduct that resulted in a violation of applicable +professional standards or committed repeated instances of unreasonable negligent +conduct each resulting in a violation of applicable professional standards that indicate a +lack of competence to practice before the Commission. + +J. FINDINGS + +45. Based on the foregoing, the Commission finds that Klein and DKM 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. + +46. Based on the foregoing, the Commission finds that Klein and DKM willfully violated, +or willfully aided and abetted the violation of, provisions of the Federal securities laws + +4 A finding of willfulness does not require intent to violate, but merely intent to do the act which +constitutes a violation. SEC v. K.W. Brown & Co., 555 F. Supp. 2d 1275, 1309 (S.D. Fla.2007), +citing Wonsover v. SEC, 205 F.3d 408, 413-15 (D.C. Cir. 2000); SEC v. Steadman, 603 F.2d +1126, 1135 (5th Cir. 1979); Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180 (2d Cir. 1976). + 11 +and the rules and regulations thereunder pursuant to Section 4C(a)(2) of the Exchange +Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + +47. Based on the foregoing, the Commission finds that Klein: (a) willfully aided and +abetted and caused a violation of Rule 2-02 of Regulation S-X; and (b) willfully +caused Issuer A’s, Issuer B’s, and Issuer C’s violations of Section 13(a) of the +Exchange Act and Rules 13a-1 and 13a-13 thereunder. + +48. Based on the foregoing, the Commission finds that DKM: (a) willfully violated Rule +2-02 of Regulation S-X; and (b) willfully caused Issuer A’s, Issuer B’s, and Issuer C’s +violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 +thereunder. + +K. RESPONDENTS’ REMEDIAL EFFORTS + +49. 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’ respective Offer. + + Accordingly, pursuant to Sections 4C and 21C of the Exchange Act, it is hereby +ORDERED, effective immediately, that: + +A. Respondents shall cease and desist from committing or causing any violations and +any future violations of Section 13(a) of the Exchange Act, Rules 13a-1 and 13a-13 promulgated +thereunder, and Rule 2-02 of Regulation S-X. + +B. Respondents are denied the privilege of appearing or practicing before the +Commission as an accountant. + +C. After 2 years from the date of this order, Klein may request that the Commission +consider his reinstatement by submitting an application (attention: Office of the Chief +Accountant) to resume appearing or practicing before the Commission as: + +1. a preparer or reviewer, or a person responsible for the preparation or review, of +any public company’s financial statements that are filed with the Commission. +Such an application must satisfy the Commission that Klein’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 + + + 12 +2. an independent accountant. + + Such an application must satisfy the Commission that: + +(a) Klein, 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) Klein, 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 Klein’s or the firm’s +quality control system that would indicate that the Klein will not receive +appropriate supervision; + +(c) Klein 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) Klein acknowledges his responsibility, as long as Klein appears or +practices before the Commission as an independent accountant, to comply +with all requirements of the Commission and the Board, including, but not +limited to, all requirements relating to registration, inspections, concurring +partner reviews and quality control standards. + +3. The Commission will consider an application by Respondent to resume appearing or +practicing before the Commission provided that his CPA license is current and he +has resolved all other disciplinary issues with the applicable boards of accountancy. +However, if CPA licensure is dependent on reinstatement by the Commission, the +Commission will consider an application on its own merits. The Commission’s +review may include consideration of, in addition to the matters referenced above, +any other matters relating to Respondent’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission. + +D. After 2 years from the date of this order, DKM may request that the Commission +consider its reinstatement by submitting an application (attention: Office of the Chief +Accountant) to resume appearing or practicing before the Commission as: + +1. a preparer or reviewer, or a person responsible for the preparation or review, of +any public company’s financial statements that are filed with the Commission. +Such an application must satisfy the Commission that DKM’s work in its practice +before the Commission will be reviewed either by the independent audit +committee of the public company for which it works or in some other acceptable +manner, as long as it practices before the Commission in this capacity; and/or + + 13 +2. an independent accountant. + +Such an application must satisfy the Commission that: + +(a) Respondent DKM is registered with the Public Company Accounting +Oversight Board (“Board”) in accordance with the Sarbanes-Oxley Act of +2002, and such registration continues to be effective. However, if +registration with the Board is dependent upon reinstatement by the +Commission, the Commission will consider an application on its other +merits; + +(b) DKM 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 +DKM’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 DKM’s +employees will not receive appropriate supervision. DKM 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 DKM, 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 DKM, or any of its present or former affiliates, +directors, officers, employees, or agents acting in their capacity as such for +the period of the review and for a period of two years after the review. + +(c) DKM 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) DKM acknowledges its responsibility, as long as DKM appears or practices +before the Commission as an independent accountant, to comply with all +requirements of the Commission and the Board, including, but not limited +to, all requirements relating to registration, inspections, concurring partner +reviews and quality control standards. + +3. The Commission will consider an application by DKM to resume appearing or +practicing before the Commission provided that its CPA license is current and it has +resolved all other disciplinary issues with the applicable boards of accountancy. + 14 +However, if CPA licensure is dependent on reinstatement by the Commission, the +Commission will consider an application on its own merits. The Commission’s +review may include consideration of, in addition to the matters referenced above, +any other matters relating to Respondent’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission. + +E. DKM and Klein shall jointly and severally pay disgorgement, which represents +profits gained as a result of the conduct described herein of $33,000, prejudgment interest of +$2,043.87, and a civil money penalty in the amount of $25,000 to the Securities and Exchange +Commission. Payment shall be made in the following four installments: + +Within 14 days of the issuance of this Order $15,010.97 +Within 90 days of the issuance of this Order $15,010.97 +Within 180 days of the issuance of this Order $15,010.97 +Within 270 days of the issuance of this Order $15,010.96 + +If any payment is not made by the date the payment is required by this Order, the entire +outstanding balance, plus any additional interest accrued pursuant to SEC Rule of Practice 600 or +pursuant to 31 U.S.C. §3717, shall be due and payable immediately without further application. + +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 + + + + + + + + 15 +Payments by check or money order must be accompanied by a cover letter identifying +DKM and Klein 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 John T. Dugan, Associate +Regional Director, Boston regional Office, Securities and Exchange Commission, 33 Arch Street, +Boston, MA 02110. + + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3725.txt b/raw/aaer/2015/AAER-3725.txt new file mode 100644 index 0000000000000000000000000000000000000000..930262b7c57ad290e6cd9868aa22f6eea09bd511 --- /dev/null +++ b/raw/aaer/2015/AAER-3725.txt @@ -0,0 +1,258 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 76611 / December 10, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3725 / December 10, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-16997 + + +In the Matter of + +JOSEPH E. MOHR, CPA + + +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative proceedings be, and hereby are, instituted against Joseph E. Mohr (“Respondent” or +“Mohr”) pursuant to Section 4C1 of the Securities Exchange Act of 1934 (“Exchange Act”) and +Rules 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character +or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the securities +laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + 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 Proceedings Pursuant to Section 4C of +the Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, +Making Findings, and Imposing Remedial Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY +From 2009 to 2012, Joseph Mohr performed engagement quality reviews in Florida for +audits and interim reviews of public companies conducted by Messineo & Co., CPAs, LLC +(“Messineo & Co.”). At the time Mohr performed this work, he was not a licensed or registered +Certified Public Accountant (“CPA”) in Florida or in any state because he failed to renew his +Illinois registration in 2009. Despite his lack of credentials, Mohr advertised himself as a +“CPA” and used the abbreviation in his title and on his professional papers. Without a CPA +license or registration, Mohr used the abbreviation “CPA” in violation of Florida law. + +In 2012, Messineo & Co. issued audit reports and granted permission for its respective +clients to use them without having received concurring approval from Mohr. To hide its +transgressions of professional standards, Messineo & Co. asked Mohr to backdate the records of +his reviews so that the records displayed dates prior to its issuance of the associated reports. Mohr +agreed. For multiple issuers, Mohr backdated the records of his reviews. + +By holding himself out as a Certified Public Accountant when he was not and by backdating +documents to conceal violations of professional standards, Mohr engaged in improper +professional conduct. + +B. RESPONDENT +Joseph E. Mohr, age 49, resides in Spring Hill, Florida and is currently a visiting +assistant professor at a Florida university. In 1988, Mohr passed the Illinois CPA exam. He did +not, however, pursue a CPA license. Later, in 2007, he became a “registered” CPA in Illinois. +Mohr’s registration expired on September 30, 2009. From 2009 to 2012, Mohr performed + +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 +engagement quality reviews (“EQRs”) for Messineo & Co. At the time, Mohr lived and worked +in Florida, but was not licensed as a Certified Public Accountant (“CPA”) in Florida or in any +other state. In addition, Mohr has been a self-employed consultant specializing in the areas of +business and finance and has served as Chief Financial Officer (“CFO”) or acting or interim +CFO for ten or more companies. Most recently in 2014, Mohr served as acting CFO for a +Florida metal-working company and from 2010 to 2013 served as CFO for a Florida- +headquartered oil and gas firm. + +C. OTHER RELEVANT PARTIES +Messineo & Co., CPAs, LLC (“Messineo & Co.”) is registered with the Public +Company Accounting Oversight Board (“PCAOB”) as a public accounting firm based in +Clearwater, Florida. The limited liability company operated as a sole proprietorship under the +name Peter Messineo, CPA from 2009 until December 17, 2012, when it effectively merged +with Drake & Klein, CPAs PA to form DKM Certified Public Accountants, Inc. (“DKM”). +Peter Messineo separated from DKM in April 2013 and began operating Messineo & Co. again, +but under its present name and form. During 2012, it performed audit services for over 70 +clients, but only had one partner -- sole owner Peter Messineo -- authorized to sign or issue +audit reports. From 2009 - 2012, Messineo & Co. paid Mohr to perform EQRs for its public +company audit clients. + +D. MOHR FALSELY REPRESENTED HIMSELF AS A CERTIFIED PUBLIC +ACCOUNTANT +1. In 1988, Mohr passed the Illinois CPA exam. Mohr, however, did not pursue a CPA +license. Later, on April 5, 2007, he became a “registered” CPA under Illinois law. +Mohr failed to renew his registration and it expired on September 30, 2009. Mohr +never received his CPA license in Illinois, which would have permitted him to sign +audits and reviews. + +2. Mohr has never held a CPA license or registration from any other jurisdiction. Mohr +has not taken any continuing education courses for accounting within the last 10 years. + +3. After his CPA registration expired in 2009, Mohr continued to use the abbreviation +“CPA” after his name and as part of his title in correspondence, invoices, and in +connection with his work as an independent contractor. Mohr used the moniker +“Joseph E. Mohr, CPA, MBA, Finance” to describe himself and his credentials. + +4. When performing EQRs for Messineo & Co. from October 2009 through December +2012, Mohr continued to advertise himself as a CPA. +E. BACKDATING DOCUMENTS +5. In 2012, Mohr performed EQRs for Messineo & Co. for its audits and interim reviews. +To document Mohr’s EQRs in compliance with auditing standards, Messineo & Co. +4 +used a “Concurring Review Questionnaire,” otherwise known as a “Form 4.2,” in +connection with each audit. See PCAOB Auditing Standard No. 7 (“AS 7”). + +6. After completing an EQR, Mohr was supposed to answer the questions on the +Concurring Review Questionnaire and then sign and date the Questionnaire. The date +on the form was to indicate when Mohr provided concurring approval of the issuance +of the audit report. See AS 7. + +7. Mohr then emailed the signed forms to Messineo & Co. where the executed Concurring +Review Questionnaires were included within the firm’s audit files. See PCAOB +Auditing Standard No. 3 (“AS 3”) & AS 7. + +8. In August 2012, Messineo & Co. began to conduct a review of its audit files to identify +any deficiencies and identified different engagements for which either: + i. it was missing a Concurring Review Questionnaire signed by Mohr; or + +ii. the signed Concurring Review Questionnaire was dated after the audit +report had been issued by Messineo & Co., indicating that Messineo & Co. +had issued the audit report prior to Mohr’s completion of his EQR. + +9. As a result, Messineo & Co. personnel requested Mohr backdate his signature on +Concurring Review Questionnaires for public company audit clients. Mohr complied. +He knowingly misrepresented the dates that he completed the respective EQRs for at +least three issuers. + +10. Messineo & Co. personnel then inserted the backdated forms into its audit files, +including into files which were putatively “locked-down” because the audit report had +been issued more than 45 days previously. See PCAOB AS 3. +F. MOHR’S USE OF THE ABBREVIATION “CPA” FROM OCTOBER 2009 +THROUGH 2012 VIOLATED FLORIDA STATE LAW BECAUSE HE LACKED A +LICENSE AS A CERTIFIED PUBLIC ACCOUNTANT. +11. Florida statute Section 473.322 (Prohibitions; Penalties) makes it a criminal violation +for a person to knowingly assume or use: + +the titles or designations “certified public accountant” or “public +accountant” or the abbreviation “C.P.A.” or any other title, designation, +words, letters, abbreviations, sign, card, or device tending to indicate that +the person holds a license to practice public accounting under this chapter or +the laws of any other state, territory, or foreign jurisdiction, unless the +person holds an active license under this chapter or has the practice +privileges pursuant to s. 473.3141; + +5 +12. As discussed above, Mohr fraudulently continued to use the abbreviation “CPA” in +connection with his concurring reviews and his contracting work for several years after +his registration from Illinois terminated on September 30, 2009. + +13. Accordingly, Mohr engaged in improper professional conduct. +G. MOHR’S BACKDATING OF DOCUMENTS VIOLATES PCAOB STANDARDS. +14. PCAOB Auditing Standard No. 7 (Engagement Quality Review) enumerates the +standards for an EQR or concurring review. AS 7 requires an EQR to be performed for +every audit and interim review. See PCAOB AS 7.1. + +15. For both audits and interim reviews, AS 7 prohibits the firm from granting permission +to the client to use the engagement report until the engagement quality reviewer +provides concurring approval of issuance. See PCAOB AS 7.13 & AS 7.18. + +16. AS 7 requires that “an engagement quality reviewer must have competence, +independence, integrity, and objectivity.” See PCAOB AS 7.14. + +17. AS 7 requires that documentation of an EQR should “contain sufficient information to +enable an experienced auditor, having no previous connection with the engagement, to +understand the procedures performed by the engagement quality reviewer…to comply +with the provisions of this standard, including information that identifies: + +* * * +c. The date the engagement quality reviewer provided concurring approval of +issuance or, if no concurring approval of issuance was provided, the reasons +for not providing the approval.” +See PCAOB AS 7.19. + +18. AS 7 also states that “[d]ocumentation of an engagement quality review should be +included in the engagement documentation” and that “[t]he requirements related to +retention of and subsequent changes to audit documentation in PCAOB Auditing +Standard No. 3, Audit Documentation, apply with respect to the documentation of the +engagement quality review.” See PCAOB AS 7.20 & AS 7.21. + +19. PCAOB AU 230 (Due Professional Care in the Performance of Work) “requires the +independent auditor to plan and perform his or her work with due professional care. +Due professional care imposes a responsibility upon each professional within an +independent auditor's organization to observe the standards of field work and +reporting.” See PCAOB AU 230.02. + +20. Mohr violated AS 7 and AU 230 when he performed EQRs after the respective audit +report was issued and backdated his signature on the Concurring Review +6 +Questionnaires (Form 4.2s) -- at Messineo & Co.’s request -- to a date before the +issuance of the audit report. +H. VIOLATIONS +21. As a result of the conduct described above, Mohr engaged in improper professional +conduct as defined in Rule 102(e)(1)(iv) of the Commission’s Rules of Practice, in that +Mohr violated applicable professional standards or committed repeated instances of +unreasonable negligent conduct each resulting in a violation of applicable professional +standards that indicate a lack of competence to practice before the Commission. +I. FINDINGS +22. Based on the foregoing, the Commission finds that Mohr 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 Mohr’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Mohr is denied the privilege of appearing or practicing before the Commission as +an accountant. After 4 years from the date of this order, Mohr may request that the +Commission consider his reinstatement by submitting an application (attention: +Office of the Chief Accountant) to resume appearing or practicing before the +Commission as an accountant. + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3726.txt b/raw/aaer/2015/AAER-3726.txt new file mode 100644 index 0000000000000000000000000000000000000000..b796b04137277d768d042e2421c6005b639317fe --- /dev/null +++ b/raw/aaer/2015/AAER-3726.txt @@ -0,0 +1,274 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 76633 / December 14, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3726 / December 14, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-17001 + + +In the Matter of + +CHARLES LOVELESS, CPA, + +Respondent. + + + + +ORDER INSTITUTING CEASE-AND-DESIST +PROCEEDINGS, PURSUANT TO SECTION +21C OF THE SECURITIES EXCHANGE ACT +OF 1934, MAKING FINDINGS AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Charles Loveless, CPA (“Loveless” 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 oth er proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Cease-and-Desist Proceedings, Pursuant to Section 21C of the +Securities Exchange Act of 1934, and Imposing Remedial Sanctions and a Cease-and-Desist Order +(“Order”), as set forth below. + + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + + 1. Respondent, a former employee of Diebold, Inc. (“Diebold”), entered into a +cooperation agreement with the Division of Enforcement on March 23, 2010, in connection with the +Commission’s investigation of violations of the federal securities laws at Diebold, and related +enforcement proceedings. That investigation and related enforcement proceedings against the +company and certain of its former senior executives are now concluded. The Commission, having +taken into consideration Respondent’s substantial cooperation, enters this Order resolving the matter +with respect to Respondent. + + 2. As described below, Respondent, at the direction of management, made improper +accounting entries in Diebold’s books, records, and accounts in 2003 and 2004, while he was a +finance manager at the company. As a result of the conduct described herein, Respondent caused +violations of Section 13(b)(2)(A) of the Exchange Act, and violated Rule 13b2-1 thereunder. + +Respondent + + 3. Respondent Charles Loveless, 50, is a resident of Massillon, Ohio. He was a finance +manager at Diebold from 2001 to 2006, and reported directly to Michael McKenna. From 2006 to +2008, Loveless was Diebold’s Manager of External Reporting. In January 2008, Loveless +separated from Diebold. Currently, Loveless is the Finance Director and Controller of a private +company in North Canton, Ohio. Loveless is a certified public accountant in Ohio. His license is +inactive. Loveless entered into a cooperation agreement with the Division on March 23, 2010. + +Other Relevant Individuals and Entity + + 4. Diebold, Inc. is an Ohio corporation headquartered in North Canton, Ohio. Diebold +manufactures and sells ATMs and bank security systems. Diebold’s common stock is registered +with the Commission pursuant to Exchange Act Section 12(b) and is listed on the New York Stock +Exchange. + + 5. Walden O’Dell, 69, is a resident of Columbus, Ohio. O’Dell was the CEO and +Chairman of Diebold from 1999 to 2005. He is retired. + + 6. Gregory Geswein, 60, is a resident of Toledo, Ohio. Geswein was the CFO of +Diebold from 2000 to 2005. Subsequently, Geswein was the CFO of Reynolds & Reynolds, Co. + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + 3 +from 2005 to 2006, and the CFO of Libbey, Inc. from May 2007 through June 2010. Geswein +currently operates a restaurant in Akron, Ohio. Geswein is not a certified public accountant. + + 7. Kevin Krakora, 59, is a resident of Canton, Ohio. Krakora was Diebold’s +Controller from 2001 through 2005, and the company’s CFO from 2005 through March 2008. +Krakora was removed as Diebold’s CFO in March 2008, and later separated from the company in +2010. From December 2011 through May 2012, Krakora worked part-time as a business +consultant. From July 2012 through September 2013, Krakora operated a handyman franchise. +Krakora is currently unemployed. Krakora is a certified public accountant in Ohio. His license is +inactive. + + 8. Sandra Miller, 47, is a resident of Houston, Texas. Miller was Diebold’s Director +of Corporate Accounting from 2002 to 2006. From 2006 through 2011, Miller was the Controller +at JoAnn Stores, Inc. Currently Miller is a reporting and compliance director at a private company +in Houston, Texas. Miller is a certified public accountant in Ohio. + + 9. Michael McKenna, 53, is a resident of New Hartford, New York. McKenna was +Diebold’s Vice President of Global Finance from 2002 to 2005, and the company’s Vice President +of North American Finance from 2005 through 2007. In July 2007, McKenna separated from +Diebold. Since January 2010, McKenna has been the Finance Director and Controller of a private +company in Utica, New York. McKenna is a certified public accountant in Ohio. His license is +inactive. McKenna entered into a cooperation agreement with the Division of Enforcement on +April 19, 2010. +Background + + 10. Loveless is a former employee of Diebold, Inc., a public company based in North +Canton, Ohio that manufactures and sells ATMs and bank security systems. Loveless was a +finance manager at Diebold from 2001 to 2006, and the company’s Manager of External Reporting +from 2006 to 2008. In 2003 and 2004, Loveless, at the direction of management, made improper +accounting entries in Diebold’s books, records, and accounts. These improper entries assisted the +company and its management in artificially inflating Diebold’s reported earnings to meet forecasts. + + 11. Under generally accepted accounting principles (“GAAP”), an issuer is required to +accrue for anticipated liabilities. Under GAAP, a liability should be released upon the occurrence +of a specified event or when the estimate should be revised in response to new information. GAAP +prohibits maintaining general or excess reserves (e.g., “cookie jar” reserves). + + 12. As a finance manager at Diebold, Loveless had certain accounting responsibilities +for Diebold’s North American sales commission accrual account. This account consolidated +several sub-accounts maintained by accounting personnel in Diebold’s North American business +units. In 2003 and 2004, Loveless, and others, including management of Diebold, knew that this +account was frequently underaccrued because the business units were not properly recording +liabilities. At the direction of management, no action was taken to correct it. In 2003 and 2004, +the account was understated by approximately $2.7 million and $300,000, respectively. + + 4 + 13. Loveless also had accounting responsibilities for Diebold’s Shipped Not Installed +accrual account, which the company at times used as a cookie jar reserve. At the direction of +management, on October 4, 2003, Loveless made an improper out-of-period entry increasing the +accrual in this account by $250,000, effective as of September 2003 (the third-quarter 2003). On +October 7, 2003, Loveless improperly reversed this accrual in the fourth-quarter 2003. There was +no legitimate accounting justification for these entries. The improper entries assisted management +in artificially inflating the company’s reported earnings for the fourth-quarter of 2003. +14. As a result of the conduct described above, Respondent Loveless caused Diebold’s +violations of Section 13(b)(2)(A) of the Exchange Act, which requires Commission registrants to +make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly +reflect the transactions and dispositions of the assets of the registrant. + +15. As a result of the conduct described above, Loveless violated Rule 13b2-1 of the +Exchange Act, which states that no person shall, directly or indirectly, falsify or cause to be +falsified, any book, record or account subject to section 13(b)(2)(A) of the Exchange Act. + +Cooperation + + 16. Loveless entered into a cooperation agreement with the Division of Enforcement on +March 23, 2010, in connection with the Commission’s investigation of violations of the federal +securities laws at Diebold and related enforcement proceedings. As a result of the investigation, the +Commission filed the following enforcement actions, all of which are now concluded: + + 17. On June 2, 2010, the Commission filed a settled enforcement action against +Diebold in which it consented to a final judgment ordering injunctive relief and a $25 million civil +penalty. See SEC v. Diebold, Inc., Civ. Action No. 1:10-CV-00908 (D.D.C.) / Lit. Rel. No. 21543. + + 18. On June 2, 2010, the Commission filed a settled compensation claw-back action +against Walden O’Dell, Diebold’s former CEO and Chairman, pursuant to Section 304 of the +Sarbanes-Oxley Act of 2002, in which he consented to a final judgment ordering him to reimburse +$470,016 in cash bonuses, 30,000 shares of Diebold stock, and stock options for 85,000 shares of +Diebold stock. See SEC. v. O’Dell, Civ. Action No. 1:10-CV-00909 (D.D.C.) / Lit. Rel. No. +21543. + + 19. On June 2, 2010, the Commission filed a contested enforcement action against +Gregory Geswein, Diebold’s former CFO. On May 26, 2015, pursuant to a settlement, the court +entered a final consent decree against Geswein ordering him to pay $680,000 in disgorgement, a +$170,000 civil penalty, and prohibiting him for three years from acting as an officer or director of a +public company. See SEC v. Geswein, et al., Civ. Action No. 5:10-CV-01235 (N.D. Ohio) / Lit. +Rel. Nos. 21543 and 23268. + + 20. On June 2, 2010, the Commission filed a contested enforcement action against +Kevin Krakora, Diebold’s former Controller and later CFO. On May 26, 2015, pursuant to a +settlement, the court entered a final consent decree against Krakora ordering him to pay $400,000 in + 5 +disgorgement, a $100,000 civil penalty, prohibiting him for three years from acting as an officer or +director of a public company, and prohibiting him from appearing or practicing before the +Commission as an accountant, with a right to apply for reinstatement after three years. See SEC v. +Geswein, et al., Civ. Action No. 5:10-CV-01235 (N.D. Ohio) / Lit. Rel. Nos. 21543 and 23268. + + 21. On June 2, 2010, the Commission filed a contested enforcement action against +Sandra Miller, Diebold’s former Director of Corporate Accounting. On May 26, 2015, pursuant to +a settlement, the court entered a final consent decree against Miller that permanently enjoins her +from aiding and abetting any violation of Section 13(a), Section 13(b)(2)(A), and Section +13(b)(2)(B) of the Exchange Act, and Rules 13a-1, 13a-11, 13a-13, and 12b-20 thereunder, and +ordered disgorgement of $29,057, which was waived, and no penalty imposed, based on her +financial condition. See SEC v. Geswein, et al., Civ. Action No. 5:10-CV-01235 (N.D. Ohio) / Lit. +Rel. Nos. 21543 and 23268. + + 22. Loveless provided significant cooperation in connection with the Commission’s +investigation of this matter and the related enforcement actions. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Loveless’s Offer. + + Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + + A. Respondent Loveless cease and desist from committing or causing any violations +and any future violations of Section 13(b)(2)(A) of the Exchange Act, and Rule 13b2-1 thereunder. + + B. Respondent shall, within ten (10) days of the entry of this Order, pay disgorgement +of $7,724 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 + 6 +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 +Charles Loveless as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Brian O. Quinn, Assistant +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + +C. Respondent acknowledges that the Commission is not imposing a civil penalty +based upon his cooperation in a Commission investigation and related enforcement actions. If at +any time following the entry of the Order, the Division of Enforcement (“Division”) obtains +information indicating that Respondent knowingly provided materially false or misleading +information or materials to the Commission or in a related proceeding, the Division may, at its sole +discretion and with prior notice to the Respondent, petition the Commission to reopen this matter +and seek an order directing that the Respondent pay a civil money penalty. Respondent may +contest by way of defense in any resulting administrative proceeding whether it knowingly +provided materially false or misleading information, but may not: (1) contest the findings in the +Order; or (2) assert any defense to liability or remedy, including, but not limited to, any statute of +limitations defense. + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in +Section 523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and +admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Respondent under this Order or any other judgment, order, +consent order, decree or settlement agreement entered in connection with this proceeding, is a +debt for the violation by Respondent of the federal securities laws or any regulation or order +issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § +523(a)(19). + + + By the Commission. + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3728.txt b/raw/aaer/2015/AAER-3728.txt new file mode 100644 index 0000000000000000000000000000000000000000..45f258bb72a85a04b00447925d5086571bee99ed --- /dev/null +++ b/raw/aaer/2015/AAER-3728.txt @@ -0,0 +1,1372 @@ + + + + + + + + + + + + + + + + SEC.gov | Lee Cole, 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\/517681","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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Lee Cole, et al., Civil Action No. 12-CV-8167 (RJS) + + Court Imposes Injunction and $100,000 Civil Penalty Against Auditor Timothy Quintanilla + + + The United States Securities and Exchange Commission announced that, on December 4, 2015, Judge Richard J. Sullivan of the U.S. District Court for the Southern District of New York issued a final judgment, on consent of defendant Timothy Quintanilla, which permanently enjoined him from violating the antifraud provisions of the federal securities laws and ordered him to pay a $100,000 civil penalty.  Quintanilla was the former outside auditor of Electronic Game Card Inc. (EGMI).  This final judgment fully resolves the enforcement action before Judge Sullivan, in which final judgments were previously entered against three other defendants, former CEO Kevin Donovan, Lee Cole (Donovan's predecessor as CEO), and Linden Boyne (EGMI's former CFO), who the Commission charged with violations of the securities laws' antifraud provisions and other violations.  + + The Complaint, filed in November 2012, alleged that Quintanilla, as the engagement partner for EGMI, violated the securities laws by authorizing the issuance of unqualified opinions for the years 2006 through 2008 by the accounting firm Mendoza Berger & Co. LLP ("Mendoza Berger").  The Complaint alleged that in Mendoza Berger's audit reports, Quintanilla knowingly misrepresented that it had conducted audits of EGMI's financial statements "in accordance with the standards of the Public Company Accounting Oversight Board (United States)" ("PCAOB") and that those statements "present[ed] fairly, in all material respects, the financial position" of EGMI.  In the course of its audit work, Quintanilla and the audit team he supervised failed to properly investigate a series of red flags, any number of which, if appropriately pursued, would have quickly uncovered large-scale fraud in EGMI's financial statements.  Other evidence indicated that Mendoza Berger simply failed to audit significant portions of EGMI's balance sheet.  To conceal those failures, Mendoza Berger employees, under Quintanilla's supervision, created and backdated documents for the EGMI audit file shortly before an inspection by the PCAOB in September and October 2009. + + Without admitting or denying the allegations of the Complaint, Quintanilla consented to the final judgment which: (a) permanently enjoins him from violating Section 17(a) of the Securities Act of 1933, Sections 10(b), 10A(a)(1),  and 10A(b)(1) of the Securities and Exchange Act of 1934, and Rule 10b-5 thereunder; and (b) orders him to pay a $100,000 civil penalty. + + For further information see Litigation Release 22529 (November 9, 2012), 23099 (September 30, 2014). + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2015/AAER-3729.txt b/raw/aaer/2015/AAER-3729.txt new file mode 100644 index 0000000000000000000000000000000000000000..63ea29b9ca6d45f7172a2f365eb4cc95bf847f51 --- /dev/null +++ b/raw/aaer/2015/AAER-3729.txt @@ -0,0 +1,296 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 76734 / December 22, 2015 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3729 / December 22, 2015 + +ADMINISTRATIVE PROCEEDING +File No. 3-17018 + + + +In the Matter of + +SPICER JEFFRIES LLP, + +Respondent. + + ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative proceedings be, and hereby are, instituted against Spicer Jeffries LLP (“Spicer +Jeffries” or “Respondent”) pursuant to Section 4C1 of the Securities Exchange Act of 1934 +(“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + + + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that +person is found . . . (1) not to possess the requisite qualifications to represent others . . . +(2) to be lacking in character or integrity, or to have engaged in unethical or improper +professional conduct; or (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may censure a person or deny, temporarily or permanently, the +privilege of appearing or practicing before it in any way to any person who is found . . . +to have engaged in unethical or improper professional conduct. + +2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative Proceedings Pursuant to Section 4C of the Securities Exchange Act of 1934 and +Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +A. SUMMARY + + These proceedings arise out of Spicer Jeffries’ failure to retain audit documentation, as +required by Generally Accepted Auditing Standards (“GAAS”). Spicer Jeffries was unable to locate +audit documentation for six (6) of its audit engagements for the years 2009 through 2013. Spicer +Jeffries did not have written policies and procedures outlining the practices followed for retention of +audit documentation. The affected clients are registered broker-dealers who were required by +Section 17(e)(1)(A) of the Exchange Act and Rules 17a-5(d)(1)(i) and 17a-5(g)(1)3 thereunder to +file annual financial reports that are audited by an independent public accountant pursuant to +GAAS. GAAS required that audit documentation for such annual audits be retained for a period of +at least five years from the report release date.4 Spicer Jeffries’ failure to retain audit documentation + +3 The provisions of Exchange Act Rule 17a-5 referred to herein are those in effect during, and +applicable to, the relevant conduct. On July 30, 2013, the Commission adopted certain amendments to +Rule 17a-5. See Broker-Dealer Reports, SEC Exchange Act Release No. 34-70073 (July 30, 2013), 78 +Fed. Reg. 51910 (Aug. 21, 2013). Among other things, the amendments to Rule 17a-5 require that audits +of brokers and dealers be performed in accordance with Public Company Accounting Oversight Board +standards, effective for audits of fiscal years ending on or after June 1, 2014. + +Prior to the July 30, 2013 amendments, Rule 17a-5 required that audits of brokers or dealers be +performed in accordance with auditing standards generally accepted in the United States of America, +established by the American Institute of Certified Public Accountants (“AICPA”). See SEC Exchange +Act Release No. 34-62991 (Sept. 24, 2010), 75 Fed. Reg. 60616 (Oct. 1, 2010) (clarifying that references +in Commission rules and staff guidance and in the federal securities laws to GAAS or to specific +standards under GAAS, as they relate to non-issuer brokers or dealers, should continue to be understood +to mean auditing standards generally accepted in the United States of America, established by the +AICPA). + +4 See AU-C Section 230.17, Audit Documentation, (effective for audits of financial statements for +periods ending on or after December 15, 2012); AU Section 339.32, Audit Documentation (effective for +3 + +in accordance with GAAS for six (6) audits for the years 2009 through 2013 of registered broker- +dealers constitutes improper professional conduct. + +B. RESPONDENT + + Spicer Jeffries LLP is an accounting and auditing firm registered with the Public +Company Accounting Oversight Board (“PCAOB”). Spicer Jeffries is based in Denver, Colorado +and recently opened offices in Florida and the Cayman Islands. During fiscal years 2009 through +2013 (the “Relevant Period”), Spicer Jeffries had two partners and approximately twenty-nine +professional staff. + +C. FACTS + + 1. Background + +a. During the Relevant Period, Spicer Jeffries issued approximately 350 audit reports +for broker-dealers registered with the Commission. For the year ended 2013, Spicer Jeffries +completed 74 audits of broker-dealers. + +b. During the Relevant Period, broker-dealers were required to annually file with the +Commission financial reports audited by an independent public accountant in accordance with +GAAS. During the Relevant Period, GAAS required that the independent public accountant retain +audit documentation for a period of at least five years from the report release date. + +c. Applicable GAAS standards state that an auditor “should adopt reasonable +procedures to retain and access audit documentation for a period of time sufficient to meet the +needs of his or her practice and to satisfy any applicable legal or regulatory requirements for +records retention.”5 + +d. Spicer Jeffries was managed by two partners, a majority partner and a minority +partner. The majority partner relied solely on the minority partner to ensure compliance with +professional standards and other requirements related to audit documentation retention. The +minority partner was responsible for overseeing the policies and procedures related to retention of +audit documentation, but the policies, procedures, and oversight were inadequate to reasonably +assure compliance with GAAS. + +e. Spicer Jeffries’ written policy regarding audit documentation retention stated that +audit documentation was to be retained for a period of six years after the balance sheet date. Spicer + +audits of financial statements for periods ending on or after December 15, 2006 and prior to December +15, 2012). PCAOB standards require a seven-year retention period. See PCAOB Auditing Standard No. +3, Audit Documentation, paragraph 14. + +5 See AU Section 339.32 Audit Documentation; AU-C Section 230, Appendix A, +paragraph .A27, Audit Documentation. +4 + +Jeffries’ administrative staff followed certain practices to retain audit documentation for this +period. The firm did not, however, have written procedures outlining these practices. The firm’s +management did not regularly review administrative staff’s practices to ensure the administrative +staff reasonably followed those practices. + +f. Spicer Jeffries maintained on-site file storage for audit documentation that was less +than one year old. Spicer Jeffries allowed all personnel to access the on-site file storage. The firm +maintained a system to record the names and dates of individuals who removed audit +documentation and the names and dates such documentation was returned to the on-site file +storage. Although the system was in place, the records were not regularly verified, and certain +records were incomplete. + +g. Spicer Jeffries generally archived audit documentation older than one year at an off- +site facility. During the Relevant Period, Spicer Jeffries maintained a master archive list to +document the location of archived audit documentation. The master archive list contained +inaccuracies during the Relevant Period. + +h. At the end of 2013, the minority partner retired from Spicer Jeffries, and the +administrative staff continued to carry out the existing audit documentation retention practices. +From January 1, 2014 until January 1, 2015, no other partner assumed responsibility of audit +documentation retention practices, although the firm’s partners were available to the administrative +staff if they had questions. + +Failure to Retain Audit Documentation + + i. In response to requests for documents issued by the Commission, Spicer Jeffries +was unable to locate audit documentation for six audit engagements of registered broker-dealers +during the Relevant Period.6 + +Remedial Efforts + + j. In 2015, a new partner took over direct responsibility for audit documentation +retention. Spicer Jeffries took steps to review and analyze its audit documentation retention +practices and developed new written policies and procedures regarding audit documentation +retention. Spicer Jeffries will hire an independent consultant at its own expense to evaluate its +audit documentation retention policies and procedures. + + + +6 Spicer Jeffries acknowledged during the investigation that out of 113 audit files for which +information was requested, it failed to retain documentation for six of those audit engagements. +5 + + 2. Violations + + a. Section 4C of the Exchange Act and Rule 102(e) of the Commission’s Rules of +Practice allow the Commission to censure a person if it finds that such person has engaged in +“improper professional conduct.” Exchange Act § 4C(a)(2); Rule 102(e)(1)(ii). Section 4C and +Rule 102(e) define improper professional conduct, in part, as “[r]epeated instances of unreasonable +conduct, each resulting in a violation of applicable professional standards, that indicate a lack of +competence to practice before the Commission.” Exchange Act § 4C(b)(2)(B); Rule +102(e)(1)(iv)(B)(2). As a result of the conduct described above, Spicer Jeffries engaged in +repeated instances of unreasonable conduct, each resulting in a violation of applicable professional +standards that indicate a lack of competence to practice before the Commission. +3. Findings +a. Based on the foregoing, the Commission finds that Spicer Jeffries 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. + +4. Remedial Efforts + + In determining whether to accept the Offer, the Commission considered remedial acts +undertaken by Respondent. + +Undertakings + + Respondent undertakes to: + +1. Retain, within sixty (60) days after the entry of this Order, at its own expense, an +independent consultant (“Independent Consultant”) not unacceptable to the staff of the +Commission, to review and evaluate whether Spicer Jeffries’ audit documentation retention +policies and procedures are designed and implemented in a manner reasonably sufficient under +PCAOB standards and applicable Commission rules to retain all audit documentation in +accordance with applicable professional standards. Spicer Jeffries shall cooperate fully with the +Independent Consultant and shall provide the Independent Consultant with access to its own files, +books, records, and personnel as reasonably requested for the review; + +2. Require that the Independent Consultant issue a report, within sixty (60) days of +being retained, summarizing the review and recommending additional or revised audit +documentation retention policies and procedures necessary to provide reasonable assurance of +compliance with PCAOB standards and applicable Commission rules pertaining to the retention of +audit documentation. + +3. Adopt all recommendations in the report of the Independent Consultant; provided, +however, that within thirty (30) days after the Independent Consultant serves that report, Spicer +Jeffries shall in writing advise the Independent Consultant and the Commission of any +6 + +recommendations that it considers to be unnecessary, unduly burdensome, impractical, or costly. +With respect to any recommendation that Spicer Jeffries considers unnecessary, unduly +burdensome, impractical or costly, Spicer Jeffries need not adopt that recommendation at that time +but shall propose in writing an alternative policy, procedure, or system designed to achieve the +same objective or purpose. As to any recommendation on which Spicer Jeffries and the +Independent Consultant do not agree, such parties shall attempt in good faith to reach an agreement +within thirty (30) days after Spicer Jeffries serves the written advice. In the event Spicer Jeffries +and the Independent Consultant are unable to agree on an alternative proposal, Spicer Jeffries will +abide by the determinations of the Independent Consultant; +4. 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 Spicer Jeffries, 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 Salt Lake Regional Office, enter into any employment, consultant, attorney-client, +auditing or other professional relationship with Spicer Jeffries, 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. + +5. Certify, in writing, compliance with the undertakings set forth above. The +certification shall identify the undertakings, provide written evidence of compliance in the form +of a narrative, and be supported by exhibits sufficient to demonstrate compliance. The +Commission staff may make reasonable requests for further evidence of compliance, and +Respondent agrees to provide such evidence. The certification and supporting material shall be +submitted to Richard R. Best, Regional Director, Division of Enforcement, U.S. Securities and +Exchange Commission, 351 So. West Temple, Suite 6.100, Salt Lake City, UT 84101 with a +copy to the office of Chief Counsel of the Enforcement Division, 100 F Street, N.E., +Washington, DC 20549-6553, no later than sixty (60) days from the date of the completion of the +undertakings. + +6. In determining whether to accept the Offer, the Commission has considered these +undertakings. + + +7 + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Spicer Jeffries’ Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent is censured. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2015/AAER-3730.txt b/raw/aaer/2015/AAER-3730.txt new file mode 100644 index 0000000000000000000000000000000000000000..eb027a79445edaf01d1b9369280373339a8340ad --- /dev/null +++ b/raw/aaer/2015/AAER-3730.txt @@ -0,0 +1,1380 @@ + + + + + + + + + + + + + + + + SEC.gov | New Stream Capital, LLC, et al. + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/517726","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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New Stream Capital, LLC, et al , Civil Action No. 3:13cv264 (JCH)(D. Conn.) + + Former Connecticut Hedge Fund Executives Settle SEC Action + + + The Honorable Janet C. Hall, Chief Judge of the United States District Court for the District of Connecticut, has entered final consent judgments against defendants David A. Bryson ("Bryson"), Bart C. Gutekunst ("Gutekunst") and Richard Pereira ("Pereira") in the Commission's action alleging that they engaged in fraud while running hedge funds affiliated with New Stream Capital, LLC ("New Stream"), formerly an unregistered investment adviser based in Ridgefield, Connecticut. + + The Commission's complaint alleges that the defendants, through New Stream and affiliated entities, ran a $750-plus million hedge fund complex focused on illiquid investments in asset-based lending. Bryson and Gutekunst were owners and senior managers of New Stream, and Pereira was New Stream's chief financial officer. The complaint alleges that beginning in March 2008, Bryson, Gutekunst and Pereira engaged in a fraudulent scheme to make changes to the New Stream funds' capital structure without disclosing those changes to new investors in the funds. As alleged in the complaint, the undisclosed changes to the capital structure subordinated the position of, among others, new fund investors but were advantageous to other existing fund investors, including the funds' largest investor, which had threatened to redeem its investment. The complaint further alleges that following the New Stream funds' collapse in the wake of the financial crisis, the investors' whose position in the funds' capital structure had been secretly subordinated were left with significantly lower recoveries than the funds' other investors. + + The final judgments, to which Bryson, Gutekunst and Pereira consented, permanently enjoin Bryson and Gutekunst from violating 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, Section 206(4) of the Investment Advisers Act of 1940 ("Advisers Act") and Rule 206(4)-8 thereunder. Bryson and Gutekunst were also enjoined from from violating Sections 206(1) and 206(2) of the Advisers Act. The judgments also require Bryson, Gutekunst and Pereira to pay disgorgement and prejudgment interest in the amounts of $6,347,252.55, $6,258,445.49 and $454,471.50, respectively, and provide that the defendants' liability for such amounts is deemed satisfied by the $57 million restitution order entered jointly and severally against them by the same court in the parallel criminal action brought by the United States Attorney's Office for the District of Connecticut ("USAO"). The judgments forgo the imposition of civil monetary penalties in view of the prison sentences imposed on the defendants pursuant to their guilty pleas in the parallel criminal action. + + In addition, the Commission issued administrative orders, pursuant to Section 203(f) of the Advisers Act, barring Bryson, Gutekunst and Pereira from association with any broker, dealer, investment adviser, municipal securities dealer, or transfer agent, and suspending Pereira, a CPA, from appearing or practicing before the Commission pursuant to Rule 102(e) of the Commission's Rules of Practice. Bryson, Gutekunst and Pereira also consented to the issuance of the Commission orders, which were based on the permanent injunctions entered against them in the federal court action and their guilty pleas in the parallel criminal proceedings. + + A final consent judgment was previously entered against defendant, Tara Bryson, who was the director of marketing and client relations at New Stream during the time of the fraud alleged in the complaint, as well a Commission order, on consent, barring her from association with any broker, dealer, investment adviser, municipal securities dealer, or transfer agent. + + With the Commission's consent, the court dismissed the claims against defendants New Stream and New Stream Capital (Cayman), Ltd., formerly an affiliated off-shore advisory entity, both of which are now defunct and whose affiliated funds are the subject of bankruptcy proceedings in which assets are being liquidated for distribution to fund investors and other fund creditors pursuant to court orders issued in the bankruptcy proceedings. + + The Commission acknowledges the assistance and cooperation of the USAO, the Federal Bureau of Investigation and the United States Department of Labor in this matter. + + http://www.sec.gov/litigation/litreleases/2013/lr22625.htm + http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171512954 + + + + + + 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/2022/AAER-4279.txt b/raw/aaer/2022/AAER-4279.txt new file mode 100644 index 0000000000000000000000000000000000000000..9363c7a08f71ab00368d48857d07c2ed240f5fe7 --- /dev/null +++ b/raw/aaer/2022/AAER-4279.txt @@ -0,0 +1,115 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94099 / January 28, 2022 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4279 / January 28, 2022 +ADMINISTRATIVE PROCEEDING +File No. 3-18769 + +In the Matter of +Jennifer F. Wolf, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN +ACCOUNTANT RESPONSIBLE FOR THE +PREPARATION OR REVIEW OF FINANCIAL +STATEMENTS REQUIRED TO BE FILED WITH +THE COMMISSION OTHER THAN AS A MEMBER +OF AN AUDIT COMMITTEE + +On April 1, 2019, the Commission issued an Order Imposing Remedial Sanctions +Pursuant to Rule 102(e) of the Commission’s Rules of Practice (the “Suspension Order”) as to +Respondent Jennifer F. Wolf, CPA (“Wolf”).1 The Suspension Order suspended Wolf from +appearing or practicing before the Commission as an accountant but permitted Wolf, after one +year from the date of the Suspension Order and if certain conditions were met, to request that the +Commission consider her reinstatement 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) (“Exchange Act”); (2) a preparer or reviewer, or a person responsible for +the preparation or review, of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of +the Exchange Act; or (3) an independent accountant. +This order is issued in response to Wolf’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 Exchange Act. + +1 See Accounting and Auditing Enforcement Release No. 4034 dated April 1, 2019. + + 2 +The Commission found that Wolf had been permanently enjoined by the United States +District Court for the Northern District of California from future violations of Section 17(a)(3) of +the Securities Act of 1933 and Rule 13b2-1 under the Exchange Act. In its complaint filed in +that District Court action, the Commission alleged, among other things, that Wolf, while serving +as the Acting Controller of Logitech International, S.A (“Logitech”), engaged in conduct that +resulted in Logitech’s filing a false and misleading Form 10-K for the fiscal year ended March +31, 2011. The Form 10-K was misleading due to Logitech’s failure to record an inventory +reserve for its Revue product. +Wolf has met all of the conditions set forth in the Suspension Order to be reinstated to +appear and practice before the Commission 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, and in this capacity has attested that she will undertake to have +her work reviewed by the independent audit committee of any company for which she works, or +in some other manner acceptable to the Commission, while practicing before the Commission in +this capacity. Wolf 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 or as an independent accountant. If, in the future, she should wish to resume +appearing and practicing in such a capacity, she will be required to submit an application to the +Commission showing, among other things, that she has complied and will comply with the terms +of the Suspension Order. + +Wolf is currently subject to probation under the California State Board of Accountancy. +Failure to abide by the terms of her probation could result in the suspension of Wolf’s CPA +license. Wolf has attested that she will notify the Commission if she is found to have violated +the terms of the probation. She also has attested that she understands that the suspension of her +CPA license could result in the revocation of the reinstatement of her privilege to appear or +practice before the Commission as an accountant. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + +On the basis of information supplied, representations made, and undertakings agreed to +by Wolf it appears that she has complied with the terms of the Suspension Order suspending her +from appearing or practicing before the Commission as an accountant. No information has come +to the attention of the Commission relating to her character, integrity, professional conduct, or +qualifications to practice before the Commission that would be a basis for adverse action against + +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 +her pursuant to Rule 102(e) of the Commission's Rules of Practice. In addition, Wolf has +undertaken to have her work reviewed by the independent audit committee of any company for +which she works, or in some other manner acceptable to the Commission. As a result, Wolf 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 +Jennifer F. Wolf, 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 as that term is defined in +Section 3(a)(58) of the Securities and Exchange Act of 1934. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4280.txt b/raw/aaer/2022/AAER-4280.txt new file mode 100644 index 0000000000000000000000000000000000000000..cd2c632147449d3d6c15d34009b06f2b4c565604 --- /dev/null +++ b/raw/aaer/2022/AAER-4280.txt @@ -0,0 +1,81 @@ + + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94108 / January 31, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4280/ January 31, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20727 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +NATHANIEL BROWN, : 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 Nathaniel Brown 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. Brown is an accountant and served as a Senior Revenue Recognition Manager at +Infinera Corporation from 2011 until he was terminated in November 2017. + +2. On October 28, 2021, a judgment of conviction was entered against Brown in +United States v. Nathaniel Brown, Crim. No. 3:21-cr-00247, in the United States District Court + +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 + +for the Northern District of California, finding him guilty of one count of securities fraud in +violation of 18 U.S.C. § 1348. + +3. As a result of this conviction, Brown was sentenced to twenty-two months +imprisonment in a federal penitentiary, three years of supervised release, and ordered to forfeit +$30,000. + +III. + +In view of the foregoing, the Commission finds that Brown 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 Nathaniel Brown 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/2022/AAER-4281.txt b/raw/aaer/2022/AAER-4281.txt new file mode 100644 index 0000000000000000000000000000000000000000..6aae220ed788b9e2694ec997e508e52f026a4b5d --- /dev/null +++ b/raw/aaer/2022/AAER-4281.txt @@ -0,0 +1,39 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94160 / February 4, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4281 / February 4, 2022 + +Admin. Proc. File No. 3-18292 + + +In the Matter of + +GREGORY A. WAHL, CPA, MICHAEL +DEUTCHMAN, CPA, and GEORGIA CHUNG, CPA + + + + + + + +ORDER EXTENDING TIME TO ISSUE DECISION + + The Commission has determined, in its discretion, that it is appropriate to extend by 90 +days the period within which the decision in this matter may be issued. Accordingly, IT IS +ORDERED that such period be, and hereby is, extended to May 5, 2022. + + By the Commission. + + + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4282.txt b/raw/aaer/2022/AAER-4282.txt new file mode 100644 index 0000000000000000000000000000000000000000..91e508255f7042f10122a91eda922bba361c9a32 --- /dev/null +++ b/raw/aaer/2022/AAER-4282.txt @@ -0,0 +1,55 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94266 / February 16, 2022 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5968 / February 16, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4282 / February 16, 2022 + +Admin. Proc. File No. 3-20395 + + +In the Matter of + +STOCKMAN KAST RYAN & CO. LLP; +ELLEN S. FISHER, CPA; AND +DAVID H. KAST, CPA + + +STAY ORDER + +On July 13, 2021, the Securities and Exchange Commission issued an order instituting an +administrative proceeding against Stockman Kast Ryan & Co. LLP, Ellen S. Fisher, CPA, and +David H. Kast, CPA (collectively, “Respondents”), pursuant to Section 4C of the Securities +Exchange Act of 1934, Section 203(k) of the Investment Advisers Act of 1940, and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice.1 On December 13, 2021, we granted the +Division of Enforcement and Respondents’ joint motion for a stay based on the parties’ +agreement in principle to a settlement on all major terms.2 The stay was contingent on the +parties’ submission to the Commission of a signed offer of settlement by February 11, 2022. +On February 11, 2022, the parties jointly requested that the stay be extended. The request +represented that the parties have been finalizing the offer of settlement since December 2021, but +will not meet the stay order’s February 11, 2022 deadline. +For good cause shown, it is ORDERED that the joint request to extend the stay is +GRANTED and that this proceeding is stayed. The stay is contingent on the submission to the + +1 Stockman Kast Ryan & Co., Exchange Act Release No. 92382, 2021 WL 2953521 (July +13, 2021). +2 Stockman Kast Ryan & Co., Exchange Act Release No. 93759, 2021 WL 5907831 (Dec. +13, 2021). +2 + +Commission of Respondents’ signed offer of settlement and the Division’s accompanying +recommendation no later than April 18, 2022. If this deadline is not met or if the Commission +rejects the offer of settlement, the parties shall file a joint status report within 7 days of that +event. +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4283.txt b/raw/aaer/2022/AAER-4283.txt new file mode 100644 index 0000000000000000000000000000000000000000..9280943fd8c78579eb231f043343789e3df3cf85 --- /dev/null +++ b/raw/aaer/2022/AAER-4283.txt @@ -0,0 +1,311 @@ + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION +SECURITIES ACT OF 1933 +Release No. 11032 / February 22, 2022 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94294 / February 22, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4283 / February 22, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20781 + +In the Matter of + +BAXTER INTERNATIONAL +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 Baxter International Inc. (“Baxter” 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 +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. Baxter is a publicly-traded, U.S.-based healthcare product company that generates +the majority of its revenue outside of the U.S. Baxter reports its consolidated financial results in +U.S. dollars, although many of its subsidiaries have a different functional currency as they +manufacture and sell products globally and transact in foreign currencies. The values of these +foreign currencies relative to the U.S. dollar fluctuate frequently. +2. From at least 1995 through July 2019, the foreign exchange rate convention (“FX +Convention”) Baxter used to record foreign currency transactions recognized by subsidiaries in their +functional currencies and to uniformly translate the results of subsidiaries with foreign functional +currencies into U.S. dollars was not in accordance with U.S. generally accepted accounting +principles (“GAAP”). +3. Beginning in at least 2009 and continuing through July 2019, Baxter improperly +leveraged its FX Convention by engaging in intra-company transactions for the purpose of +generating foreign exchange accounting gains or avoiding foreign exchange accounting losses (the +“FX Transactions”). These FX Transactions had the effect of materially misstating Baxter’s net +income as reported in its public filings. +4. In October 2019, Baxter announced that it was conducting an internal investigation +concerning the FX Transactions. In March 2020, Baxter restated its financial statements, which +reduced its previously reported net income for 2017 through June 30, 2019 and retained earnings as +of January 1, 2017 by $582 million, collectively. Of this amount, $517 million was related to +foreign exchange gains and losses dating back to 2010, which was in part attributable to FX +Transactions. +5. Based on this conduct, and as described in further detail below, Baxter violated +Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-11 and 13a-13 thereunder. +Respondent +6. Baxter International Inc. is a Delaware corporation with its principal place of +business in Deerfield, Illinois. Its common stock is registered pursuant to Section 12(b) of the +Exchange Act and trades on the New York Stock Exchange. Baxter files periodic reports, including +annual reports on Form 10-K and quarterly reports on Form 10-Q, with the Commission pursuant to + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + 3 +Section 13(a) of the Exchange Act and related rules thereunder. During the relevant period, Baxter +sold securities to the public pursuant to registration statements filed with the Commission. +Facts +Baxter’s Foreign Exchange Rate Convention +7. FASB Accounting Standards Codification Topic 830, “Foreign Currency Matters” +(ASC 830), provides guidance concerning foreign exchange rate conventions. ASC 830-20-30-1 +requires that foreign currency transactions initially be measured and recorded in an entity’s +functional currency using the exchange rate on the date of the transaction. ASC 830-20-35-2 +requires that foreign currency denominated assets and liabilities be remeasured at the end of each +reporting period using the exchange rate at that date. +8. Before July 2019, Baxter’s FX Convention was not in accordance with GAAP +because foreign currency transactions in a given month were initially measured using exchange +rates from a specified date near the middle of the previous month as opposed to the exchange rate +on the date of the transaction. Additionally, foreign currency denominated assets and liabilities +were subsequently remeasured at the end of each month using exchange rates from a specified date +near the middle of the then current month, called “T Day,” and not at the end of the reporting +period. +9. Because of Baxter’s FX Convention, Baxter employees knew the exchange rates +that would apply to intra-company transactions from the T Day in a given month through month- +end. +Treasury Employees Leveraged Baxter’s Foreign Exchange Rate to Record Gains +10. Baxter’s Treasury department was responsible for managing Baxter’s exposure to +fluctuations in foreign exchange rates, which Baxter managed on a consolidated basis. +11. Beginning in about 2007, Baxter’s Treasury department began focusing on +managing Baxter’s foreign exchange rate exposure more efficiently and at a lower cost. Baxter +wanted to reduce its use of third-party derivative contracts and instead manage its foreign currency +exposures on a consolidated basis through offsetting cash positions. Baxter developed the FX +Transactions as a way to better control reported foreign exchange gains and losses. +12. Beginning in at least 2009, personnel in Baxter’s Treasury department engaged in +the FX Transactions solely to generate non-operating foreign exchange accounting gains or avoid +foreign exchange accounting losses. +13. Each FX Transaction comprised a series of transactions designed to create a foreign +exchange gain or avoid a loss at a Baxter subsidiary. For example, when the dollar was +strengthening in comparison to the Euro, Baxter would generate a foreign exchange gain by +moving U.S. dollars to a Euro-functional Baxter entity. Specifically, a U.S. dollar Baxter entity +would make a capital distribution in U.S. dollars to its Baxter Euro-functional parent (“Euro +Parent”). Euro Parent would then enter into simultaneous transactions with Baxter’s Euro- + 4 +functional cash pooling entity (“Euro Cash Pooling Entity”) to (i) trade the dollars for Euros and +(ii) loan Euros in the same amount it just traded. The Euro Cash Pooling Entity would record a +foreign exchange gain on the U.S. dollars that it held at month end. The gain was the difference +between exchange rates for the prior month’s T Day and current month’s T Day. After month-end, +the Treasury group would unwind the currency trade and the loan. +14. Because of Baxter’s FX Convention, Treasury personnel knew the foreign +exchange rates that would apply to month-end transactions before they happened. With this +knowledge, certain Treasury personnel executed FX Transactions to generate specific amounts of +accounting gains or avoid specific amounts of accounting losses. +15. Beginning in the fourth quarter of 2017, Baxter began to more accurately forecast +the “other (income) expense, net” line of its financial statements as part of a company-wide +initiative to improve its forecast accuracy and as a result of the consistent gains being generated by +the Treasury department. The foreign exchange component of the other (income) expense line +forecast was based on the average actual foreign exchange gains reported by Baxter over the +previous several quarters, discounted slightly for volatility. +16. Baxter did not have sufficient internal accounting controls over intra-company +transactions. It also did not have adequate internal controls to monitor and quantify the difference +between the foreign exchange gains and losses that it reported using its FX Convention and the +gains and losses it would have reported using exchange rates in accordance with GAAP. Baxter’s +internal accounting controls failed to identify that the foreign exchange gains generated by the FX +Transactions were improper. +Baxter’s Inaccurate Financial Reporting and Ineffective Internal Control Over Financial Reporting +17. The accounting gains generated (or losses avoided) from the FX Transactions were +reported on the “other (income) expense, net” line of Baxter’s financial statements and were +reflected in Baxter’s net income and earnings per share (“EPS”). +18. Baxter reported foreign exchange gains of $113 million in 2015, $28 million in +2016, $50 million in 2017, $73 million in 2018, and $22 million for the first two quarters of 2019. +The improper FX Transactions had the effect of inflating Baxter’s net income and EPS. +19. Baxter should have discovered that the FX Transactions caused materially +misstated financial results. +20. In late July 2019, Baxter’s Tax department asked certain Treasury personnel about +the details of the FX Transactions. The Treasury personnel explained the FX Transactions to the +Tax personnel, including that the FX Transactions were used to generate foreign exchange gains or +avoid losses. Shortly thereafter, Baxter undertook to change its FX Convention. +21. In October 2019, Baxter announced that it was conducting an internal investigation +concerning the FX Transactions. + 5 +22. On February 13, 2020, Baxter announced that its consolidated financial statements +for the years ended December 31, 2016, 2017, and 2018 and its quarterly financial statements for +the quarters ended March 31, 2017 through June 30, 2019, should no longer be relied upon because +of misstatements to Baxter’s previously reported foreign exchange gains and losses. +23. On March 17, 2020, Baxter filed its Form 10-K for the period ending December 31, +2019. In that filing, Baxter announced it had completed the investigation concerning the FX +Transactions and restated its financial statements and financial information for 2017, 2018, and the +first half of 2019, including each of the quarterly and year-to-date periods from 2018 through 2019, +to correct material misstatements related to the FX Transactions as well as other immaterial +misstatements. The 10-K also included restatements of selected unaudited financial information +for the years ended December 31, 2015 and 2016. +24. In quantifying the misstatements, Baxter identified all legal entities that had foreign +exchange gains or losses on intra-company transactions above an immaterial threshold and +remeasured the foreign exchange gains and losses for those transactions by applying a new +exchange rate convention in accordance with GAAP. No distinction was made on whether the +foreign exchange gain or loss resulted from FX Transactions. Baxter also remeasured the gains and +losses on foreign currency derivative contracts in these same entities using the new exchange rate +convention. +25. As a result of the restatement, Baxter reduced its total reported foreign exchange +gains and losses from 2010 through the second quarter of 2019 by $517 million. +26. On February 13, 2020, Baxter announced that it had determined that it had material +weaknesses in its internal control over financial reporting in the area of foreign exchange gains and +losses, and that as a result of the material weaknesses, its disclosure controls and procedures were +not effective as of December 31, 2018, March 31, 2019, and June 30, 2019. +27. In its Form 10-K for the year ended December 31, 2019, Baxter disclosed that it +had a material weakness in its internal control over financial reporting related to accounting for +foreign exchange gains and losses as of December 31, 2018 and continuing through December 31, +2019. +28. Specifically, Baxter disclosed that it did not have controls in place to monitor and +quantify the difference between the foreign exchange gains and losses that it reported using the FX +Convention and the foreign exchange gains and losses it would have reported using exchange rates +determined in accordance with GAAP. In addition, Baxter did not have sufficient policies and +controls for approving and monitoring intra-company transactions to prevent or detect the FX +Transactions. As a result of this material weakness, Baxter did not maintain effective internal +control over financial reporting as of December 31, 2019. +Violations +29. As a result of the conduct described above, Baxter violated Sections 17(a)(2) and +17(a)(3) of the Securities Act, which prohibit any person from directly or indirectly obtaining +money or property by means of any untrue statement of a material fact or any omission to state a + 6 +material fact necessary in order to make the statements made, in light of the circumstance under +which they are made, not misleading, or engaging in any transaction, practice, or course of +business which operates or would operate as a fraud or deceit upon the purchaser, in the offer or +sale of securities. 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). +30. As a result of the conduct described above, Baxter violated Section 13(a) of the +Exchange Act and Rules 13a-1, 13a-11, and 13a-13 thereunder, which require issuers with +securities registered under Section 12 of the Exchange Act to file annual, current, and quarterly +reports with the Commission containing such information as the Commission’s rules may require. +A violation of these reporting provisions does not require scienter and may rest on a finding of +negligence. See SEC v. Wills, 472 F. Supp. 1250, 1268 (D.D.C. 1978). +31. As a result of the conduct described above, Baxter 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. Scienter is not +an element of the books and records provision. See Ponce v. SEC, 345 F.3d 722, 737 n.10 (9th Cir. +2003) (noting that a “plain reading of Section 13(b) reveals that it also does not impose a scienter +requirement”). +32. As a result of the conduct described above, Baxter 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 and maintain a system of internal accounting controls sufficient to provide +reasonable assurance that, among other things, transactions are recorded as necessary to permit +preparation of financial statements in conformity with GAAP. Scienter is not an element of the +internal accounting control provisions. See Ponce, 345 F.3d at 737 n.10. +Baxter’s Remedial Efforts and Cooperation +33. In determining to accept Baxter’s Offer, the Commission considered Baxter’s +report of the FX Transactions to the Commission’s staff, the cooperation provided by Baxter +throughout the Commission’s investigation, and remedial measures undertaken by Baxter. +34. Shortly before announcing the internal investigation publicly on October 24, 2019, +Baxter disclosed to the Commission’s staff that it was conducting an internal investigation +concerning the FX Transactions. +35. Thereafter, Baxter provided substantial cooperation to the Commission’s staff +throughout its investigation, including by providing detailed explanations of how the FX +Transactions worked, summarizing witness interviews, and providing other relevant information to +the staff, both on their own initiative and at the staff’s request. The cooperation afforded by Baxter +substantially advanced the quality and efficiency of the staff’s investigation and conserved +Commission resources. +36. Baxter also undertook multiple remedial measures, including: (i) adopting a new, +GAAP-compliant foreign exchange rate convention shortly after personnel raised concerns about + 7 +the FX Transactions; (ii) hiring a new treasurer with public company experience and creating two +new roles to provide additional oversight over treasury matters; (iii) recouping bonuses paid to the +CEO, CFO, and other officers pursuant to its Executive Compensation Recoupment Policy and +Section 304(a) of the Sarbanes-Oxley Act of 2002; (iv) improving its approval process for intra- +company transactions; and (v) restating its financial statements. +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. Baxter cease and desist from committing or causing any violations and any future +violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a), 13(b)(2)(A), +and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-11 and 13a-13 thereunder. +B. Baxter shall, within 10 days of the entry of this Order, pay a civil money penalty in +the amount of $18,000,000 to the Securities and Exchange Commission. If timely payment is not +made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. +Payment must be made in one of the following ways: +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying +Baxter 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 Jeffrey A. Shank, Division of +Enforcement, Securities and Exchange Commission, 175 W. Jackson Blvd., Ste. 1450, Chicago, +Illinois 60604. + 8 +C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for the penalties referenced in paragraph IV.B. above. Amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondent agrees that in any Related Investor Action, it shall not argue that it is entitled to, nor +shall it benefit by, offset or reduction of any award of compensatory damages by the amount of any +part of Respondent’s payment of a civil penalty in this action (“Penalty Offset”). If the court in +any Related Investor Action grants such a Penalty Offset, Respondent agrees that it shall, within 30 +days after entry of a final order granting the Penalty Offset, notify the Commission’s counsel in +this action and pay the amount of the Penalty Offset to the Securities and Exchange Commission. +Such a payment shall not be deemed an additional civil penalty and shall not be deemed to change +the amount of the civil penalty imposed in this proceeding. For purposes of this paragraph, a +“Related Investor Action” means a private damages action brought against Respondent by or on +behalf of one or more investors based on substantially the same facts as alleged in the Order +instituted by the Commission in this proceeding. +D. Respondent acknowledges that the Commission is not imposing a civil penalty in +excess of $18,000,000 based upon its cooperation in a Commission investigation. If at any time +following the entry of the Order, the Division of Enforcement (“Division”) obtains information +indicating that Respondent knowingly provided materially false or misleading information or +materials to the Commission, or in a related proceeding, the Division may, at its sole discretion and +with prior notice to the Respondent, petition the Commission to reopen this matter and seek an +order directing that the Respondent pay an additional civil penalty. Respondent may contest by +way of defense in any resulting administrative proceeding whether it knowingly provided +materially false or misleading information, but may not: (1) contest the findings in the Order; or (2) +assert any defense to liability or remedy, including, but not limited to, any statute of limitations +defense. +By the Commission. + + + + Vanessa A. Countryman + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4284.txt b/raw/aaer/2022/AAER-4284.txt new file mode 100644 index 0000000000000000000000000000000000000000..a8aafc2bf1c7358f312a21e1c1cc4bf877d10864 --- /dev/null +++ b/raw/aaer/2022/AAER-4284.txt @@ -0,0 +1,306 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES ACT OF 1933 +Release No. 11033 / February 22, 2022 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94295 / February 22, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4284 / February 22, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20782 + +In the Matter of + +JEFFREY SCHAIBLE, + +Respondent. + +CORRECTED 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 Jeffrey Schaible (“Schaible” 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 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. From 2005 until October 2019, Respondent Jeffrey Schaible was an employee in the +Treasury department of Baxter International Inc. (“Baxter”), a publicly-traded, U.S.-based +healthcare product company. +2. Baxter generates the majority of its revenue outside of the U.S. Baxter reports its +consolidated financial results in U.S. dollars, although many of its subsidiaries have a different +functional currency as they manufacture and sell products globally and transact in foreign +currencies. The values of these foreign currencies relative to the U.S. dollar fluctuate frequently. +3. From at least 1995 through July 2019, the foreign exchange rate convention (“FX +Convention”) Baxter used to record foreign currency transactions recognized by subsidiaries in their +functional currencies and to uniformly translate the results of subsidiaries with foreign functional +currencies into U.S. dollars was not in accordance with U.S. generally accepted accounting +principles (“GAAP”). +4. Beginning in at least 2009 and continuing through July 2019, Baxter improperly +leveraged its FX Convention by engaging in intra-company transactions for the purpose of +generating foreign exchange accounting gains or avoiding foreign exchange accounting losses (the +“FX Transactions”). Schaible and his staff were primarily responsible for executing the FX +Transactions. The FX Transactions had the effect of materially misstating Baxter’s net income as +reported in its public filings. +5. In October 2019, Baxter announced that it was conducting an internal investigation +concerning the FX Transactions. In March 2020, Baxter restated its financial statements, which +reduced its previously reported net income for 2017 through June 30, 2019 and retained earnings as +of January 1, 2017 by $582 million, collectively. Of this amount, $517 million was related to +foreign exchange gains and losses dating back to 2010, which was in part attributable to FX +Transactions. +6. Based on his conduct, and as described in further detail below, Schaible violated +Sections 17(a)(2) and 17(a)(3) of the Securities Act and caused Baxter’s violations of Sections 13(a) +and 13(b)(2)(A) of the Exchange Act and Rules 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 +7. Jeffrey Schaible, age 57, is a resident of Frontenac, Missouri. Schaible started at +Baxter in 2005 in its Treasury department. He became Baxter’s Assistant Treasurer in 2010. He +held that role until he was put on administrative leave in October 2019. Schaible ultimately +resigned in March 2020. Prior to his employment at Baxter, Schaible was employed by other +publicly-traded companies in their treasury departments. While Schaible had extensive experience +working in treasury departments, he is not a certified public accountant. Schaible has no prior +enforcement or disciplinary history with the Commission. +Other Relevant Entity +8. Baxter International Inc. is a Delaware corporation with its principal place of +business in Deerfield, Illinois. Its common stock is registered pursuant to Section 12(b) of the +Exchange Act and trades on the New York Stock Exchange. Baxter files periodic reports, including +annual reports on Form 10-K and quarterly reports on Form 10-Q, with the Commission pursuant to +Section 13(a) of the Exchange Act and related rules thereunder. During the relevant period, Baxter +sold securities to the public pursuant to registration statements filed with the Commission. +Facts +Baxter’s Foreign Exchange Rate Convention +9. FASB Accounting Standards Codification Topic 830, “Foreign Currency Matters” +(ASC 830), provides guidance concerning foreign exchange rate conventions. ASC 830-20-30-1 +requires that foreign currency transactions initially be measured and recorded in an entity’s +functional currency using the exchange rate on the date of the transaction. ASC 830-20-35-2 +requires that foreign currency denominated assets and liabilities be remeasured at the end of each +reporting period using the exchange rate at that date. +10. Before 2019, Baxter’s FX Convention was not in accordance with GAAP because +foreign currency transactions in a given month were initially measured using exchange rates from a +specified date near the middle of the previous month as opposed to the exchange rate on the date of +the transaction. Additionally, foreign currency denominated assets and liabilities were subsequently +remeasured at the end of each month using exchange rates from a specified date near the middle of +the then current month, called “T Day,” and not at the end of the reporting period. +11. Because of Baxter’s FX Convention, Baxter employees knew the exchange rates that +would apply to intra-company transactions from the T Day in a given month through month-end. +Treasury Employees Leveraged Baxter’s Foreign Exchange Rate to Record Gains +12. Baxter’s Treasury department was responsible for managing Baxter’s exposure to +fluctuations in foreign exchange rates, which Baxter managed on a consolidated basis. + + 4 +13. Beginning in about 2007, Baxter’s Treasury department began focusing on +managing Baxter’s foreign exchange rate exposure more efficiently and at a lower cost. Baxter +wanted to reduce its use of third-party derivative contracts and instead manage its foreign currency +exposures on a consolidated basis through offsetting cash positions. By at least 2009, Baxter +developed the FX Transactions as a way to better control reported foreign exchange gains and +losses. +14. Each FX Transaction comprised a series of transactions designed to create a foreign +exchange gain or avoid a loss at a Baxter subsidiary. For example, when the dollar was +strengthening in comparison to the Euro, Baxter would generate a foreign exchange gain by +moving U.S. dollars to a Euro-functional Baxter entity. Specifically, a U.S. dollar Baxter entity +would make a capital distribution in U.S. dollars to its Baxter Euro-functional parent (“Euro +Parent”). Euro Parent would then enter into simultaneous transactions with Baxter’s Euro- +functional cash pooling entity (“Euro Cash Pooling Entity”) to (i) trade the dollars for Euros and +(ii) loan Euros in the same amount it just traded. The Euro Cash Pooling Entity would record a +foreign exchange gain on the U.S. dollars that it held at month end. The gain was the difference +between exchange rates for the prior month’s T Day and current month’s T Day. After month-end, +the Treasury group would typically unwind the currency trade and the loan. +15. Schaible and his staff were primarily responsible for executing the FX Transactions +for the Treasury department since at least 2009. Initially, the Treasury department used the FX +Transactions to avoid losses caused by foreign exchange rate fluctuations. Over time, this practice +evolved to proactively generating gains from foreign exchange rate fluctuations. Baxter used the +FX Transactions to generate non-operating foreign exchange accounting gains or avoid accounting +losses since at least 2009. +16. During his tenure as Assistant Treasurer, Schaible forecasted minimal foreign +exchange gains or losses for Treasury’s management of Baxter’s foreign exchange exposures, +which flowed through Baxter’s forecasts of its financial statements. However, beginning in the +fourth quarter of 2017, Baxter’s Treasurer began to forecast more substantial foreign exchange +gains. +17. Because of Baxter’s FX Convention, Schaible and other Treasury personnel knew +the foreign exchange rates that would apply to month-end transactions before they happened. With +this knowledge, Schaible and certain Treasury personnel executed FX Transactions to generate +specific amounts of accounting gains or avoid specific amounts of accounting losses. Throughout +the period of his involvement in FX Transactions, Schaible believed the FX Transactions had been +authorized by senior Baxter officials. +18. While Schaible believed the use of FX Transactions had been sanctioned by senior +Baxter officials, he negligently failed to realize that it was improper to utilize Baxter’s FX +Convention to execute FX Transactions for the sole purpose of generating foreign exchange +accounting gains or avoiding foreign exchange accounting losses. + + 5 +Baxter’s Inaccurate Financial Reporting +19. The accounting gains generated (or losses avoided) from the FX Transactions were +reported on the “other (income) expense, net” line of Baxter’s financial statements and were +reflected in Baxter’s net income and earnings per share (“EPS”). +20. Baxter reported foreign exchange gains of $113 million in 2015, $28 million in +2016, $50 million in 2017, $73 million in 2018, and $22 million for the first two quarters of 2019. +The improper FX Transactions had the effect of inflating Baxter’s net income and EPS. +21. In late July 2019, Baxter’s Tax department asked about the details of the FX +Transactions. Schaible explained the FX Transactions to the Tax personnel, including that the FX +Transactions were used to generate foreign exchange gains or avoid losses. Shortly thereafter, +Baxter undertook to change its FX Convention. +22. In October 2019, Baxter announced that it was conducting an internal investigation +concerning the FX Transactions and Baxter placed Schaible on administrative leave. +23. On February 13, 2020, Baxter announced that its consolidated financial statements +for the years ended December 31, 2016, 2017, and 2018 and its quarterly financial statements for +the quarters ended March 31, 2017 through June 30, 2019, should no longer be relied upon because +of misstatements to Baxter’s previously reported foreign exchange gains and losses. +24. On March 17, 2020, Baxter filed its Form 10-K for the period ending December 31, +2019. In that filing, Baxter announced it had completed the investigation concerning the FX +Transactions and restated its financial statements and financial information for 2017, 2018, and the +first half of 2019, including each of the quarterly and year-to-date periods from 2018 through 2019, +to correct material misstatements related to the FX Transactions as well as other immaterial +misstatements. The 10-K also included restatements of selected unaudited financial information +for the years ended December 31, 2015 and 2016. Schaible resigned in March 2020. +25. In quantifying the misstatements, Baxter identified all legal entities that had foreign +exchange gains or losses on intra-company transactions above an immaterial threshold and +remeasured the foreign exchange gains and losses for those transactions by applying a new +exchange rate convention in accordance with GAAP. No distinction was made on whether the +foreign exchange gain or loss resulted from FX Transactions. Baxter also remeasured the gains and +losses on foreign currency derivative contracts in these same entities using the new exchange rate +convention. +26. As a result of the restatement, Baxter reduced its total reported foreign exchange +gains and losses from 2010 through the second quarter of 2019 by $517 million. +27. Schaible’s bonus compensation was based, in part, on Baxter meeting performance +metrics tied to EPS, which had been inflated by Baxter’s FX Convention and the related FX +Transactions. From 2015 through 2019, Schaible received a total of approximately $76,404 in +excess bonus payments from Baxter due to Baxter’s inflated EPS. + + 6 +Violations +28. As a result of the conduct described above, Respondent violated Sections 17(a)(2) +and 17(a)(3) of the Securities Act, which prohibit any person from directly or indirectly obtaining +money or property by means of any untrue statement of a material fact or any omission to state a +material fact necessary in order to make the statements made, in light of the circumstance under +which they are made, not misleading, or engaging in any transaction, practice, or course of business +which operates or would operate as a fraud or deceit upon the purchaser, in the offer or sale of +securities. 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). +29. As a result of the conduct described above, Respondent caused Baxter’s violations +of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11, and 13a-13 thereunder, which +require issuers with securities registered under Section 12 of the Exchange Act to file annual, +current, and quarterly reports with the Commission containing such information as the +Commission’s rules may require. A violation of these reporting provisions does not require +scienter and may rest on a finding of negligence. See SEC v. Wills, 472 F. Supp. 1250, 1268 +(D.D.C. 1978). A finding of negligence is sufficient to establish causing under Exchange Act +Section 21C(a) where the primary violation does not require scienter. See KPMG, LLP v. SEC, +289 F.3d 109, 120 (D.C. Cir. 2002). +30. As a result of the conduct described above, Respondent caused Baxter’s violations +of 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. Scienter is not an element of the books and records provision. See Ponce v. SEC, 345 F.3d +722, 737 n.10 (9th Cir. 2003) (noting that a “plain reading of Section 13(b) reveals that it also does +not impose a scienter requirement”). +Disgorgement +31. The disgorgement and prejudgment interest ordered in paragraph IV.B. is +consistent with equitable principles and does not exceed Respondent’s net profits from his +violations, and will be distributed to harmed investors to the extent feasible. The Commission +will hold funds paid pursuant to paragraph IV.B. in an account at the United States Treasury +pending distribution. Upon approval of the distribution final accounting by the Commission, any +amounts remaining that are infeasible to return to investors, and any amounts returned to the +Commission in the future that are infeasible to return to investors, may be transferred to the +general fund of the U.S. Treasury, subject to Section 21F(g)(3) of the Exchange Act. + + + 7 +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent cease and desist from committing or causing any violations and any future violations of +Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a) and 13(b)(2)(A) of the +Exchange Act and Rules 13a-1, 13a-11 and 13a-13 thereunder. +B. Respondent shall, within 10 days of the entry of this Order, pay disgorgement of +$76,404 and prejudgment interest thereon of $12,955 to the Securities and Exchange Commission, +and a civil money penalty in the amount of $100,000 to the Securities and Exchange Commission. +If timely payment is not made, additional interest shall accrue pursuant to SEC Rule of Practice +600 and 31 U.S.C. § 3717. +Payment must be made in one of the following ways: +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying Jeffrey +Schaible 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 Jeffrey A. Shank, Division of +Enforcement, Securities and Exchange Commission, 175 W. Jackson Blvd., Ste. 1450, Chicago, +Illinois 60604. +C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for the disgorgement, prejudgment interest AND penalties referenced in paragraph IV.B. above (the +“Schaible Fair Fund”) and the Schaible Fair Fund shall be added to the Fair Fund established in +the Commission’s related proceeding, In the Matter of Baxter International Inc., Admin. Proc. No. + + 8 +3-20781 (instituted February 22, 2022) (the “Baxter Fair Fund”). The Baxter Fair Fund will be +distributed to affected investors in accordance with a Commission-approved plan of distribution in +that 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/2022/AAER-4290.txt b/raw/aaer/2022/AAER-4290.txt new file mode 100644 index 0000000000000000000000000000000000000000..ee828b2a5eaede28dc09bb5b48a7b2a824a6846f --- /dev/null +++ b/raw/aaer/2022/AAER-4290.txt @@ -0,0 +1,113 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94493 / March 23, 2022 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4290 / March 23, 2022 +ADMINISTRATIVE PROCEEDING +File No. 3-14177 + +In the Matter of +CARL W. JASPER, +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 June 2, 2011, the Commission issued an Order Making Findings and Imposing +Remedial Sanctions Pursuant to Rule 102(e)(3) of the Commission’s Rules of Practice (the +“Suspension Order”) against Respondent Carl W. Jasper.1 The Suspension Order suspended +Jasper from appearing or practicing before the commission as an accountant but permitted +Jasper, after five years from the date of the Suspension Order and if certain conditions were met, +to request that the Commission consider his reinstatement to resume appearing or practicing +before the Commission as (1) a preparer or reviewer, or a person responsible for the preparation +or review, of financial statements that are required to be filed with the Commission; or (2) an +independent accountant. +This order is issued in response to Jasper’s application for reinstatement to appear and +practice before the Commission as an accountant responsible for the preparation or review of +financial statements required to be filed with the Commission. +In the Suspension Order, the Commission found that Jasper had been permanently +enjoined from future violations of certain provisions of the federal securities laws and rules +thereunder. In the underlying civil injunctive action before the United States District Court for +the Northern District of California, the Commission alleged that Jasper, from at least 2000 +through 2005, engaged in a scheme to illegally backdate stock options granted to employees and +directors of Maxim Integrated Products, Inc., concealing millions of dollars in expenses from + +1 See Accounting and Auditing Enforcement Release No. 3286, dated June 2, 2011. + + 2 +investors and significantly overstating Maxim’s income. It further alleged that Jasper was aware +that Maxim granted options on purported dates that had been selected with hindsight and that he +knew, or was reckless in not knowing, that Maxim was failing to report expenses for those in- +the-money options and was falsely reporting that it only granted options at fair market value. It +further alleged that Respondent signed several of Maxim’s public filings, including annual, +quarterly, and current reports and registration statements, which were materially false and +misleading. + +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. + +Jasper has shown good cause for reinstatement and has met all of the conditions set forth +in the Suspension Order to be reinstated to appear and practice before the Commission as a +person responsible for the preparation or review of financial statements required to be filed with +the Commission and in this capacity has attested that he will have his work reviewed by the +independent audit committee of any company for which he works, or in some other manner +acceptable to the Commission, while practicing before the Commission in this capacity. Jasper +is not, at this time, seeking to appear or practice before the Commission as an independent +accountant. If, in the future, Jasper 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, among other things, that he has complied and will comply with the terms +of the Suspension Order. + +On the basis of information supplied, representations made, and undertakings agreed to +by Jasper, it appears that he has complied with the terms of the Suspension Order. No +information has come to the attention of the Commission relating to his character, integrity, +professional conduct or qualifications to practice before the Commission that would be a basis +for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of Practice. In +addition, Jasper has undertaken to have his work reviewed by the independent audit committee +of any company for which he works, or in some other manner acceptable to the Commission. As +a result, Jasper 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 Carl +W. Jasper, 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 +Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4293.txt b/raw/aaer/2022/AAER-4293.txt new file mode 100644 index 0000000000000000000000000000000000000000..4511af9d276a0f7c4d13d72fce724d04eb33f236 --- /dev/null +++ b/raw/aaer/2022/AAER-4293.txt @@ -0,0 +1,1405 @@ + + + + + + + + + + + + + + + + SEC.gov | Mark Loman + + + + + + + + !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\/528166","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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Mark Loman , No. 19-CV-06187 (C.D. Cal. filed July 18, 2019) + + + + + + + + + The Securities and Exchange Commission announced today the entry of a final judgment on April 11, 2022 against Mark Loman, formerly controller of OSI Systems, Inc., a California-based security, electronics, and healthcare manufacturing company. Loman agreed to pay $482,050 to settle the charges that he secretly used confidential information he obtained in his position to unlawfully trade securities. + + The SEC's complaint, filed in federal court in Los Angeles, California on July 19, 2019, alleged that Mark Loman, the former Controller and Vice President of Finance of OSI, knew that the company was going to fall far short of its revenue and earnings expectations in the last quarter of 2015, and just days before the end of the quarter, Loman made options trades betting that OSI's stock would go down in price. The complaint further alleged that when OSI publicly announced its disappointing quarterly financial results, its stock dropped approximately 35%, netting Loman more than $300,000 on the options trades. As alleged, Loman further profited from the misuse of nonpublic information by purchasing stock in a target company after he learned that OSI was in negotiations to acquire the target at a premium over its market price. According to the complaint, when OSI's intended acquisition was announced publicly, Loman immediately sold his shares, netting more than $100,000. + + In a parallel criminal action filed November 21, 2019 by the United States Attorney's Office for the Central District of California, a jury found Loman guilty of four counts of securities fraud and four counts of insider trading. Loman was sentenced to 35 months in prison and ordered to pay a $600,000 fine. + + In the SEC's action, Loman consented to the entry of a final judgment permanently enjoining him from violating the antifraud provisions of Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder, permanently barring him from serving as an officer or director of a public company, and ordering him to pay a civil penalty of $482.050. + + Loman has also agreed to settle an administrative proceeding pursuant to Rule 102(e) of the Commission's Rules of Practice, barring him from appearing or practicing before the Commission as an accountant. + + The SEC's litigation against Loman was conducted by Sheila O'Callaghan, John Han and Ruth Hawley of the SEC's San Francisco Regional Office. The SEC's investigation was conducted by Ruth Hawley and supervised by Jeremy Pendrey and Monique C. Winkler of the San Francisco Regional Office. 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Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2022/AAER-4294.txt b/raw/aaer/2022/AAER-4294.txt new file mode 100644 index 0000000000000000000000000000000000000000..2cdaa2390e4ea996acb34f1e6e948039117364d0 --- /dev/null +++ b/raw/aaer/2022/AAER-4294.txt @@ -0,0 +1,499 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11052 / April 18, 2022 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94742 / April 18, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT RELEASE +Release No. 4294 / April 18, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20824 + + + +In the Matter of + + ROLLINS, INC., and + PAUL EDWARD NORTHEN, + +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 against Rollins, Inc. and Paul Edward +Northen pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”) and Section 21C +of the Securities Exchange Act of 1934 (“Exchange Act”). + +II. + +In anticipation of the institution of these proceedings, Rollins, Inc. and Paul Edward +Northen (collectively “Respondents”) have submitted Offers of Settlement (the “Offers”) which +the Commission has determined to accept. Solely for the purpose of these proceedings and any +other proceedings brought by or on behalf of the Commission, or to which the Commission is a +party, and without admitting or denying the findings herein, except as to the Commission’s +jurisdiction over them and the subject matter of these proceedings, which are admitted, and +except as provided herein in Section V, Respondents consent to the entry of this Order Instituting +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. This matter involves improper earnings management practices by Rollins, Inc. +(“Rollins”). During the quarterly close process in two quarters—the first quarter of 2016 and the +second quarter of 2017—Rollins’ then-Chief Financial Officer, Paul Edward Northen, directed +reductions to certain corporate-level accounting reserves for the purpose of enabling the company +to publicly report earnings per share (“EPS”) in line with research analysts’ consensus estimates. +At the time that Northen directed reductions to the reserve accounts, he was aware that the +company’s preliminary earnings results were close to, but short of, consensus EPS estimates. +Northen directed the reduction in the accounting reserve accounts, which had the effect of +increasing the company’s net income, toward the very end of the quarterly close process, without +conducting an analysis of the appropriate accounting criteria under generally accepted accounting +principles (“GAAP”) and without adequately memorializing the basis for his decision to reduce the +accounting reserves at issue. Had these reserves not been reduced, Rollins would have missed +consensus EPS estimates in the two quarters by one penny. + +2. As a result of such conduct, Rollins reported misstated net income and EPS in its +quarterly reports filed on Form 10-Q and in its earnings releases for the first quarter of 2016 and +the second quarter of 2017, and further made materially false and misleading disclosures regarding +its EPS performance in those two quarters. + +3. Rollins’ improper reduction to accounting reserves took place in an environment of +inadequate internal accounting controls. In particular, Rollins granted significant discretion to +finance personnel, including the CFO, to determine the amount of reserves during the quarterly +close process, at a time when such individuals were aware of potential shortfalls between the +company’s financial results and internal and external financial targets, such as research analysts’ +consensus EPS estimates. Although Rollins’ policies and procedures required accounting entries +to have adequate supporting documentation, between the first quarter of 2016 and the fourth +quarter of 2018, Rollins’ finance personnel recorded manual journal entries that impacted reserve +accounts with inadequate documentation. + +4. As a result, Rollins failed to devise and maintain sufficient internal accounting +controls to prevent and detect the improper accounting and inadequately supported, period-end +journal entries described herein, resulting in the underlying violations of the federal securities +laws. + +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 + +RESPONDENTS + +5. Rollins, Inc. is a Delaware corporation with is principal place of business located in +in Atlanta, Georgia. Rollins provides termite and other pest control services to residential and +commercial customers, including through such brands as Orkin. Rollins’ common stock is +registered with the Commission pursuant to Section 12(b) of the Exchange Act and is traded under +the symbol “ROL” on the New York Stock Exchange. During the relevant period, Rollins issued +restricted stock to its employees pursuant to its 2008 Stock Incentive Plan and Form S-8 filed on +April 18, 2008. The Form S-8 incorporated by reference all subsequent filings made by Rollins +under the Exchange Act, including the Form 10-Qs for the first quarter of 2016 and the second +quarter of 2017. + +6. Paul Edward Northen, age 57, is a resident of Alpharetta, Georgia. Northen served +as the Chief Financial Officer, Senior Vice President, and Treasurer of Rollins from 2015 until +2021. + +FACTS + +Background + +7. Earnings growth was important to Rollins, and it often touted the consistency of +that growth in its earnings releases and periodic filings to the investing public. For example, in the +first quarter of 2016, Rollins issued an earnings release on a Form 8-K filed with the Commission +that announced that the company “post[ed] [its] 40th consecutive quarter of improved revenues and +earnings[.]” Rollins second quarter 2017 earnings release similarly announced its “45th +consecutive quarter of improved revenue and earnings[.]” In addition, Rollins’ senior +management, including Northen, regularly tracked the company’s financial performance against +various internal and external financial targets, including, as is relevant here, research analysts’ +consensus EPS estimates. Rollins’ Board of Directors also received information comparing the +company’s actual EPS performance against consensus EPS estimates. + +8. Each quarter, Rollins made a determination as to the appropriate amount to reserve +(or accrue) for several different categories of liability accounts, including certain corporate-level +reserve accounts that were determined after individual Rollins reporting units had reported their +operating results. For instance, Rollins maintained a termite reserve, which was an estimate of +actual or potential damage claims by residential and commercial customers representing the +estimated costs of reapplication, repairs and associated labor and chemicals, settlements, awards +and other costs relative to termite control services. Rollins further maintained casualty and medical +reserves, which were amounts accrued to pay for, among other things, workers compensation and +employee-medical claims, respectively. Rollins also maintained a bad debt reserve, which accrued +an amount for possible non-payment by customers, and an outside services reserve, which accrued +amounts expected to be paid to third-party service providers.2 + +2 The Accounting Standards Codification (“ASC”) 450-20 is the principal source of GAAP guidance for the +recognition and disclosure of loss contingencies, including the corporate-level reserves (liability accounts) at issue. + 4 + +9. In practice, the CFO had the final and ultimate authority to determine the +appropriate amount of the corporate-level reserves. Adjustments to the amount of a corporate-level +reserve had a direct impact on Rollins’ net income, and thus by extension, the company’s reported +EPS. For instance, all other things being equal, decreasing the amount accrued for a particular +corporate-level reserve would have the effect of decreasing the company’s expenses and increasing +the company’s net income, thereby increasing the company’s EPS. + +The Quarterly Close Process + +10. Rollins undertook a six-day process to “close” its accounting books following the +end of each quarter in order to generate quarterly financial statements. During days one through +five, after the end of each quarter, Rollins’ operating divisions uploaded income and expenses and +the corporate accounting staff entered recurring corporate expenses to the company financial +system. On the fifth day, a flash report showing the preliminary financial results, including EPS, +was compiled and made available to senior Rollins finance personnel, including the CFO. + +11. On the sixth day after the quarter close, senior Rollins finance personnel, including +Northen, would typically meet in Northen’s office to finalize the corporate-level reserves. At the +time of these meetings, Rollins’ finance personnel, including Northen, were aware of whether the +company was on track to report EPS results in line with or short of consensus EPS estimates. +During these meetings, Northen discussed the impact that proposed adjustments to the corporate- +level reserves would have on the company’s reported EPS. Moreover, in quarters where the fifth +day flash report reflected that the company’s preliminary EPS calculation was short of consensus +EPS estimates, Northen and other finance personnel discussed whether any corporate-level +reserves could be reduced in order to increase net income, and by extension the company’s +reported EPS. + +12. When Northen was preparing to take over as CFO in 2015, a then-Rollins executive +(now-former executive) provided Northen with guidance on the quarterly close process at Rollins. +Among other things, the executive advised that, for a particular reserve account, “[y]ou give up +positive adjustments at qtr end that offset negative surprises” and “[s]ome quarters you need +flexibility and it is good to know a place where you might have it. It's part of the art of the close.” +In other communications with Northen in 2019, the executive wrote that Rollins “need[ed] to keep +something in that cookie jar for quarters like this.”3 + +13. The executive also sent Northen an Excel spreadsheet to keep track of performance +throughout the quarter to avoid “surprises” at the end of the quarter. The spreadsheet, which + +ASC 450 requires a loss contingency to be accrued if (a) it is probable that an asset had been impaired or a liability had +been incurred, and (b) the amount of loss can be reasonably estimated. + + 3 “Cookie jar” reserve accounting is a practice by which companies manipulate earnings by overaccuring +reserve accounts in good quarters, and reducing the accruals in lean quarters to meet earnings targets. See United +States v. Rand, 835 F.3d 451, 456 (4th Cir. 2016) (“It is not appropriate to increase or decrease funds in reserve +accounts to understate or inflate its actual earnings.”). + 5 +Northen used during his time as CFO, included an embedded calculation on how to impact EPS +“[by 1 cent]” by adjusting various corporate-level reserves during the quarterly close process. + +First Quarter 2016 + +14. On April 7, 2016, the fifth day of Rollins’ close process, Rollins finance personnel +received a flash report that showed a preliminary income figure that was below the company’s +internal financial target, and a corresponding EPS of $0.12. This latter amount was below the +consensus EPS estimates for this quarter of $0.15. + +15. The following day, April 8, 2016, which was the last day of the quarterly close +process, Northen met with finance personnel to discuss proposed adjustments to corporate-level +reserves. Among other things, they discussed how to manage the unexpectedly low income that +was causing a lower-than-expected EPS. A Rollins finance department employee noted that the +“biggest driver is the termite reserve,” which was resulting in higher expenses, and that Northen +was “working on it.” Northen then responded that he had “room to look” in the termite reserve for +additional income. The finance department employee responded that Northen should “start +looking, we need it.” + +16. Later that same day, on April 8, 2016, Northen directed a $1.3 million reduction of +the termite reserve account. In the evening, a Rollins accounting employee emailed Northen and +other Rollins finance personnel that the “pickup [to income] was $1,374,732” from the termite +reserve account adjustment. Northen also directed similar adjustments to the medical and outside +services reserves that had the effect of increasing Rollins’ net income. Northen directed the +reductions to the termite, medical and outside services reserves without adequately documenting +the basis for their reductions and without consideration of any accounting criteria or guidance. The +reserve reductions were among the very last accounting adjustments made during the quarterly +close process. + +17. After the reserve reductions directed by Northen had been made, a finance +employee emailed Northen that “I have been told everyone is done. We came in at 14.59 cents +[EPS],” which rounded to $0.15 per share, in line with consensus EPS estimates. + +18. As a result of the inadequately supported adjustments to the termite, medical, and +outside services reserves, Rollins publicly reported in its Form 10-Q for the first quarter of 2016 +and in its earnings release an EPS of $0.15. Without the unsupported reductions to the termite, +medical and outside services reserves, Rollins would have reported EPS of $0.14, thereby missing +consensus EPS estimates by one penny. + +19. The inadequately supported reserve adjustments caused Rollins to misstate its net +income and EPS in its Form 10-Q for the first quarter of 2016 and in its earnings release for this +quarter. As CFO, Northen signed and certified Rollins’ Form 10-Q that included the misstated net +income and EPS. + + + 6 +Second Quarter 2017 + +20. On the morning of July 10, 2017, the fifth day of Rollins’ six-day close process +following the end of the quarter, Northen and other finance personnel received a flash report +showing a preliminary EPS of $0.20, short of the consensus EPS estimates of $0.25. + +21. The following day, July 11, 2017, was the sixth day when Northen would typically +meet with Rollins finance personnel to finalize adjustments to corporate-level reserves. But +Northen was out of the country on business, so instead of meeting with the other finance personnel +in person, Northen corresponded with them by email to finalize the reserve account adjustments. + +22. After making initial adjustments to corporate-level reserves, Northen emailed +another Rollins finance employee: “I show a .237 [EPS] and thought that the [reserve account +adjustments] would be a[n] [income] pickup of $2.7 [million]. What am I missing?” The Rollins +finance employee responded that the adjustments resulted in “a[n] [income] pickup of $1 million,” +not $2.7 million as Northen had anticipated. + +23. A few minutes later, Northen asked the finance employee “how the other [reserve +account] accruals look.” The finance employee advised Northen that “if [Northen] needed it,” +Rollins could “scrap up $300K [from] medical and $600K [from] bad debt” to increase Rollins’ +income. Northen directed that the medical and bad debt reserves be reduced by these amounts and +further directed the finance employee to “update [the] spreadsheet with these two items.” Northen +directed the reduction in the medical and bad debt reserves without adequately documenting the +basis for their reductions and without consideration of any accounting criteria or guidance. The +finance employee further provided an updated analysis which showed an increase in EPS to +$0.2427 (or $.24 rounded), which although an increase from the earlier $0.237, was still short of +the consensus estimate of $0.25. + +24. Northen also inquired whether the casualty reserve account was “ok” and whether +there was “[a]nything else to take a look at” in the reserve accounts. The finance employee +responded: “No, if you are trying to get to [$].25 [consensus EPS] for the qtr it will take about +$1.2 million,” and asked Northen to “[p]lease advise if you want to” reduce the casualty reserve +account by $1.2 million. + +25. Shortly thereafter on the same day, July 11, Northen directed a $1 million reduction +in the casualty reserve account, which increased Rollins’ income. The adjustment was contrary to +an initial recommendation that Northen received from Rollins risk personnel, who advised that no +adjustment to the casualty reserve account should be made in the second quarter of 2017 and that +the need for any adjustments would be “more apparent” in the third quarter or fourth quarter of +2017. Later on the same day, and prior to the entry of the adjustment, Rollins risk personnel +agreed with the reduction. After the casualty reserve adjustment, Rollins further made a termite +reserve adjustment based on an amount provided by Northen. + +26. The reductions to the bad debt, medical, casualty, and termite reserves were among +the very last accounting adjustments made during the quarterly close process. Following these + 7 +adjustments, Rollins finance personnel sent Northen an updated calculation that showed that +Rollins EPS was now at $0.2462 EPS, which rounded to $0.25. + +27. As a result of these inadequately supported reserve adjustments, Rollins publicly +reported in its Form 10-Q for the second quarter of 2017 and in its earnings release an EPS of +$0.25. Without the reductions to the bad debt, medical, casualty, and termite reserves, Rollins +would have reported EPS of $0.24, thereby missing consensus EPS estimates by one penny. + +28. The inadequately supported reserve adjustments caused Rollins to misstate its net +income and EPS in its Form 10-Q for the second quarter of 2017 and in its earnings release for +this quarter. As CFO, Northen signed and certified Rollins’ Form 10-Q that included the +misstated net income and EPS. + +Rollins Lacked Accurate Books and Records and Sufficient Internal Accounting Controls, +and Failed to Maintain Internal Control Over Financial Reporting + +29. Between the first quarter of 2016 and the fourth quarter of 2018, Rollins’ finance +personnel, including Northen, made multiple quarter-end adjustments to corporate-level reserves +that were not adequately documented and that did not memorialize a sufficient basis for the +adjustments. The corporate-level reserves included termite, legal/environmental, casualty, +medical, bad debt, and outside services. + +30. During this period, Rollins lacked sufficient internal accounting controls over (a) +reserves for medical, casualty, bad debt, litigation, environmental and termite expenses, (b) +manual journal entries, and (c) period-end adjustments made during the closing process. +Although Rollins had policies and procedures requiring accounting entries to have adequate +supporting documentation, its finance staff recorded manual journal entries with no or +inadequate supporting documentation. Rollins also lacked procedures to ensure that the +accounting personnel received necessary information to properly record and document quarter-end +reserve adjustments. Finally, Rollins did not maintain a sufficient complement of personnel with +the requisite level of accounting knowledge, experience, and training. + +31. As a result, Rollins’ internal accounting controls were not designed or maintained +to provide reasonable assurance that Rollins’ financial statements would be presented in +conformity with GAAP, and it further failed to maintain internal control over financial reporting. +Rollins’s books, records, and accounts also did not accurately and fairly reflect, in reasonable +detail, Rollins’ transactions and disposition of assets. + +VIOLATIONS + +32. Section 17(a)(2) of the Securities Act proscribes, in the offer or sale of a security, +obtaining “money or property by means of any untrue statement of a material fact or any omission +to state a material fact necessary in order to make the statements made, in light of the +circumstances under which they were made, not misleading.” Section 17(a)(3) of the Securities +Act proscribes, in the offer or sale of a security, engaging “in any transaction, practice, or course of + 8 +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). + +33. Section 13(a) of the Exchange Act requires issuers to file such periodic and other +reports as the Commission may prescribe and in conformity with such rules as the Commission +may promulgate. Exchange Act Rules 13a-11 and 13a-13 require issuers with securities +registered under Section 12 of the Exchange Act to file current and quarterly reports, +respectively. The obligation to file such reports embodies the requirement that they be true and +correct. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978). In addition to +the information expressly required to be included in such reports, Rule 12b-20 of the Exchange Act +requires issuers to add such further material information, if any, as may be necessary to make the +required statements, in the light of the circumstances under which they are made, not misleading. +A violation of these reporting provisions does not require scienter. See SEC v. Wills, 472 F. Supp. +1250, 1268 (D.D.C. 1978). + +34. Section 13(b)(2)(A) of the Exchange Act requires Section 12 registrants to make +and keep books, records, and accounts that accurately and fairly reflect the transactions and +dispositions of their assets. Section 13(b)(2)(B) of the Exchange Act requires all reporting +companies, among other things, to devise and maintain a system of internal accounting controls +sufficient to provide reasonable assurances that transactions are recorded as necessary to permit +preparation of financial statements in accordance with GAAP. Scienter is not an element of the +books-and-records and internal accounting controls provisions. See Ponce v. SEC, 345 F.3d 722, +737 n.10 (9th Cir. 2003) (noting that a “plain reading of Section 13(b) reveals that it also does +not impose a scienter requirement”). Also, Exchange Act Rule 13a-15(a) requires issuers to +maintain internal control over financial reporting. + +35. Section 13(b)(5) of the Exchange Act provides: “No person shall knowingly +circumvent or knowingly fail to implement a system of internal accounting controls or knowingly +falsify any book, record, or account described in paragraph (2) [of Section 13(b)].” + +36. Rule 13b2-1 prohibits any person from directly or indirectly falsifying or causing +to be falsified, any book, record, or account subject to Section 13(b)(2)(A). A violation of Rule +13b2-1 does not require scienter and may rest on a finding of negligence. SEC v. World-Wide +Coin Investments, 567 F. Supp. 724, 749 (N.D. Ga. 1983). + +37. As a result of the conduct described above, the Commission finds that Rollins +violated Securities Act Sections 17(a)(2) and 17(a)(3), and Exchange Act Sections 13(a), +13(b)(2)(A), 13(b)(2)(B), and Rules 12b-20, 13a-11, 13a-13, and 13a-15(a) thereunder. + +38. As a result of the conduct described above, the Commission finds that Northen (a) +violated Securities Act Sections 17(a)(2) and 17(a)(3), Exchange Act Section 13(b)(5), and Rule +13b2-1; and (b) caused Rollins’ violations of Securities Act Sections 17(a)(2) and 17(a)(3), and +Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), and Rules 12b-20, 13a-11, 13a-13, +and 13a-15(a) thereunder. + 9 + +ROLLINS’ COOPERATION AND REMEDIAL EFFORTS + +39. In determining to accept Rollins’ Offer, the Commission considered cooperation +and the remedial acts promptly undertaken by Rollins to prevent and detect the type of +misconduct described in the Order. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Rollins shall cease and desist from committing or causing any violations and any +future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, and Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-11, 13a-13, and +13a-15(a) promulgated thereunder. + +B. Northen shall cease and desist from committing or causing any violations and any +future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, and Sections 13(a), +13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-11, 13a-13, +13a-15(a), and 13b2-1 promulgated thereunder. + +C. Rollins shall, within ten (10) days of the entry of this Order, pay a civil money +penalty in the amount of $8,000,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 + 10 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter +identifying Rollins as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Carolyn +Welshhans, Associate Director, Division of Enforcement, Securities and Exchange +Commission, 100 F St., N.E., Washington, DC 20549. + +D. Northen shall, within ten (10) days of the entry of this Order, pay a civil money +penalty in the amount of $100,000 to the Commission for transfer to the general fund of the +United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not +made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter +identifying Northen as Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Carolyn +Welshhans, Associate Director, Division of Enforcement, Securities and Exchange +Commission, 100 F St., N.E., Washington, DC 20549. + +E. Regardless of whether the Commission in its discretion orders the creation of a +Fair Fund for the penalties ordered in this proceeding, amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondents agree that in any Related Investor Action, they shall not argue that they are entitled +to, nor shall they benefit by, offset or reduction of any award of compensatory damages by the + 11 +amount of any part of Respondents’ payment of a civil penalty in this action (“Penalty Offset”). +If the court in any Related Investor Action grants such a Penalty Offset, Respondents agree that +they shall, within 30 days after entry of a final order granting the Penalty Offset, notify the +Commission's counsel in this action and pay the amount of the Penalty Offset to the +Commission. Such a payment shall not be deemed an additional civil penalty and shall not be +deemed to change the amount of the civil penalty imposed in this proceeding. For purposes of +this paragraph, a “Related Investor Action” means a private damages action brought against +Respondents by or on behalf of one or more investors based on substantially the same facts as +alleged in the Order instituted by the Commission in this proceeding. + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in +Section 523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and +admitted by Northen, and further, any debt for disgorgement, prejudgment interest, civil penalty +or other amounts due by Northen 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 Northen 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/2022/AAER-4295.txt b/raw/aaer/2022/AAER-4295.txt new file mode 100644 index 0000000000000000000000000000000000000000..98d1ddef5a04ea38ada6f9dbf7cf8409ca146e6c --- /dev/null +++ b/raw/aaer/2022/AAER-4295.txt @@ -0,0 +1,129 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94757 /April 19, 2022 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4295 / April 19, 2022 +ADMINISTRATIVE PROCEEDING +File No. 3-19914 + +In the Matter of +Brian Dee Matlock, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN +ACCOUNTANT RESPONSIBLE FOR THE +PREPARATION OR REVIEW OF FINANCIAL +STATEMENTS REQUIRED TO BE FILED WITH +THE COMMISSION (OTHER THAN AS A +MEMBER OF AN AUDIT COMMITTEE AS THAT +TERM IS DEFINED IN SECTION 3(a)(58) OF THE +SECURITIES EXCHANGE ACT OF 1934) AND AS +AN INDEPENDENT ACCOUNTANT + +On August 13, 2020, the Commission issued an Order Instituting Public Administrative +and Cease-and-Desist Proceedings Pursuant to Section 4C and 21C of the Securities Exchange +Act of 1934 (“Exchange Act”) and Rule 102(e) of the Commission’s Rules of Practice, Making +Findings, and Imposing Remedial Sanctions and a Cease-and Desist-Order (the “Suspension +Order”) against Respondent Brian Dee Matlock, CPA (“Matlock”).1 The Suspension Order +suspended Matlock from appearing or practicing before the Commission as an accountant but +permitted Matlock, after one year from the date of the Suspension Order and if certain conditions +were met, to request that the Commission consider his reinstatement to resume appearing or +practicing before the Commission as (1) a preparer or reviewer, or a person responsible for the +preparation or review, of any public company’s financial statements that are filed with the +Commission (other than as a member of an audit committee, as that term is defined in Section +3(a)(58) of the Exchange Act); (2) a preparer or reviewer, or a person responsible for the +preparation or review, of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of +the Exchange Act; or (3) an independent accountant. + +1 See Accounting and Auditing Enforcement Release No. 4159, dated August 13, 2020. +2 + +This order is issued in response to Matlock’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) and as an independent accountant. + +In the Suspension Order, the Commission found that Matlock had engaged in improper +professional conduct while serving as the engagement partner for Rothstein, Kass & Company, +P.C.’s (“RK”) audit of the financial statements of Breitling Energy Corporation, Inc. +(“Breitling”) for the two-year period ended December 31, 2013. In addition, RK violated, and +Matlock caused violations of, Section 10A(b)(1)(A)(i) of the Exchange Act, by failing to take +appropriate steps in relation to potential illegal activity on the part of Breitling and its +management. Finally, Matlock, by failing to comply with applicable audit standards, caused +violations by RK of Rule 2-02(b)(1) of Regulation S-X. + +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. + +Matlock has shown good cause for reinstatement and has met all of the conditions set +forth in the original order to be 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. In his capacity as an independent accountant, Matlock has stated that he will comply +with all requirements of the Commission and the Public Company Accounting Oversight Board +(“PCAOB”), including, but not limited to all requirements relating to registration, inspections, +concurring partner reviews and quality control standards. In his capacity as a preparer or +reviewer, or as a person responsible for the preparation or review, of financial statements of a +public company to be filed with the Commission (other than as a member of an audit +committee), Matlock attests that he will have his work reviewed by the independent audit +committee of any company for which he works, or in some other manner acceptable to the +Commission, while practicing before the Commission in this capacity. + +Matlock 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. If, in the future, he should wish to resume appearing and practicing before the +Commission in such a capacity, 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. + +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 + + +On the basis of the information supplied, representations made, and undertakings agreed +to by Matlock, it appears that he has complied with the terms of the Suspension Order. No +information has come to the attention of the Commission relating to his character, integrity, +professional conduct, or qualifications to practice before the Commission that would be a basis +for adverse action against him pursuant to Rule 102(e) of the Commission’s Rules of Practice. +In addition, Matlock has undertaken to have his work reviewed by the independent audit +committee of any company for which he works, or in some other manner acceptable to the +Commission, in his practice before the Commission as a preparer or reviewer of financial +statements required to be filed with the Commission, and has undertaken to comply with all +requirements of the Commission and the PCAOB, including, but not limited to, all requirements +relating to registration, inspections, concurring partner reviews and quality control standards, in +his practice before the Commission as an independent accountant. As a result, Matlock 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 +Brian Dee Matlock, 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/2022/AAER-4297.txt b/raw/aaer/2022/AAER-4297.txt new file mode 100644 index 0000000000000000000000000000000000000000..1ffd1550b566a3a814b0ffca9a75af30aab1b95c --- /dev/null +++ b/raw/aaer/2022/AAER-4297.txt @@ -0,0 +1,118 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94786 / April 22, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4297 / April 22, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20830 + +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 Carl +Iberger (“Respondent” or “Iberger”) 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. + +In the Matter of + + +CARL IBERGER, + +Respondent. +2 +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Iberger, age 69, has served as Chief Financial Officer of Precipio, Inc. +(“Precipio”) since 2016. Iberger does not hold a CPA license. + +2. Precipio, Inc. was, at all relevant times, a Delaware company with a +principal place of business in New Haven, Connecticut. Precipio was engaged in the business of +developing and distributing medical diagnostics. At all relevant times, Precipio’s common stock +was registered with the Commission pursuant to Section 12(g) of the Securities Exchange Act of +1934 (“Exchange Act”), and traded on the NASDAQ National Market. + +3. On April 15, 2022, a final judgment was entered against Iberger, +permanently enjoining him from future violations of Section 10(b) of the Exchange Act and Rule +10b-5 thereunder in the civil action entitled Securities and Exchange Commission v. Carl Iberger et +al., Civil Action Number 1:22-CV-10565, in the United States District Court for the District of +Massachusetts. Iberger was also ordered to pay a $69,223 civil money penalty. Iberger was +further ordered to be barred for a period of five years from serving as an officer or director of any +issuer required to register securities with the Commission pursuant to Section 12(b) or 12(g) [15 +U.S.C. §78l(b), 78l(g)], or to file reports with the Commission pursuant to Section 15(d) [15 +U.S.C. §78o(d)], of the Exchange Act. + +4. The Commission’s complaint alleged, among other things, that Iberger +engaged in insider trading by tipping his two sons with Precipio’s material, nonpublic +information concerning a novel COVID-19 business strategy and Precipio’s entry into an +agreement to distribute a COVID-19 test kit that had received Emergency Use Authorization +from the U.S. Food and Drug Administration. The Complaint alleged that Iberger tipped his +sons in advance of the company’s July 30, 2020 public announcement of this information, which +caused Precipio’s stock to increase over 400% from its open market price. + +IV. + +In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Iberger’s Offer. + + + + +3 +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Iberger is suspended from appearing or practicing before the Commission as an +accountant. + +B. After five (5) years from the date of the Order, Iberger may request that the +Commission consider his reinstatement by submitting an application to resume appearing or +practicing before the Commission to the attention of the Office of the Chief Accountant. + + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4300.txt b/raw/aaer/2022/AAER-4300.txt new file mode 100644 index 0000000000000000000000000000000000000000..51ff84c99787fc9929547565b06263651fcfbb28 --- /dev/null +++ b/raw/aaer/2022/AAER-4300.txt @@ -0,0 +1,54 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94906 / May 13, 2022 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4300 / May 13, 2022 +ADMINISTRATIVE PROCEEDING +File No. 3-20852 +In the Matter of +DOUGLAS A. RICHARDSON, CPA +Respondent. +ORDER OF SUSPENSION PURSUANT +TO RULE 102(e)(2) OF THE +COMMISSION’S RULES OF PRACTICE +I. +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Douglas A. Richardson 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. Richardson maintained a certified public accountant license from the State of +Missouri from April 1996 until May 2018. He had an accounting practice and was also +employed as the Treasurer and CFO for Smart Prong Technologies, Inc., a privately-held +corporation headquartered at Tulsa, Oklahoma. +2. On June 15, 2021, a judgment of conviction was entered against Richardson +in United States of America v. Douglas A. Richardson, 6:18-CR-03094-MDH, in the United +States District Court for the Western District of Missouri, Southern Division, finding him +guilty of six counts of wire fraud (18 U.S.C. §1343) and four counts of money laundering +(18 U.S.C. §1957). +3. As a result of this conviction, Richardson was sentenced to 188 months +imprisonment followed by three years of supervised release and ordered to pay restitution in +the amount of $8,832,828. He was also ordered to forfeit a $696,000 interest in a home. + +1 Rule 102(e)(2) provides in pertinent part: “Any ... person who has been convicted of a felony or a +misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the +Commission.” + + + +2 + +III. +In view of the foregoing, the Commission finds that Richardson 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 Douglas A. Richardson 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/2022/AAER-4301.txt b/raw/aaer/2022/AAER-4301.txt new file mode 100644 index 0000000000000000000000000000000000000000..e7dbda0434f97b362869dc42773ac4a8d4a235bc --- /dev/null +++ b/raw/aaer/2022/AAER-4301.txt @@ -0,0 +1,111 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 94976 / May 24, 2022 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4301 / May 24, 2022 +ADMINISTRATIVE PROCEEDING +File No. 3-17691 + +In the Matter of +Christopher Bauer, 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 November 21, 2016, the Commission issued a consented Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e) of the Commission’s Rules +of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order +(the “Suspension Order”) as to Respondent Christopher Bauer, CPA (“Bauer”).1 The Suspension +Order denied Bauer the privilege of appearing or practicing before the Commission as an +accountant but permitted him, after one year from the date of the Suspension Order and if certain +conditions were met, to request that the Commission consider his reinstatement 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; or (2) an independent accountant. +This order is issued in response to Bauer’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. +In the Suspension Order, the Commission found that Bauer improperly served as the lead +engagement partner on the first and second quarter 2013 reviews of Uni-Pixel, Inc.’s interim +financial information after having served as lead engagement partner for the preceding five + +1 See Accounting and Auditing Enforcement Release No. 3825, dated November 21, 2016. + + 2 +years. In addition, the Commission found that, during the first two quarters of 2013, Bauer failed +to comply with professional standards with respect to the review of disclosures surrounding two +significant transactions. As a result of this conduct, Bauer engaged in improper professional +conduct. In addition, Bauer willfully aided and abetted violations of Section 10A(j) of the +Exchange Act and Rule 10A-2 thereunder and Rule 2-02 of Regulation S-X; and caused +violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. + +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. + +Bauer has shown good cause for reinstatement and has met all of the conditions set forth +in the Suspension Order. In his capacity as an independent accountant, he 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, Bauer 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. + +On the basis of the information supplied, representations made, and undertakings agreed +to by Bauer, and for the reasons stated immediately above, it appears that he has complied with +the terms of the Suspension Order denying him the privilege of appearing or practicing before +the Commission as an accountant. No information has come to the attention of the Commission +relating to his character, integrity, professional conduct, or qualifications to practice before the +Commission that would be a basis for adverse action against him pursuant to Rule 102(e) of the +Commission’s Rules of Practice. As a result, Bauer 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 +Christopher Bauer, 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/2022/AAER-4303.txt b/raw/aaer/2022/AAER-4303.txt new file mode 100644 index 0000000000000000000000000000000000000000..5952f7d32b0c8cbea8b422ba488138ff02a6ec7c --- /dev/null +++ b/raw/aaer/2022/AAER-4303.txt @@ -0,0 +1,521 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95050 / June 7, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4303 / June 7, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20884 + + +In the Matter of + +CLAYTON “CHARLIE” +THOMAS + +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 Clayton “Charlie” Thomas +(“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 + + These proceedings arise out of improper accounting at Synchronoss Technologies, Inc. +(“SNCR” or the “Company”), a New Jersey-based technology company that primarily provides +products, software, and services to telecommunications companies. In July 2018, SNCR announced +a restatement of its 2013, 2014, 2015, and 2016 financial statements of approximately $190 million +in cumulative revenues. As part of this announcement, SNCR restated revenues related to a series +of transactions for which SNCR had recognized revenue improperly and in a manner inconsistent +with generally accepted accounting principles (“GAAP”). These included (1) transactions for +which SNCR, through “side letter” agreements, concealed that the revenue the Company recognized +upfront was in fact contingent on future events and (2) transactions in which the Company sold +software licenses together with multi-year related supporting services, and the Company improperly +recognized the revenue for the licenses immediately, rather than recognizing it ratably over the term +of the arrangements. + + Clayton “Charlie” Thomas, who joined SNCR in late 2015 as Senior Vice President +(“SVP”) of Analytics, was involved, along with other company officials, in negotiating and +structuring three of these problematic transactions, for which SNCR improperly recognized a +combined total of approximately $10 million in revenue. As a result, Thomas violated Sections +10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5(a) and (c) and 13b2-1 thereunder, and +caused SNCR’s violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 13a-1, +13a-11, 13a-13, and 12b-20 thereunder. + +Respondent + +1. Thomas, age 59, resides in Arlington, Virginia. Thomas was the Chief Executive +Officer of Razorsight, a private cloud analytics company that was acquired by SNCR in August +2015. Thomas served as SVP of Analytics at SNCR until August 2017, when he was terminated. +In his role at SNCR, Thomas operated as a senior salesperson and interacted frequently with +SNCR’s senior management and finance department, including on the three transactions that are the +subject of this order. + +Other Relevant Entity + +2. SNCR is a Delaware corporation based in New Jersey whose securities are +registered pursuant to Section 12(b) of the Exchange Act. Its securities are currently listed on + +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 + +NASDAQ and have been since its initial public offering in June 2006, although SNCR’s common +stock was suspended from trading on NASDAQ from May 2018 to October 2018 because SNCR +had become delinquent in its required filings. + +FACTS + +A. Background +3. In 2015 and 2016 (the “relevant period”), SNCR’s software products and services +included software-based activation, messaging, analytics, and cloud services for its +telecommunications customers. + +4. Under GAAP, companies are required to take into account all material terms of an +arrangement between two parties in recognizing revenue. If, for example, companies enter into +“side letter” agreements that alter the material terms of other transactional documents (such as by +providing that payments under the agreement are contingent on future events), companies must take +such terms into account in determining whether it is appropriate to recognize revenue. + +5. Similarly, when software companies such as SNCR sell software licenses to their +customers together with related, ancillary services (such as hosting and maintenance), GAAP +required that the sales be accounted for as “multiple-element arrangements” (“MLEs”). Under +GAAP during the relevant period, if a contract or series of contracts was determined to be an MLE, +the fee should be allocated to the various elements based on vendor-specific objective evidence +(“VSOE”) of fair value.2 + +6. If certain components of MLEs have yet to be delivered (such as services that will +be performed over the life of the agreement), GAAP required that companies defer revenue +recognition of such elements until they have been performed. And if an MLE has undelivered +components for which the company lacks VSOE of fair value, GAAP generally required that the +revenue from the entire arrangement, including for delivered elements, be deferred until either all +elements lacking VSOE have been delivered or VSOE is established for all undelivered elements, or +in certain cases, be deferred and recognized over time, such as ratably over the term of the +agreement or as remaining services are expected to be performed.3 + +7. While SNCR did have VSOE of fair value for certain components of MLEs such as +professional services, critically, SNCR lacked VSOE of fair value for the hosting service it often +provided for customers who utilized its software. Accordingly, the addition of hosting to an MLE +would require that the revenue from the entire arrangement, including for delivered elements, be + +2 VSOE is, for example, the price established by the vendor for the separate sale of each +element. + +3 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification +(“ASC”) 985-605-25-9 through 25-10. + +4 + +deferred and recognized over time, i.e. that revenue be recognized ratably over the term of the +agreement. + +8. As a result, Thomas and other employees at SNCR undertook efforts to make it +appear as if the hosting services in the agreements described below were not part of the MLEs, so +that SNCR could improperly recognize the license fees in these transactions as revenue upfront, +rather than ratably over the term of the agreement. + +B. Customer A Transaction +9. Before the relevant period, SNCR’s software business was premised largely on a +“software as a service” (“SaaS”) model, in which SNCR agreed to provide customers with the use +of its software, together with related support services such as hosting and maintenance, primarily +through multi-year agreements. For SaaS arrangements, SNCR was required to recognize revenue +ratably over the life of the agreements, as the services were provided. + +10. In the second quarter of 2016, SNCR sought to accelerate the recognition of revenue +on a number of existing customer relationships in order to generate the appearance of an improved +financial performance in its publicly-filed financial reports. One way it sought to do so was by +breaking a number of its SaaS arrangements with those customers into their component parts and +selling “perpetual license agreements” (“PLA”s)4 to SNCR’s software purportedly separately from, +or without, the other ancillary elements of the previous SaaS agreements, such as hosting. SNCR +then improperly recognized revenue from the entirety of the PLA fee upfront, instead of only +ratably over the term of the agreement. + +11. In connection with this effort, Thomas and others sought to convert SNCR’s pre- +existing SaaS arrangement with Customer A for its payment processing software5 into a PLA. +Thomas and others simultaneously negotiated separate agreements for the related, ancillary hosting +and support services for the software that SNCR had already been providing to Customer A under +its SaaS arrangement. + +12. The PLA with Customer A was signed on June 30, 2016. Negotiations for the three- +year, related hosting and support services agreements were conducted contemporaneously with the +PLA negotiations; however, SNCR postponed execution of them to January 2017 and made them +retroactive to July 1, 2016. SNCR continued to provide hosting and support services to Customer A +throughout the period, without interruption, just as SNCR had under its SaaS arrangement with +Customer A. + + +4 A customer purchasing a PLA pays for the license upfront and has the right to use the +software indefinitely. + +5 The software processed invoices, automated payments, and sought to improve margins by +optimizing cost and revenue. + +5 + +13. At the same time it was conducting these negotiations, Thomas and others also +negotiated an amendment to an existing audit services agreement with Customer A. The “audit +services” in question consisted of the review of Customer A’s invoices by SNCR and its +subcontractor to determine if Customer A had been overcharged by various vendors. Customer A +would authorize SNCR and its subcontractor to seek reimbursement from the vendors on its behalf +and, if successful, Customer A would pay SNCR and its subcontractor a percentage of the +reimbursed payments as audit fees. No fee was payable to SNCR until Customer A had realized the +savings identified by SNCR. At the time of these negotiations, SNCR had already identified +potential overcharges, but had not yet negotiated reimbursement from Customer A’s vendors. The +amendment substituted an upfront fee applicable to a set amount of identified potential overcharges +instead of the contingency fees. + +14. Throughout June, as an inducement for Customer A to purchase the PLA, Thomas +and others proposed an upfront fee that was significantly less than the amount SNCR estimated it +would receive in contingency fees if SNCR achieved its historical success rate. Thomas explained +in an internal email to SNCR salespeople, “The [audit services] savings will pay for the licenses.” + +15. During the negotiations, SNCR attributed more than $6 million in value to the audit +services, and a significantly smaller amount ($750,000 in SNCR’s final proposal) to the PLA. +However, shortly before the agreements were finalized, a SNCR employee switched the dollar value +between the two agreements. Although the total price to Customer A was the same, the amount +allocated to the PLA was now $6.15 million and the amount allocated to the audit services was now +$600,000. Thomas reviewed the edit, commented that whatever two other SNCR employees said +“works for him,” and asked if $300,000 could be added to the PLA, which necessarily would mean +it would be subtracted from the audit services agreement. + +16. The price in the final contract for the license was $4.3 million, almost 6 times the +price agreed to in the “final” proposal. SNCR added another license for software not even +negotiated with Customer A, nominally for $1.85 million, to reach the $6.15 million total in the +executed PLA. When Customer A questioned the inclusion of the new software, Thomas informed +Customer A that SNCR was including the software for free and Customer A could delete the +software if it wanted. + +17. Thomas structured the deal and spearheaded the concurrent negotiations over the +PLA and the audit services agreement. Thomas and others drafted and revised proposals showing +the values SNCR originally attributed to the PLA and audit services and reviewed and approved the +last-minute switch of those amounts that significantly and arbitrarily inflated the purported value of +the PLA. + +18. Thomas knew or recklessly disregarded that there was no factual basis for switching +the price of the PLA and audit services (or for including the additional software license in the PLA). +In fact, he and others negotiated an agreement to pay SNCR’s subcontractor approximately $4 +million for its audit services to Customer A, a figure that was almost seven times the $600,000 +6 + +attributed to those services in the contracts, but which was consistent with the amount originally +contemplated for those services.6 + +19. Switching these two amounts in the agreements provided the appearance that SNCR +was entitled to recognize significantly more revenue upfront than it would have been entitled to had +the prices in the contracts not been altered. Under GAAP, revenue for the audit services could not +be recognized upfront in its entirety because the audit service fee had not been earned. SNCR, +through its subcontractor, was still required to perform by negotiating the disputes with the vendors. +Furthermore, if SNCR did not successfully negotiate and obtain a set amount of reimbursement +from the covered claims by a given date, SNCR would be required to discount its audit services +going forward until Customer A had realized the promised amount. In contrast, in certain +circumstances, revenue from a PLA could properly be recognized upfront in its entirety. + +20. In its Form 10-Q for the quarter ended June 30, 2016, SNCR recognized $5.25 +million in revenue for the PLA sold to Customer A, with approximately $900,000 being allocated to +maintenance. SNCR’s recognition of $5.25 million in revenue for the PLA was improper under +GAAP because the PLA and the ancillary hosting and audit services agreements comprised an +MLE, and SNCR had no VSOE for the fair value of hosting or audit services. According to GAAP, +the fees from these agreements should therefore have been recognized ratably over the life of the +agreement. + +21. The improperly recorded revenue appeared in a press release announcing net +revenues and net income for the second quarter 2016, which was included in a Form 8-K issued on +August 3, 2016, and in SNCR’s Form 10-K issued on February 27, 2017, which included net +revenues and net income for 2016. The improperly recorded revenue from the Customer A +transaction materially inflated SNCR’s revenue in these periods. + +22. SNCR reversed the PLA revenue for the Customer A transaction when it restated its +2016 financial results, reducing revenue by $5,252,000 in the quarter ended June 30, 2016 and +$4,660,000 for the year ended December 31, 2016. + +C. Reseller Transaction with Subcontractor A +23. In late 2016, sales and finance personnel at SNCR forecasted internally that SNCR +would close on the sale of PLA for several types of software7 to Customer A, for an estimated $4 +million in revenue. + + +6 Because SNCR provided the audit services primarily through its subcontractor, the +subcontractor was entitled to approximately 2/3 of the $6.15 million audit services fee. + + +7 The software assisted telecommunications companies with managing invoices, including +paying vendors, auditing invoice charges, managing invoice disputes, and analyzing billing data. + +7 + +24. As the close of the fourth quarter approached, however, Customer A informed the +sales and finance personnel at SNCR that it would not close the deal until 2017. + +25. In response, Thomas, Marc Bandini (“Bandini”), then the Senior Director of +Communications and Media at SNCR, and Daniel Ives, then the Executive Vice President of +Investor Relations at SNCR, with the approval of senior SNCR executives, embarked on an effort to +persuade one of SNCR’s subcontractors (“Subcontractor A”) to agree to acquire the software PLA +originally intended for Customer A before the end of the year for $3.6 million, and then resell it to +Customer A in 2017 (the “Reseller Agreement”). Subcontractor A had never previously been a +customer of SNCR, had never purchased any of its software, and had never been a reseller of +software. Rather, Subcontractor A was a party to a consulting agreement with SNCR under which +it performed services for licensees of SNCR’s software products in exchange for consulting fees. + +26. In addition, Subcontractor A was not financially capable of paying SNCR $3.6 +million, a fact its president told Thomas, Bandini, and Ives before the end of the year. + +27. To get around that obstacle, on December 28, 2016, Thomas and Bandini prepared, +signed, and sent a side letter (“first side letter”) to Subcontractor A stipulating that (1) Subcontractor +A did not need to pay SNCR under the Reseller Agreement until it had resold the software, and (2) +SNCR would make Subcontractor A whole for any losses incurred in the resale by adjusting the sale +price and awarding Subcontractor A additional consulting services. + +28. Thomas was entitled to a bonus tied to certain revenue earned by SNCR, including +for the Subcontractor A transaction and a transaction with Customer B.8 + +29. By the morning of December 31, 2016, Subcontractor A had not yet agreed to sign +the Reseller Agreement. In a last-ditch effort to close the deal in time for SNCR to include the $3.6 +million as revenue for the fourth quarter of 2016, that morning, Thomas met with a representative of +Subcontractor A and proposed that SNCR pre-pay the fees it expected to owe Subcontractor A on +the long-standing consulting agreement between them, so that Subcontractor A could use those +funds to pay the $3.6 million it would ostensibly owe SNCR under the Reseller Agreement. +Subcontractor A agreed to that proposal. + +30. Following the meeting on that same day, Subcontractor A emailed Thomas, Bandini, +and Ives to confirm that they were working on memorializing the terms of the proposal in a draft +agreement (“second side letter”). This second side letter, which was drafted with the assistance of +others at SNCR, amended a previously signed agreement between Subcontractor A and SNCR9 and +provided that SNCR would prepay $4.05 million in fees to Subcontractor A by February 28, 2017. + +8 The Customer B transaction is discussed supra at Section III.D, paragraphs 36-43. +Thomas ultimately did not receive his bonus for the Subcontractor A or Customer B transactions. + +9 The previously signed Auditing and Consulting Services Agreement was executed +between Subcontractor A and a company which SNCR acquired prior to the relevant period. +8 + +Thomas reviewed, revised, and circulated the second side letter internally for comment. Thomas, +Bandini, and Ives negotiated the second side letter with Subcontractor A throughout the day on +December 31, 2016, and the parties agreed to formally sign the document in early 2017. + +31. In the meantime, on the afternoon of December 31, 2016, SNCR and Subcontractor +A signed the Reseller Agreement, which ostensibly provided that Subcontractor A would pay +SNCR $3.6 million for a PLA for three types of SNCR software that it could then resell to other +companies. The Reseller Agreement on its face did not contain any contingencies, made no +mention of the first or second side letter, and purported to require Subcontractor A to pay for the +software PLA by March 31, 2017. + +32. In February 2017, Subcontractor A signed the second side letter. + +33. SNCR included the $3.6 million fee under the Reseller Agreement as revenue for the +quarter and year ended December 31, 2016, in a press release and Form 8-K issued on February 8, +2017, and in its Form 10-K for the year ended December 31, 2016, filed on February 27, 2017. + +34. SNCR’s inclusion of this revenue was improper under GAAP because, as reflected +in the first and second side letter and as Thomas knew or recklessly disregarded, the fee was +contingent on Subcontractor A reselling the software. Because of this contingency, the Reseller +Agreement was in substance a consignment agreement, revenue for which, according to GAAP, can +be recognized only when the sale to an end customer is complete (provided all other revenue +recognition criteria have been met). + +35. The improperly recorded revenue from the Subcontractor A transaction materially +inflated SNCR’s revenue for the quarter and year ended December 31, 2016 and was reversed when +SNCR restated its 2016 financial results. + +D. Customer B Transaction +36. In the fourth quarter of 2016, Thomas and others at SNCR also sought to convert a +pre-existing SaaS agreement with Customer B into a PLA and other component parts, in order to +accelerate the recognition of revenue for financial reporting purposes. To obscure that these +separate agreements were in fact component parts of an MLE arrangement (and, indeed, that they +were merely a repackaging of an existing customer arrangement), SNCR employees arranged to +have the agreements for the ancillary elements, such as hosting, be executed separately at a later +date. + +37. On December 12, 2016, Bandini informed Customer B that SNCR needed to +recognize license revenue for the software that Customer B was using in the fourth quarter of 2016 +and that to do so, it needed to exclude the hosting and service elements from the PLA. + +38. Customer B refused to sign the PLA without knowing the cost and terms for the +ancillary services that had, to that point, been provided under the SaaS agreement. In response, +9 + +Bandini provided two draft statements of work (“SOWs”) to Customer B, one for hosting and one +for services. + +39. Customer B preferred to sign all three agreements together and objected to signing +the PLA without a guarantee that the price and terms for hosting and services would not deviate +from those presented in the draft SOWs. To assuage Customer B, Bandini sent Customer B by +email, a side letter stating that the hosting and services SOWs that were negotiated +contemporaneously with the PLA would remain unchanged until they were signed in the subsequent +quarter. Bandini and Thomas both signed the side letter. The draft SOWs referenced in the side +letter specified hosting and all the other services to be performed and the fees to be paid. + +40. Customer B signed the PLA on December 29, 2016, which provided for payment of +a fee for the PLA alone to SNCR in the amount of $1.3 million. Several months later, the hosting +and other services SOWs were executed and were unchanged from the previously agreed to drafts. +SNCR continued to provide its hosting services to Customer B during this entire period, including +from the time the software PLA was signed to the time the hosting SOW was executed. + +41. SNCR included the $1.3 million PLA fee as part of its net revenue and income for +the quarter and year ended December 31, 2016, in a Form 8-K and press release issued on February +8, 2017, and in its Form 10-K for the year ended December 31, 2016, filed on February 27, 2017. + +42. As Thomas knew or recklessly disregarded, SNCR’s inclusion of this fee as revenue +was improper under GAAP because the PLA and the ancillary hosting and services agreements +comprised an MLE, and SNCR had no VSOE of fair value for hosting. According to GAAP, the +fees from these agreements should therefore have been recognized ratably over the life of the +agreement. The improperly recorded revenue from the Customer B transaction materially inflated +SNCR’s revenue in these periods. + +43. SNCR reversed the revenue for the Customer B transaction when it restated its 2016 +financial results. + +E. The Above Transactions Resulted in a Material Overstatement of SNCR’s Financial +Performance +44. The revenue from the foregoing transactions that SNCR improperly recorded for the +quarters ended June 30, 2016 and December 31, 2016 materially inflated SNCR’s revenue for these +periods. SNCR also understated its pre-tax loss for the quarter ended June 30, 2016 by +approximately 57% by improperly including revenue from the Customer A transaction. SNCR +understated its pre-tax loss from continuing operations for the quarter ended December 31, 2016 by +approximately 14% by improperly including revenue from the Subcontractor A and Customer B +transactions. Based on its improper inclusion of revenue from all of these transactions, SNCR +understated its 2016 pre-tax loss from continuing operations by approximately 11% in its Form +10-K for the year ended December 31, 2016. + +10 + +VIOLATIONS + +45. As a result of the conduct described above, Thomas violated Section 10(b) of the +Exchange Act and Rules 10b-5(a) and 10b-5(c) thereunder, which prohibit fraudulent conduct in +connection with the purchase or sale of securities. + +46. As a result of the conduct described above, Thomas violated Section 13(b)(5) of the +Exchange Act and Rule 13b2-1 thereunder, which prohibit any person from knowingly +circumventing or failing to implement a system of internal accounting controls; knowingly +falsifying any book, record, or account, which, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of the assets of the issuer; and directly or indirectly, falsifying or +causing to be falsified, any book, record or account subject to Section 13(b)(2)(A) of the Exchange +Act. + +47. As a result of the conduct described above, Thomas caused SNCR to violate +Sections 13(a) and 13(b)(2)(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 accurate information, documents, and annual and +quarterly reports as the Commission may require, mandate that periodic reports contain such further +material information as may be necessary to make the required statements not misleading, and +require issuers to make and keep books, records, and accounts that accurately and fairly reflect the +transactions and dispositions of the assets of the issuer. + +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 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 10(b), 13(a), 13(b)(2)(A) +and 13b(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, and 13b2-1 +thereunder. + + Respondent shall, within 365 days of the entry of this Order, pay a civil money +penalty in the amount of $90,000.00 to the Securities and Exchange Commission. Post-Order +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; + +11 + +(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 +Clayton Thomas as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Lara Mehraban, Division of +Enforcement, Securities and Exchange Commission, New York Regional Office, 100 Pearl Street, +Suite 20-100, New York, New York 10004. + + Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for any penalties referenced in paragraph IV(B) above. The Fair Fund may be +added to or combined with any other fair fund created in a related district court action or +administrative proceeding arising out of the same violations. The Fair Fund will be distributed to +harmed investors 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 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 +12 + +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/2022/AAER-4305.txt b/raw/aaer/2022/AAER-4305.txt new file mode 100644 index 0000000000000000000000000000000000000000..c46a2854f4b9328d589913c75cf314481b75ba24 --- /dev/null +++ b/raw/aaer/2022/AAER-4305.txt @@ -0,0 +1,302 @@ + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95052 / June 7, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4305 / June 7, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20886 + + +In the Matter of + +DANIEL IVES, + +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 Daniel Ives (“Ives” 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 + + These proceedings arise out of improper accounting at Synchronoss Technologies, Inc. +(“SNCR” or the “Company”), a New Jersey-based technology company that primarily provides +products, software, and services to telecommunications companies. In July 2018, SNCR announced +a restatement of its 2013, 2014, 2015, and 2016 financial statements of approximately $190 million +in cumulative revenues. As part of this announcement, SNCR restated revenues related to a series +of transactions for which SNCR had recognized revenue improperly and in a manner inconsistent +with generally accepted accounting principles (“GAAP”). These included transactions for which +SNCR, through “side letter” agreements, concealed that the revenue the Company recognized +upfront was in fact contingent on future events. + + Daniel Ives, the former Executive Vice President of Investor Relations at SNCR, was +involved, along with other company officials, in negotiating one problematic transaction for which +SNCR improperly recognized approximately $3.6 million in revenue. As a result, Ives violated +Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and caused SNCR’s violations +of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 13a-1, 13a-11, and 12b-20 +thereunder. + +Respondent + +1. Ives, age 46, resides in Westfield, New Jersey. Ives was SNCR’s Executive Vice +President of Investor Relations from approximately February 2016 to mid-2017, when he was +terminated. + +Other Relevant Entity + +2. SNCR is a Delaware corporation based in New Jersey whose securities are +registered pursuant to Section 12(b) of the Exchange Act. Its securities are currently listed on +NASDAQ and have been since its initial public offering in June 2006, although SNCR’s common +stock was suspended from trading on NASDAQ from May 2018 to October 2018 because SNCR +had become delinquent in its required filings. + + +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 + +3. In 2015 and 2016 (the “relevant period”), SNCR’s software products and services +included software-based activation, messaging, analytics, and cloud services for its +telecommunications customers. + +4. In late 2016, sales and finance personnel at SNCR forecasted internally that SNCR +would close on the sale of a “perpetual license agreement” (“PLA”) 2 for several types of software3 +to one of their customers (“Customer A”) for an estimated $4 million in revenue. + +5. As the close of the fourth quarter approached, however, Customer A informed the +sales and finance personnel at SNCR that it would not close the deal until 2017. + +6. In response, Ives, Marc Bandini (“Bandini”), then the Senior Director of +Communications and Media at SNCR, and Clayton Thomas (“Thomas”), then the Senior Vice +President of Analytics at SNCR, with the approval of senior SNCR executives, embarked on an +effort to persuade one of SNCR’s subcontractors (“Subcontractor A”) to agree to acquire the +software PLA originally intended for Customer A before the end of the year for $3.6 million, and +then resell it to Customer A in 2017 (the “Reseller Agreement”). Subcontractor A had never +previously been a customer of SNCR, had never purchased any of its software, and had never been +a reseller of software. Rather, Subcontractor A was a party to a consulting agreement with SNCR +under which it performed services for licensees of SNCR’s software products in exchange for +consulting fees. + +7. In addition, Subcontractor A was not financially capable of paying SNCR $3.6 +million, a fact its president told Ives, Bandini, and Thomas before the end of the year. + +8. To get around that obstacle, on December 28, 2016, Bandini and Thomas prepared, +signed, and sent a side letter (“first side letter”) to Subcontractor A stipulating that (1) Subcontractor +A did not need to pay SNCR under the Reseller Agreement until it had resold the software, and +(2) SNCR would make Subcontractor A whole for any losses incurred in the resale by adjusting the +sale price and awarding Subcontractor A additional consulting services. + +9. By the morning of December 31, 2016, Subcontractor A had not yet agreed to sign +the Reseller Agreement. In a last-ditch effort to close the deal in time for SNCR to include the $3.6 +million as revenue for the fourth quarter of 2016, that morning, Thomas met with a representative of +Subcontractor A and proposed that SNCR pre-pay the fees it expected to owe Subcontractor A on +the long-standing consulting agreement between them, so that Subcontractor A could use those +funds to pay the $3.6 million it would ostensibly owe SNCR under the Reseller Agreement. That + +2 A customer purchasing a PLA pays for the license upfront and has the right to use the +software indefinitely. + +3 The software assisted telecommunications companies with managing invoices, including +paying vendors, auditing invoice charges, managing invoice disputes, and analyzing billing data. + 4 +same morning, Ives called Subcontractor A’s CEO and reiterated that SNCR would pre-pay fees to +Subcontractor A in order to finance Subcontractor A’s obligation to SNCR under the Reseller +Agreement. Ives further promised that Subcontractor A would not suffer a loss from the deal under +any circumstances, including assuring Subcontractor A that in the event that Customer A did not +ultimately purchase the license, Subcontractor A would not be held responsible for the $3.6 million +payment to SNCR. Subcontractor A agreed to the proposal outlined by Ives and Thomas. + +10. Following the meeting on that same day, Subcontractor A emailed Ives, Bandini, +and Thomas to confirm that they were working on memorializing the terms of the proposal in a +draft agreement (“second side letter”). This second side letter, which was drafted with the +assistance of others at SNCR, amended a previously signed agreement between Subcontractor A +and SNCR4 and provided that SNCR would prepay $4.05 million in fees to Subcontractor A by +February 28, 2017. Ives reviewed a draft of the second side letter and emailed others at SNCR to let +them know that the document would be finalized and executed in early 2017. + +11. Ives, Bandini, and Thomas negotiated the second side letter with Subcontractor A +throughout the day on December 31, 2016, and the parties agreed to formally sign the document in +early 2017. + +12. In the meantime, on the afternoon of December 31, 2016, SNCR and Subcontractor +A signed the Reseller Agreement, which ostensibly provided that Subcontractor A would pay +SNCR $3.6 million for a PLA for three types of SNCR software that it could then resell to other +companies. The Reseller Agreement on its face did not contain any contingencies, made no +mention of the first or second side letter, and purported to require Subcontractor A to pay for the +software PLA by March 31, 2017. + +13. In February 2017, Subcontractor A signed the second side letter. + +14. SNCR included the $3.6 million fee under the Reseller Agreement as revenue for the +quarter and year ended December 31, 2016, in a press release and Form 8-K issued on February 8, +2017, and in its Form 10-K for the year ended December 31, 2016, filed on February 27, 2017. + +15. SNCR’s inclusion of this revenue was improper under GAAP because, as reflected +in the first and second side letter and as Ives knew or recklessly disregarded, the fee was contingent +on Subcontractor A reselling the software. Because of this contingency, the Reseller Agreement +was in substance a consignment agreement, revenue which, according to GAAP, can be recognized +only when the sale to an end customer is complete (provided all other revenue recognition criteria +have been met). + +16. The improperly recorded revenue from the Subcontractor A transaction materially +inflated SNCR’s revenue for the quarter and year ended December 31, 2016 and was reversed when +SNCR restated its 2016 financial results. SNCR understated its pre-tax loss from continuing + +4 The previously signed Auditing and Consulting Services Agreement was executed +between Subcontractor A and a company which SNCR acquired prior to the relevant period. + 5 +operations for the quarter ended December 31, 2016 by approximately 10.7% by improperly +including revenue from the Subcontractor A transaction. + +VIOLATIONS + +17. As a result of the conduct described above, Ives violated Section 13(b)(5) of the +Exchange Act and Rule 13b2-1 thereunder, which prohibit any person from knowingly +circumventing or failing to implement a system of internal accounting controls; knowingly +falsifying any book, record, or account, which, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of the assets of the issuer; and directly or indirectly, falsifying or +causing to be falsified, any book, record or account subject to Section 13(b)(2)(A) of the Exchange +Act. + +18. As a result of the conduct described above, Ives caused SNCR to violate Sections +13(a) and 13(b)(2)(A) of the Exchange Act and Rules 13a-1, 13a-11, 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 annual reports as the Commission may +require, mandate that periodic reports contain such further material information as may be necessary +to make the required statements not misleading, and require issuers to make and keep books, +records, and accounts that accurately and fairly reflect the transactions and dispositions of the assets +of the issuer. + +UNDERTAKINGS + + Respondent has undertaken to: + +A. For a period of three years from the entry of the Order, refrain from participating as +a salesperson in transactions, contracts, or agreements involving (1) side or supplemental contracts, +agreements, or letters and (2) the sale of goods or services valued at or over $10,000. This includes +communicating with counterparties, structuring transactions, negotiating with counterparties, +drafting or revising contracts, drafting and sending invoices, and participating in any aspect of +revenue recognition, but does not include engaging in these activities with respect to any purchases +or sales that are or would be in a personal capacity. + +B. Complete thirty (30) hours of compliance training relating to revenue recognition +and/or accounting fraud within one year from the entry of the Order. + +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’s Offer. + + Accordingly, it is hereby ORDERED that: + 6 + + 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)(5) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13b2-1 thereunder. + + Respondent shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $15,000.00 to the Securities and Exchange Commission. Post-Order +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 +Daniel Ives as a Respondent in these proceedings, and the file number of these proceedings; a copy +of the cover letter and check or money order must be sent to Lara Mehraban, Division of +Enforcement, Securities and Exchange Commission, New York Regional Office, 100 Pearl Street, +Suite 20-100, New York, New York 10004. + + Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for any penalties referenced in paragraph IV(B) above. The Fair Fund may be +added to or combined with any other fair fund created in a related district court action or +administrative proceeding arising out of the same violations. The Fair Fund will be distributed to +harmed investors 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 + 7 +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/2022/AAER-4306.txt b/raw/aaer/2022/AAER-4306.txt new file mode 100644 index 0000000000000000000000000000000000000000..3e08097f3327ed1a3c91ca517e640b276f95479c --- /dev/null +++ b/raw/aaer/2022/AAER-4306.txt @@ -0,0 +1,459 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95053 / June 7, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4306 / June 7, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20887 + + +In the Matter of + +JOHN MURDOCK, + +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 John Murdock (“Murdock” 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 + + These proceedings arise out of improper accounting at Synchronoss Technologies, Inc. +(“SNCR” or the “Company”), a New Jersey-based technology company that primarily provides +products, software, and services to telecommunications companies. In July 2018, SNCR announced +a restatement of its 2013, 2014, 2015, and 2016 financial statements of approximately $190 million +in cumulative revenues. As part of this announcement, SNCR restated revenues related to a series +of transactions for which SNCR had recognized revenue improperly and in a manner inconsistent +with generally accepted accounting principles (“GAAP”). These included (1) transactions for +which SNCR, through “side letter” agreements, concealed that the revenue the Company recognized +upfront was in fact contingent on future events and (2) transactions in which the Company sold +software licenses together with multi-year related supporting services, and the Company improperly +recognized the revenue for the licenses immediately, rather than spreading it ratably over the term of +the arrangements. + + Murdock, the-then Senior Director of Procurement and Business Operations at SNCR, was +involved, along with other company officials, in structuring and reviewing contracts for two of these +problematic transactions, for which SNCR improperly recognized a combined total of $8.85 million +in revenue. As a result, Murdock was a cause of SNCR’s violations of Sections 13(a) and +13(b)(2)(A) of the Exchange Act and Rules 13a-1, 13a-11, 13a-13, and 12b-20 thereunder. + +Respondent + +1. Murdock, age 55, resides in Branchburg, New Jersey. Murdock joined SNCR in +2009, and served as the Company’s Senior Director of Procurement and Business Operations during +the relevant period. In that role, Murdock drafted and revised sales agreements for review and +approval by others at the Company. + +Other Relevant Entity + +2. SNCR is a Delaware corporation based in New Jersey whose securities are +registered pursuant to Section 12(b) of the Exchange Act. Its securities are currently listed on +NASDAQ and have been since its initial public offering in June 2006, although SNCR’s common +stock was suspended from trading on NASDAQ from May 2018 to October 2018 because SNCR +had become delinquent in its required filings. + + +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 + +A. Background +3. In 2015 and 2016 (the “relevant period”), SNCR’s software products and services +included software-based activation, messaging, analytics, and cloud services for its +telecommunications customers. + +4. Under GAAP, companies are required to take into account all material terms of an +arrangement between two parties in recognizing revenue. If, for example, companies enter into +“side letter” agreements that alter the material terms of other transactional documents (such as by +providing that payments under the agreement are contingent on future events), companies must take +such terms into account in determining whether it is appropriate to recognize revenue. + +5. Similarly, when software companies such as SNCR sell software licenses to their +customers together with related, ancillary services (such as hosting and maintenance), GAAP +required that the sales be accounted for as “multiple-element arrangements” (“MLEs”). Under +GAAP during the relevant period, if a contract or series of contracts was determined to be an MLE, +the fee should be allocated to the various elements based on vendor-specific objective evidence +(“VSOE”) of fair value.2 + +6. If certain components of MLEs have yet to be delivered (such as services that will +be performed over the life of the agreement), GAAP required that companies defer revenue +recognition of such elements until they have been performed. And if an MLE has undelivered +components for which the company lacks VSOE of fair value, GAAP generally required that the +revenue from the entire arrangement, including for delivered elements, be deferred until either all +elements lacking VSOE have been delivered or VSOE is established for all undelivered elements, +or in certain cases, be deferred and recognized over time, such as ratably over the term of the +agreement or as remaining services are expected to be performed.3 + +7. While SNCR did have VSOE of fair value for certain components of MLEs such as +professional services, critically, SNCR lacked VSOE of fair value for the hosting service it often +provided for customers who utilized its software. Accordingly, the addition of hosting to an MLE +would require that the revenue from the entire arrangement, including for delivered elements, be +deferred and recognized over time, i.e. that revenue be recognized ratably over the term of the +agreement. + +8. As a result, Murdock should have known that other employees at SNCR undertook +efforts to make it appear as if the hosting services in the agreements described below were not part + +2 VSOE is, for example, the price established by the vendor for the separate sale of each +element. + +3 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification +(“ASC”) 985-605-25-9 through 25-10. + + 4 +of the MLEs, so that SNCR could improperly recognize the license fees in these transactions as +revenue upfront, rather than ratably over the term of the agreement. + +B. Customer A Transaction +9. Before the relevant period, SNCR’s software business was premised largely on a +“software as a service” (“SaaS”) model, in which SNCR agreed to provide customers with the use +of its software, together with related support services such as hosting and maintenance, primarily +through multi-year agreements. For SaaS arrangements, SNCR was required to recognize revenue +ratably over the life of the agreements, as the services were provided. + +10. In the second quarter of 2016, SNCR sought to accelerate the recognition of revenue +on a number of existing customer relationships in order to generate the appearance of an improved +financial performance in its publicly-filed financial reports. One way it sought to do so was by +breaking a number of its SaaS arrangements with those customers into their component parts and +selling “perpetual license agreements” (“PLA”s)4 to SNCR’s software purportedly separately from, +or without, the other ancillary elements of the previous SaaS agreements, such as hosting. SNCR +then improperly recognized revenue from the entirety of the PLA fee upfront, instead of only +ratably over the term of the agreement. + +11. In connection with this effort, SNCR sought to convert its pre-existing SaaS +arrangement with Customer A for its payment processing software5 into a PLA. SNCR +simultaneously negotiated separate agreements for the related, ancillary hosting and support +services for the software that it had already been providing to Customer A under its SaaS +arrangement. + +12. The PLA with Customer A was signed on June 30, 2016. Negotiations for the +three-year, related hosting and support services agreements were conducted contemporaneously +with the PLA negotiations; however, SNCR postponed execution of them to January 2017 and +made them retroactive to July 1, 2016. SNCR continued to provide hosting and support services to +Customer A throughout the period, without interruption, just as SNCR had under its SaaS +arrangement with Customer A. + +13. At the same time it was conducting these negotiations, the same SNCR employees +also negotiated an amendment to an existing audit services agreement with Customer A. The “audit +services” in question consisted of the review of Customer A’s invoices by SNCR and its +subcontractor to determine if Customer A had been overcharged by various vendors. Customer A +would authorize SNCR and its subcontractor to seek reimbursement from the vendors on its behalf +and, if successful, Customer A would pay SNCR and its subcontractor a percentage of the + +4 A customer purchasing a PLA pays for the license upfront and has the right to use the +software indefinitely. + +5 The software processed invoices, automated payments, and sought to improve margins by +optimizing cost and revenue. + + 5 +reimbursed payments as audit fees. No fee was payable to SNCR until Customer A had realized the +savings identified by SNCR. At the time of these negotiations, SNCR had already identified +potential overcharges, but had not yet negotiated reimbursement from Customer A’s vendors. The +amendment substituted an upfront fee applicable to a set amount of identified potential overcharges +instead of the contingency fees. + +14. Throughout June, as an inducement for Customer A to purchase the PLA, SNCR +proposed an upfront fee that was significantly less than the amount SNCR estimated it would +receive in contingency fees if SNCR achieved its historical success rate. + +15. Murdock was among the employees who drafted and revised both the PLA and audit +services agreement and helped structure the transaction. During the negotiations, SNCR attributed +more than $6 million in value to the audit services, and a significantly smaller amount ($750,000 in +SNCR’s final proposal) to the PLA. However, shortly before the agreements were finalized, a +SNCR employee switched the dollar value between the two agreements. Although the total price to +Customer A was the same, the amount allocated to the PLA was now $6.15 million and the amount +allocated to the audit services was now $600,000. + +16. The price in the final contract for the license was $4.3 million, almost 6 times the +price agreed to in the “final” proposal. SNCR added another license for software not even +negotiated with Customer A, nominally for $1.85 million, to reach the $6.15 million total in the +executed PLA. Murdock reviewed and provided comments on these revisions to the contracts. + +17. Murdock knew or should have known that there was no factual basis for switching +the price of the PLA and audit services (or for including the additional software license in the PLA). +Murdock had previously reviewed proposals showing the values SNCR originally attributed to the +PLA and audit services. Moreover, he later reviewed and revised an agreement to pay SNCR’s +subcontractor approximately $4 million for its audit services to Customer A, a figure that was +almost seven times the $600,000 attributed to those services in the contracts, but which was +consistent with the amount originally contemplated for those services.6 + +18. Switching these two amounts in the agreements provided the appearance that SNCR +was entitled to recognize significantly more revenue upfront than it would have been entitled to had +the prices in the contracts not been altered. Under GAAP, revenue for the audit services could not +be recognized upfront in its entirety because the audit service fee had not been earned. SNCR, +through its subcontractor, was still required to perform by negotiating the disputes with the vendors. +Furthermore, if SNCR did not successfully negotiate and obtain a set amount of reimbursement +from the covered claims by a given date, SNCR would be required to discount its audit services +going forward until Customer A had realized the promised amount. In contrast, in certain +circumstances, revenue from a PLA could properly be recognized upfront in its entirety. + + +6 Because SNCR provided the audit services primarily through its subcontractor, the +subcontractor was entitled to approximately 2/3 of the $6.15 million audit services fee. + 6 +19. In its Form 10-Q for the quarter ended June 30, 2016, SNCR recognized $5.25 +million in revenue for the PLA sold to Customer A, with approximately $900,000 being allocated to +maintenance. SNCR’s recognition of $5.25 million in revenue for the PLA was improper under +GAAP because the PLA and the ancillary hosting and audit services agreements comprised an +MLE, and SNCR had no VSOE for the fair value of hosting or audit services. According to GAAP, +the fees from these agreements should therefore have been recognized ratably over the life of the +agreement. + +20. The improperly recorded revenue appeared in a press release announcing net +revenues and net income for the second quarter 2016, which was included in a Form 8-K issued on +August 3, 2016, and in SNCR’s Form 10-K issued on February 27, 2017, which included net +revenues and net income for 2016. The improperly recorded revenue from the Customer A +transaction materially inflated SNCR’s revenue in these periods. + +21. SNCR reversed the PLA revenue for the Customer A transaction when it restated its +2016 financial results, reducing revenue by $5,252,000 in the quarter ended June 30, 2016 and +$4,660,000 for the year ended December 31, 2016. + +C. Reseller Transaction with Subcontractor A +22. In late 2016, sales and finance personnel at SNCR forecasted internally that SNCR +would close on the sale of PLA for several types of software7 to Customer A, for an estimated $4 +million in revenue. + +23. As the close of the fourth quarter approached, however, Customer A informed the +sales and finance personnel at SNCR that it would not close the deal until 2017. + +24. In response, Thomas, Marc Bandini (“Bandini”), then the Senior Director of +Communications and Media at SNCR, and Daniel Ives, then the Executive Vice President of +Investor Relations at SNCR, with the approval of senior SNCR executives, embarked on an effort to +persuade one of SNCR’s subcontractors (“Subcontractor A”) to agree to acquire the software PLA +originally intended for Customer A before the end of the year for $3.6 million, and then resell it to +Customer A in 2017 (the “Reseller Agreement”). Subcontractor A had never previously been a +customer of SNCR, had never purchased any of its software, and had never been a reseller of +software. Rather, Subcontractor A was a party to a consulting agreement with SNCR under which +it performed services for licensees of SNCR’s software products in exchange for consulting fees. + +25. In addition, Subcontractor A was not financially capable of paying SNCR $3.6 +million, a fact its president told SNCR before the end of the year. + +26. To get around that obstacle, on December 28, 2016, Bandini and Thomas prepared, +signed, and sent a side letter (“first side letter”) to Subcontractor A stipulating that (1) Subcontractor +A did not need to pay SNCR under the Reseller Agreement until it had resold the software, and + +7 The software assisted telecommunications companies with managing invoices, including +paying vendors, auditing invoice charges, managing invoice disputes, and analyzing billing data. + 7 +(2) SNCR would make Subcontractor A whole for any losses incurred in the resale by adjusting the +sale price and awarding Subcontractor A additional consulting services. Murdock was not made +aware of the side letter. + +27. Murdock reviewed certain documents for this transaction, and knew or should have +known that Thomas, Bandini, and Ives were attempting to eliminate Subcontractor A’s risk on the +deal to overcome its reluctance to engage in the transaction, and thus allow SNCR to recognize the +revenue in the fourth quarter of 2016. Among the documents Murdock reviewed was a draft letter +amending a previously signed agreement between Subcontractor A and SNCR (the “draft letter +amendment”)8 that contained a provision that purported to indemnify Subcontractor A for any losses +incurred in reselling SNCR software. Murdock told Bandini, Thomas, and Ives that the +indemnification provision in the draft letter amendment would create revenue recognition problems +for SNCR (as he believed it would have required the use of a different sell-through guidance that +may have deferred the recognition of revenue until profitability was determined), but to help +achieve the same effect with less obvious revenue recognition issues, he revised the letter +amendment to, among other things, make the indemnification provision less explicit. The revised +letter amendment required SNCR to increase Subcontractor A’s consulting fee until the excess fees +made up for any shortfall in promised proceeds of the resale. + +28. Murdock forwarded the revised letter amendment to the then-CFO and +then-Assistant Controller for review, directing their attention to the indemnification section. +Murdock explained in an email to the then-Senior Director of the Deal Desk & Business Operations +that the new language was largely the same thing as the deleted indemnification provision, but less +direct. The Assistant Controller rejected the letter agreement on the basis that the introduction of +the make whole clause made revenue recognition contingent on whether Subcontractor A +successfully resold the software. The revised letter agreement was never signed. + +29. On the morning of December 31, 2016, Thomas proposed—and Subcontractor A +agreed—that SNCR would pre-pay the fees it expected to owe Subcontractor A under the +Consulting Agreement, so that Subcontractor A could use those funds to pay the $3.6 million it +would ostensibly owe SNCR under the Reseller Agreement. Following the meeting, Subcontractor +A emailed Thomas, Bandini, and Ives to confirm that they were working on memorializing the +terms of the proposal in a draft agreement (“second side letter”). This second side letter, which was +drafted with the assistance of others at SNCR, again amended the Consulting Agreement and +provided that SNCR would prepay $4.05 million in fees to Subcontractor A by February 28, 2017. +Murdock, who was aware that the Assistant Controller had just rejected the earlier attempt to +provide an indemnification provision to Subcontractor A, reviewed and commented on the second +side letter without objecting to this prepayment provision. As Murdock knew or should have +known, the parties agreed to formally sign the document in early 2017. + + +8 The previously signed Auditing and Consulting Services Agreement (the “Consulting +Agreement”) was executed between Subcontractor A and a company which SNCR acquired prior +to the relevant period. + + 8 +30. In the meantime, on the afternoon of December 31, 2016, SNCR and Subcontractor +A signed the Reseller Agreement, which ostensibly provided that Subcontractor A would pay +SNCR $3.6 million for a PLA for three types of SNCR software that it could then resell to other +companies. The Reseller Agreement on its face did not contain any contingencies, made no +mention of the first or second side letter, and purported to require Subcontractor A to pay for the +software PLA by March 31, 2017. + +31. SNCR included the $3.6 million fee under the Reseller Agreement as revenue for the +quarter and year ended December 31, 2016, in a press release and Form 8-K issued on February 8, +2017, and in its Form 10-K for the year ended December 31, 2016, filed on February 27, 2017. + +32. SNCR’s inclusion of this revenue was improper under GAAP because, as reflected +in the first and second side letter and as Murdock knew or should have known, the fee was +contingent on Subcontractor A reselling the software. Because of this contingency, the Reseller +Agreement was in substance a consignment agreement, revenue for which, according to GAAP, can +be recognized only when the sale to an end customer is complete (provided all other revenue +recognition criteria have been met). + +33. The improperly recorded revenue from the Subcontractor A transaction materially +inflated SNCR’s revenue for the quarter and year ended December 31, 2016 and was reversed when +SNCR restated its 2016 financial results. + +D. The Above Transactions Resulted in a Material Overstatement of SNCR’s Financial +Performance + +34. The revenue from the foregoing transactions that SNCR improperly recorded for the +quarters ended June 30, 2016 and December 31, 2016 materially inflated SNCR’s revenue for these +periods. SNCR also understated its pre-tax loss for the quarter ended June 30, 2016 by +approximately 57% by improperly including revenue from the Customer A transaction. SNCR +understated its pre-tax loss from continuing operations for the quarter ended December 31, 2016 by +approximately 10.7% by improperly including revenue from the Subcontractor A transaction. +Based on its improper inclusion of revenue from these two transactions, SNCR understated its 2016 +pre-tax loss from continuing operations by approximately 10% in its Form 10-K for the year ended +December 31, 2016. + +VIOLATIONS + +35. As a result of the conduct described above, Murdock was a cause of SNCR’s +violations of Sections 13(a) and 13(b)(2)(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 accurate information, documents, and +annual and quarterly reports as the Commission may require, mandate that periodic reports +contain such further material information as may be necessary to make the required statements +not misleading, and require issuers to make and keep books, records, and accounts that +accurately and fairly reflect the transactions and dispositions of the assets of the issuer. + 9 + +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 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of +the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + + Respondent shall pay a civil money penalty in the amount of $15,000.00 to the +Securities and Exchange Commission. Payment shall be made in the following installments: + +• $5,000.00 within thirty days of the entry of this Order; +• an additional $2,500.00 every 75 days thereafter, with payments ending no later than +one year from 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. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission and hand-delivered +or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + + 10 +Payments by check or money order must be accompanied by a cover letter identifying John +Murdock as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Lara Mehraban, Division of Enforcement, +Securities and Exchange Commission, New York Regional Office, 100 Pearl Street, Suite 20-100, +New York, New York 10004. + + Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for any penalties referenced in paragraph IV(B) above. The Fair Fund may be +added to or combined with any other fair fund created in a related district court action or +administrative proceeding arising out of the same violations. The Fair Fund will be distributed to +harmed investors 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 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/2022/AAER-4308.txt b/raw/aaer/2022/AAER-4308.txt new file mode 100644 index 0000000000000000000000000000000000000000..d1159805e580178ce9134c9e7ab4bd1c5bbb77b0 --- /dev/null +++ b/raw/aaer/2022/AAER-4308.txt @@ -0,0 +1,429 @@ + + + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95055 / June 7, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4308 / June 7, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20889 + + +In the Matter of + +RONALD PRAGUE, ESQ. + +Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +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 and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted against Ronald Prague (“Prague” or “Respondent”) pursuant to Section 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(3) 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 attorney . . . who has been by name . . . (B) found by any +court of competent jurisdiction in an action brought by the Commission to which he or she is a party or found by the +Commission in any administrative proceeding to which he or she is a party to have violated (unless the violation was +found not to have been willful) or aided and abetted 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, 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 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 finds2 that + +Summary + + These proceedings arise out of improper accounting at Synchronoss Technologies, Inc. +(“SNCR” or the “Company”), a New Jersey-based technology company that primarily provides +products, software, and services to telecommunications companies. On July 2, 2018, SNCR filed a +Form 10-K with the Commission that restated its FY 2015 and 2016 financial statements and +certain financial data for FY 2013 and 2014. The restatements applied to approximately $190 +million in cumulative revenues for the four year period. As part of this announcement, SNCR +restated revenues related to a series of transactions for which SNCR had recognized revenue +improperly and in a manner inconsistent with generally accepted accounting principles (“GAAP”). +These included transactions for which there was not persuasive evidence of an arrangement and an +acquisition in which SNCR recognized revenue on a license agreement instead of combining the +amount of that license agreement with the acquisition purchase price. + + As the then-General Counsel (“GC”) at SNCR, Prague was involved, along with others, in +misleading auditors regarding two transactions and was a cause of SNCR’s violations of certain +reporting provisions. As a result, Prague violated Rule 13b2-2(a) of the Exchange Act and was a +cause of SNCR’s violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b- +20, 13a-1, 13a-11, and 13a-13 thereunder. + + + +2 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +3 + +Respondent + +1. Prague, age 59, resides in Livingston, New Jersey. After graduating from law +school in 1988, Prague worked in private practice for a number of years and also was in-house +counsel at several public companies. Prague served as SNCR’s GC and Chief Legal Officer from +2006 until 2021. Prague is a licensed attorney in New York and has no disciplinary history. + +Other Relevant Entity + + 2. SNCR is a Delaware corporation based in New Jersey whose securities are +registered pursuant to Section 12(b) of the Exchange Act. Its securities are currently listed on +NASDAQ and have been since its initial public offering in June 2006, although SNCR’s common +stock was suspended from trading on NASDAQ from May 2018 to October 2018 because SNCR +had become delinquent in its required filings. + +Facts + +A. Transaction 1 +3. In Q3 2015, SNCR’s sales team unsuccessfully sought to finalize an agreement +for the sale of a license to Customer A, one of its largest telecommunications customers. Despite +that, it booked $4.35 million in revenue related to the transaction. + 4. In February 2016, senior Customer A personnel attended a meeting with a SNCR +salesperson at which the Customer A personnel conveyed it was unhappy with SNCR’s efforts to +go outside normal procurement channels. Customer A personnel further told the SNCR +salesperson that the email on which SNCR had relied in booking the $4.35 million of revenue for +Transaction 1 did not reflect a “commitment by [Customer A] to acquire the software,” and that +SNCR “certainly should not have booked revenue on the basis of an email exchange.” + 5. Senior personnel from Customer A then followed up the meeting with two letters in +February: one to SNCR’s COO that warned SNCR that Customer A needed a written agreement +to consider a deal complete, and another to SNCR sales personnel stating that Customer A had not +committed to purchase the software. + +6. Prague reviewed these letters and reviewed a response that did not dispute the above +assertions by Customer A. + +7. In June 2016, Customer A emailed certain sales personnel at SNCR that SNCR “was +not selected as a finalist” against products offered by its competitors. The email was forwarded +later that day to Prague and other executives at SNCR. + +4 + +8. SNCR nonetheless improperly continued to include this revenue as an unbilled +receivable – i.e., revenue that was not billed to the customer – from Customer A in its Forms 10-Q +for Q1 through Q3 2016 as well as Forms 8-K. + +9. In July 2016, Prague attended a meeting of SNCR’s audit committee as SNCR’s +Secretary. At the meeting, SNCR’s CFO explained to the audit committee and the auditor that +SNCR was having issues with certain unbilled receivables related to Transaction 1 due to +“management changes” at Customer A. Neither the CFO nor Prague shared with the auditor the +fact or substance of the February and June communications from Customer A. These +communications were contrary to representations made by the CFO to the auditor that, in +accordance with GAAP, the receivable was collectible, which was material to the accuracy of +SNCR’s financial statements. The auditor would have found these communications important in +evaluating whether the receivable was collectible. + + 10. As SNCR’s Secretary, Prague memorialized and signed the minutes of the meeting, +which, as he knew or should have known, would be and were provided to the auditor in connection +with its quarterly reviews and audits. + +B. Acquisition + 11. ASC 805-10-25-20 provides that if a separate transaction is entered into +concurrently with an acquisition of a business, it should be accounted for in accordance with the +relevant GAAP for that type of transaction. In determining whether it is a separate transaction, ASC +805-10-55-18 states that a company should consider certain factors including the reason for the +transaction, who initiated the transaction, and the timing of the transaction. If the transaction is not +a separate transaction, GAAP requires that the transaction be considered as part of the consideration +for the acquisition, rather than accounted for separately. + +12. In March 2016, SNCR entered into an agreement to acquire a certain business from +a private equity firm (the “Acquisition”). On the same day, SNCR entered into a transaction to sell +a license for $10 million to both the business unit it was acquiring, as well as an affiliate of the +business unit still owned by the private equity firm. The license sale was purportedly to settle +claims that the business was infringing on certain SNCR patents. SNCR had not asserted any +infringement claims to the business or the private equity firm until after SNCR had contacted the +private equity firm and began negotiating the Acquisition. + +13. SNCR included this $10 million fee as revenue in its Form 10-Q for Q1 2016 and in +its Form 10-K for FY 2016 as well as Forms 8-K. + +14. As Prague knew or should have known from his role in the transaction, the +Acquisition and license were negotiated together, and the Acquisition was contingent upon the sale +of the license. + +15. In addition, as Prague knew or should have known from his role in the transaction, +SNCR did not identify potential patent infringement claims against the acquisition target until after +5 + +negotiations for the acquisition had begun. Under GAAP, these facts would have been material to +the proper accounting treatment of the $10 million license fee under GAAP, and required SNCR to +treat the $10 million license fee not as revenue, but rather as an adjustment to the purchase price of +the acquisition. + +16. Prague nevertheless made representations to the auditor regarding these foregoing +facts that were misleading because they created the false impression that the license and acquisition +were separate transactions for purposes of accounting under GAAP. + +VIOLATIONS + +17. As a result of the conduct described above, Prague violated Rule 13b2-2(a) of the +Exchange Act which prohibits an officer or director of an issuer from, directly or indirectly, making +or causing to be made a materially false or misleading statement, or omitting to state, or causing +another person to omit to state, any material fact necessary in order to make statements made, in +light of the circumstances under which such statements were made, not misleading to an accountant +in connection with (1) any audit or examination of the financial statements of the issuer required to +be made or (2) the preparation or filing of any document or report required to be filed with the +Commission. + +18. As a result of the conduct described above, Prague was a cause of SNCR’s +violation of Sections 13(a) and 13(b)(2)(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 accurate information, documents, and +annual and quarterly and current reports as the Commission may require, mandate that periodic +reports contain such further material information as may be necessary to make the required +statements not misleading, and require issuers to make and keep books, records, and accounts +that accurately and fairly reflect the transactions and dispositions of the assets of the issuer. + +IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent’s Offer. + +Accordingly it is hereby ORDERED effective immediately that: + + Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of +the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13b2-2 thereunder. + + Respondent, within 30 days of entry of this Order, pay a civil money penalty in the +amount of $25,000 to the Securities and Exchange Commission. If timely payment is not made, +additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: +6 + + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission and hand-delivered +or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Ronald Prague as Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Lara S. Mehraban, Division of +Enforcement, Securities and Exchange Commission, New York Regional Office, 100 Pearl Street, +Suite 20-100, New York, New York 10004. + + Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for any penalties referenced in paragraph IV(B) above. The Fair Fund may be +added to or combined with any other fair fund created in a related district court action or +administrative proceeding arising out of the same violations. The Fair Fund will be distributed to +harmed investors 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 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. + +7 + + Pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of Practice, effective +immediately, Prague is suspended from appearing or practicing before the Commission as an +attorney for 18 months from the date of the Order. + + After 18 months from the date of the Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the attention of +the Office of the General Counsel. + +F. In support of any application for reinstatement to appear and practice before the +Commission as an attorney, Respondent shall provide a certificate of good standing from each state +bar where Respondent is a member. + +G. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings including any orders in this +proceeding or any related Commission proceedings, including any orders +requiring payment of disgorgement or penalties; + +2. That Respondent is not currently suspended or disbarred as an attorney by a +court of the United States (or any agency of the United States) or the bar or +court of any state, territory, district, commonwealth, or possession; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a +basis for a forthwith suspension from appearing or practicing before the +Commission pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +a. has not been charged with a felony or a misdemeanor involving +moral turpitude as set forth in Rule 102(e)(2) of the Commission’s +Rules of Practice, except for any charge concerning the conduct that +was the basis for the Order; + +b. has not been found by the Commission or a court of the United +States to have committed a violation of the federal securities laws, +and has not been enjoined from violating the federal securities laws, +except for any finding or injunction concerning the conduct that was +the basis for the Order; + +8 + +c. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge +concerning the conduct that was the basis for the Order; + +d. has not been found by a court of the United States (or any agency of +the United States) or any state, territory, district, commonwealth, or +possession, or any bar thereof to have committed an offense (civil or +criminal) involving moral turpitude, except for any finding +concerning the conduct that was the basis for the Order; + +e. has not been charged by the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, civilly or criminally, with having committed an act of +moral turpitude, except for any charge concerning the conduct that +was the basis for the Order; and + +f. has not been subject to disciplinary action by a bar, court or agency +of any state for violations of applicable rules of professional +conduct, except for any charge concerning the conduct that was the +basis for the Order; + +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement or any criminal law +enforcement investigation. + +6. That Respondent is not the subject of any complaints to, or investigations +by, the bar or court of any state, territory, district, commonwealth, or +possession, except to the extent that such complaints concern the conduct +that was the basis for the Order; + +7. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by the bar or court of any state, territory, district, commonwealth, or +possession, or other regulatory body; and + +8. That Respondent undertakes to notify the Office of General Counsel +immediately in writing if any information submitted in support of the +application for reinstatement becomes materially false or misleading or +otherwise changes in any material way while the application is pending. + +H. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + +9 + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Respondent reported for +such work; + +2. The circumstances under which Respondent’s membership in a state bar or any +court for which Respondent was a member has lapsed or otherwise is no longer +active and an explanation of why for each; and + +3. Respondent’s plans for any future appearance or practice before the +Commission. + +I. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +J. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under Paragraph I, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +K. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph I, the burden shall be on the Respondent to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + +L. If the Commission declines to reinstate Respondent pursuant to Paragraphs J and K, +it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an attorney. + + + + + + + + +10 + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by +Respondent, 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/2022/AAER-4310.txt b/raw/aaer/2022/AAER-4310.txt new file mode 100644 index 0000000000000000000000000000000000000000..32f400404b0d69464d6b093f74f3ddf526e19c3a --- /dev/null +++ b/raw/aaer/2022/AAER-4310.txt @@ -0,0 +1,1250 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95067 / June 8, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4310 / June 8, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20892 + + + +In the Matter of + +STEPHEN M. WYSS, CPA, +STEPHEN H. JACKSON, CPA, +and +ROBERT G. HILBERT, CPA, + + +Respondents. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE 102(e) +OF THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections +4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of + +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 +the Commission’s Rules of Practice2 against Respondents Stephen M. Wyss, CPA (“Wyss”), +Stephen H. Jackson, CPA (“Jackson”) and Robert G. Hilbert, CPA (“Hilbert”) (collectively, +“Respondents”). +II. + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over them and the subject matter of +these proceedings, which are admitted, and except as provided herein in Section V, Respondents +consent to the entry of this Order Instituting Public Administrative and Cease-and-Desist +Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions and a Cease-and-Desist Order (the “Order”), as set forth below. +III. + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: +A. SUMMARY + + This matter involves improper professional conduct by three CohnReznick LLP +(“CohnReznick”) partners, in connection with the firm’s interim reviews and audits of the financial +statements of Sequential Brands Group, Inc. (“Sequential”) – in particular, the goodwill impairment +testing performed by the company in 2016 and 2017. Deficiencies in CohnReznick’s system of +quality controls, together with improper professional conduct by engagement partner Stephen M. +Wyss (“Wyss”), engagement quality review (“EQR”) partner Stephen H. Jackson (“Jackson”), and +Managing Partner of Assurance and National Director of Accounting, Robert G. Hilbert (“Hilbert”) +led to auditing and interim review failures. During the course of the Sequential engagement, Wyss, +Jackson, and Hilbert violated numerous professional standards, which were a cause of Sequential’s +filing of materially misstated financial statements with the Commission. + + As the engagement partner, Wyss was primarily responsible for the performance of the +audits and the interim reviews of Sequential’s financial statements, including its goodwill + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have engaged in unethical +or improper professional conduct. + +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 +impairment testing, in accordance with PCAOB standards. On multiple occasions, he accepted +management’s assertions that goodwill was not impaired, despite the presence of strong indicators +that goodwill was at least likely impaired and that additional impairment testing by Sequential was +required under Generally Accepted Accounting Principles (“GAAP”), as well as additional +procedures by the engagement team. At year-end 2016, Wyss understood that, if management +conducted a goodwill impairment test in a similar manner to the company’s most recent annual +impairment test, and consistent with its current policy, the testing would indicate that Sequential’s +goodwill was likely impaired. Yet, despite management’s omission of that fact from its impairment +assessment, Wyss nevertheless accepted management’s conclusion that goodwill was not impaired +at year-end. He similarly accepted management’s conclusion that goodwill was not impaired in the +first two quarters of 2017, despite multiple contrary indicators. + + In the third quarter of 2017, Sequential conducted goodwill impairment testing in response +to indicators of impairment and concluded that goodwill was not impaired based on a valuation +analysis that relied heavily on assertions posited by Sequential’s management regarding the +market’s mispricing of Sequential’s stock that were not supported by relevant and reliable audit +evidence. During CohnReznick’s interim review process, the internal valuation specialists, the +assigned engagement quality control review (“EQCR”) partner from CohnReznick’s national +office, and its National Director of SEC Services expressed concerns that Sequential’s fair value +estimates were not adequately supported by the evidence. As a result, CohnReznick paused its +interim review process. Confronted with these disagreements and concerns of insufficient evidence +to support Sequential’s assertions, Wyss, with the concurrence of Jackson and Hilbert, nonetheless +ultimately accepted Sequential’s conclusion that goodwill was not impaired without obtaining +sufficient relevant and reliable evidence in support of management’s assertions or performing +sufficient additional contemporaneous procedures. + + After Sequential issued its third quarter 2017 Form 10-Q, Wyss, Jackson, and Hilbert +documented the engagement team’s third quarter conclusions in the work papers for the third +quarter interim review and as part of the annual audit but failed to recognize the deficiencies of the +engagement team’s analysis and the continuing lack of evidential matter in support of Sequential’s +conclusions. Moreover, Wyss, Jackson, and Hilbert failed to adequately consider and address +concerns raised by the EQCR partner, the National Director of SEC Services, and the firm’s internal +valuation specialists. + + As a result of their failure to appropriately consider the indicators of impairment and +conduct appropriate additional audit procedures, Wyss, Jackson, and Hilbert caused CohnReznick, +in violation of the Exchange Act, to inaccurately state in its audit report accompanying Sequential’s +2017 Form 10-K, filed with the Commission on March 16, 2018, that it had conducted the audit in +accordance with Public Company Accounting Oversight Board (“PCAOB”) standards. Moreover, +their failures were a cause of Sequential’s violations of the reporting and books and records +provisions of the Exchange Act. + + +4 + +B. RESPONDENTS + +1. Stephen M. Wyss (“Wyss”), age 50, is a Certified Public Accountant (“CPA”), +licensed to practice in New York. Wyss served as the CohnReznick engagement partner on the +2016 and 2017 audits of Sequential and the interim reviews between the audits. + +2. Stephen H. Jackson (“Jackson”), age 58, is a CPA licensed to practice in +Connecticut. Jackson served as the CohnReznick engagement quality review partner for the third +quarter 2017 review and 2017 annual audit of Sequential. + +3. Robert G. Hilbert (“Hilbert”), age 53, is a CPA licensed to practice in New York +and Texas. Hilbert served as CohnReznick’s Managing Partner of Assurance and National +Director of Accounting during the third quarter 2017 review and 2017 annual audit of Sequential. +He also served as the liaison between CohnReznick’s auditors and its internal group of valuation +specialists. + +C. RELEVANT ENTITIES + +4. Sequential Brands Group, Inc. is a Delaware corporation headquartered in New +York, New York. Sequential owns a portfolio of consumer brands and promotes, markets, and +licenses those brands through retailers, wholesalers and distributors in the United States and +abroad. Sequential’s common stock was registered with the Commission under Section 12(b) of +the Exchange Act and traded on the Nasdaq Capital Market under the ticker symbol “SQBG” at all +times during the relevant period. On August 31, 2021 Sequential filed for Chapter 11 bankruptcy +relief and on September 27, 2021, the Nasdaq Stock Market LLC delisted Sequential for failing to +meet listing requirements.4 + +5. CohnReznick LLP, a New Jersey limited liability partnership, is a public +accounting firm in the United States with over 3,000 employees in 25 cities and offers services in +three segments – accounting, tax and advisory. CohnReznick registered with the PCAOB in + +4 To settle the Commission’s litigation against Sequential alleging failure to timely impair goodwill, +Sequential agreed to the entry of a final judgment permanently enjoining it from future violations of the +antifraud provision of Section 17(a)(3) of the Securities Act of 1933 and certain reporting, books and +records, and internal control provisions under the Securities Exchange Act of 1934. The U.S. District Court +for the Southern District of New York entered the final judgment against Sequential on December 1, 2021. +See Accounting and Auditing Enforcement Release No. 4277, dated December 15, 2021. + + + +5 +October 2003. CohnReznick became the independent auditor for Sequential in 2013 and issued +reports on Sequential’s financial statements through the year-end 2020 financial statement audit. + +D. FACTS + +COHNREZNICK’S AUDIT OF SEQUENTIAL’S +2016 GOODWILL IMPAIRMENT TESTING + +The Engagement Team Identified Goodwill Impairment as an Area of Significant Risk + +6. In planning the 2016 audit of Sequential, the engagement team identified goodwill +impairment testing as an area of significant risk. Sequential’s goodwill constituted over 20% of the +company’s assets, and the likelihood of its impairment increased as the company’s stock price, and +therefore its market capitalization, declined. + +7. Wyss understood that Sequential had disclosed its goodwill impairment testing +policy in its quarterly reports filed earlier in 2016 on Form 10-Q, which relied exclusively on the +company’s market capitalization, as adjusted by a control premium, to estimate the company’s fair +value (the “Market Approach”), and that the disclosed policy had not changed during 2016. In +fact, Sequential utilized this methodology to perform its 2016 annual goodwill impairment test as +of October 1, 2016. + +8. As Sequential’s stock price continued to decline after its October 1st annual +impairment test, it was increasingly likely that a goodwill impairment test performed using the +Market Approach would indicate impairment. Further, additional facts and circumstances arose +relevant to Sequential’s 2016 interim goodwill testing that increased the likelihood of impairment +at year-end, including the declining performance of its key consumer brands and downward +revisions to the company’s earnings guidance. + +9. In light of these facts and circumstances, PCAOB standards required that Wyss +develop substantive audit procedures and an appropriate audit plan to address this risk of material +misstatement, including procedures reasonably designed to obtain sufficient audit evidence and +assess whether more persuasive audit evidence was needed. Wyss failed to do so. + +Wyss Failed to Audit Sequential’s 2016 Goodwill Assessment in Accordance with +Professional Standards + +10. Wyss received Sequential’s year-end 2016 goodwill impairment memo (“Goodwill +Memorandum”) as part of CohnReznick’s audit work. The Goodwill Memorandum described the +company’s methodology and basis for its conclusion that there was no goodwill impairment as of +its annual testing date, October 1, 2016. The Goodwill Memorandum also evaluated whether +events had occurred or circumstances had arisen during the fourth quarter of 2016 that indicated + + +6 +that it was more likely than not that a goodwill impairment existed at the company’s year-end +financial reporting date, December 31, 2016. + +11. Sequential’s conclusion that its goodwill was not impaired as of October 1 was +supported by a valuation report, prepared by its third party valuation specialist, utilizing the Market +Approach. Between October 1 and year-end, Sequential’s stock price declined from $8.00 per +share to $4.68 per share. Based on the significant decline in the company’s stock price, Wyss +understood that the company’s estimated fair value at year-end, based on the Market Approach, +was well below the company’s carrying value. + +12. Wyss therefore should have known that, if Sequential were to perform a +quantitative goodwill impairment test as of year-end using the Market Approach, that calculation +would have indicated that goodwill was at least likely impaired. This and other negative trends in +the company’s sales and performance were events and circumstances indicating that goodwill was +at least likely impaired and therefore a further quantitative goodwill impairment test was required +by GAAP. + +13. The Goodwill Memorandum reflected that Sequential had identified the decline in +the company’s stock price as a triggering event. However, the company’s Goodwill Memorandum +omitted any consideration of the Market Approach in reaching its conclusion as to year-end. It +also did not adequately address other indicia of likely impairment in reaching its conclusion that +the company’s goodwill was not impaired as of year-end. In relying on the Goodwill +Memorandum as a primary basis for his conclusion, Wyss failed to consider other relevant and +objective evidence indicating impairment of goodwill Nevertheless, Wyss approved +CohnReznick’s issuance of its audit report regarding Sequential’s 2016 financial statements. + +WYSS’S DEFICIENT REVIEWS OF SEQUENTIAL’S Q1 AND Q2 2017 +INTERIM GOODWILL IMPAIRMENT ASSESSMENTS + +14. During the first two quarters of 2017, Sequential experienced additional adverse +changes concerning the company’s business that Wyss should have recognized as indicators of +goodwill impairment. Among those developments, Sequential’s board of directors fired the +company’s chief executive officer, the company continued to revise its earnings guidance +downward, and Sequential’s stock price continued its decline. + +15. Despite the presence of these impairment indicators, Sequential failed to document +that it considered them or any other negative or positive indicators in its interim assessments of +whether goodwill was likely impaired. Through CohnReznick’s first and second quarter interim +reviews, Wyss should have known that Sequential had not documented its consideration of these +impairment indicators. + +16. Given these facts and circumstances, together with the information from +Sequential’s year-end 2016 impairment analysis, Sequential’s interim goodwill assessments should + + +7 +have concluded that goodwill was at least likely impaired and therefore further testing was +required. However, Wyss again accepted management’s assertions that goodwill was likely not +impaired without obtaining sufficient and relevant evidence to support management’s assertions. + +COHNREZNICK’S THIRD QUARTER REVIEW AND AUDIT OF SEQUENTIAL’S +2017 GOODWILL IMPAIRMENT TESTING + +Wyss and Jackson Identified Goodwill Impairment as an Area of Significant Risk + +17. Throughout the audit planning process in 2017, the engagement team identified +goodwill impairment testing to be an area of significant risk, as it had done in the previous year’s +audit. Sequential’s goodwill still constituted over 20% of the company’s assets and the likelihood +of its impairment increased as the company’s stock price, and therefore its market capitalization, +continued its decline in 2017. + +In the Third Quarter of 2017, Wyss and Jackson Reviewed Sequential’s Interim +Goodwill Impairment Test and Conclusion that Goodwill Was Not Impaired + +18. Following the identification of impairment indicators arising from the impairment +of five of its brands in the third quarter, Sequential determined that an interim quantitative +impairment test of goodwill was necessary as of the end of the third quarter. It accelerated by one +day the company’s annual impairment test scheduled for first day of the fourth quarter, from +October 1st to September 30th. Based on the then current stock price and the number of shares +outstanding, Wyss and Jackson understood that the Market Approach would indicate that +Sequential’s goodwill was impaired. + +19. Approximately a week before Sequential was required to file its third quarter Form +10-Q, and before the company had released its earnings, Wyss received a draft valuation report +from Sequential. That report, which had been prepared by Sequential’s third party valuation +specialist, based on information and guidance provided by Sequential, departed from the +company’s previously disclosed Market Approach to goodwill impairment testing and instead +incorporated two different valuation methodologies: the income approach using a discounted cash +flow (“DCF”) model and the Market Approach. Specifically, this report relied on a weighted +average between the fair values obtained by the Market Approach (approximately $245 million) +and the DCF (approximately $650 million), which it compared to Sequential’s carrying value of +approximately $444 million, and concluded that the company’s goodwill was not impaired. + +20. To explain the wide discrepancy in the fair value estimates, Sequential’s report +cited three assertions by Sequential’s management, which in management’s view, supported the +conclusion that public markets had mispriced Sequential’s stock: (1) the company’s stock price +was low because Sequential was unfairly grouped with other out-of-favor companies in the retail +industry with business models incomparable to Sequential; (2) the market was undervaluing the tax +amortization benefit of its brands, which it believed would become significant in future periods + + +8 +when the company was more profitable; and (3) the company’s high leverage ratio created a +“perception overhang.” + +CohnReznick’s Internal Valuation Specialist Raised Concerns with Wyss, Jackson +and Hilbert Concerning Sequential’s Goodwill Impairment Testing Methodology + +21. Upon receiving Sequential’s goodwill impairment analysis from the engagement +team, CohnReznick’s assigned internal valuation specialist assessed the report and identified +several concerns suggesting that the company might fail the impairment test. He furnished his +written comments to Wyss and Hilbert, and a second valuation specialist at the firm. Wyss shared +the report with Jackson later the same day. + +22. In his comments, the internal valuation specialist observed that “[w]hile the DCF +implies that impairment is not present, the trading price approach implies impairment” and that +“[t]he difference in estimated values is significant and implies that one or both require adjustment.” +He also added, after applying additional potential valuation methods to the analysis, which he +included in his written comments, “the implication from the sensitivities is that the Step 1 test may +fail.” + +23. The next day, a second CohnReznick valuation specialist sent an email to Wyss, +Hilbert and others noting “troubling facts” in Sequential’s impairment analysis, including that +Sequential’s market capitalization was equal to 50% of book value and that there was a “large +disparity in equity value conclusions between the DCF and the Market…2.68x…??? too big of a +difference.” + +In Response to CohnReznick’s Comments, Sequential Prepared a Quantitative +Reconciliation That Relied Heavily on Management Assertions that Sequential Was +Undervalued by the Market + +24. Wyss, Jackson, and Hilbert did not believe that the wide disparity in estimated +values obtained from the Market Approach and the DCF supported a finding that the DCF-based +valuation was inaccurate. Rather, Wyss, Jackson, and Hilbert concluded that the company could +rely on the DCF-based valuation estimate if (i) Sequential management believed the DCF valuation +represented the best estimate of the company’s fair value, and (ii) it supplemented its valuation +report with a quantitative reconciliation to the Market Approach. In a follow-up conference call +attended by Sequential’s management and these partners, among others, CohnReznick +communicated these conclusions to Sequential’s management and its third party valuation +specialist. In response, Sequential’s third party valuation specialist, working at the direction of +Sequential’s management, prepared a revised valuation analysis quantifying the reconciling +factors. + +25. The revised report, which Sequential forwarded to CohnReznick hours after the +conference call, exclusively utilized the DCF valuation to estimate fair value and incorporated a + + +9 +quantitative reconciliation to Sequential’s estimated fair value under the Market Approach. This +reconciliation analysis relied heavily on two assertions of the company’s management: (1) that the +stock market failed to properly incorporate the potential tax amortization value of the company’s +intangible indefinite-lived assets (primarily, its brands) to an acquirer; and (2) that the stock market +was not correctly pricing Sequential’s stock in relation to the company’s revenues because of +misperceptions of the company’s industry. These management assertions were not supported by +sufficient objective evidence or analysis to justify management’s view that the market was +undervaluing the company. + +CohnReznick’s Valuation Specialist Raised Concerns Regarding the Reasonableness +of Sequential’s Fair Value Assessment + +26. CohnReznick’s internal valuation specialist reviewed the revised report and raised +concerns about whether there was sufficient evidentiary support for management’s assertions. +Specifically, he did not believe the evidential matter provided by management supported the +magnitude of the quantitative reconciliation between the results of the DCF model and Market +Approach valuation. He communicated his concerns and conclusion to the engagement team and +Hilbert, including his unwillingness to opine as to the reasonableness of the fair value analysis. + +27. Wyss and Hilbert did not agree with the valuation specialist’s concerns regarding +the magnitude of the reconciliation. Instead, they viewed the reconciliation between the estimated +fair values obtained by the DCF and the Market Approach as an accounting consideration and +outside the scope of the specialist’s expertise, despite his extensive experience in assessing fair +value assessments similar to Sequential’s impairment testing in prior engagements. They also +determined that the internal valuation specialist’s concern with inadequate evidence in support of +the wide gap between the values yielded by the DCF model and the Market Approach was not a +valuation issue appropriate for his consideration. Rather, they believed that the sufficiency of the +evidence on the issue was solely an auditing issue for the engagement team’s consideration. + +28. Contrary to the typical practice at CohnReznick, wherein the internal valuation +specialist would opine as to the reasonableness of an audit client’s overall fair value measurement. +in this case the engagement team, including Wyss and Jackson, assumed responsibility for +assessing the reasonableness of the determination, as a result of the specialist’s unwillingness to do +so and based on Wyss, Jackson, and Hilbert’s conclusion that the sufficiency of evidential matter +to support the reconciliation between two fair value estimates presented an audit (rather than a +valuation) question. + + + +10 +Sequential Issued Its Earnings Release, Even Though CohnReznick’s National Office +Quality Control Review Remained Incomplete, in Reliance on Wyss’s Assurances +That Changes to the Financial Statements Were Unlikely + +29. As part of CohnReznick’s documented quality control system, an EQCR review, in +addition to the EQR review, was to be performed for each public company audit. 5 The firm’s +national office assigned a partner or director from its Quality Control group to serve as the EQCR +reviewer. In addition to being a required sign-off for all public company reviews and audits, under +CohnReznick’s procedures, the EQCR was also required to be involved in the evaluation of +significant engagement team judgments and the evaluation of engagement documentation related +to areas deemed significant. + +30. Despite the requirement that the EQCR be involved in the evaluation of significant +engagement team judgments, the Sequential engagement team did not include the assigned EQCR +partner in their initial consultations with Hilbert on Sequential’s goodwill impairment analysis. +Moreover, without notifying the EQCR, Wyss informed Sequential’s management, as management +was finalizing the company’s third quarter earnings release, that additional changes to the financial +statements in the Form 10-Q were unlikely. As a result, the EQCR was unable to complete his +review or provide input to the engagement team regarding Sequential’s goodwill impairment +testing prior to the issuance of Sequential’s earnings release + +31. Sequential’s third quarter earnings release was furnished as an exhibit to the +company’s Form 8-K and did not incorporate an impairment to goodwill. The EQCR promptly +questioned Wyss, Jackson, and Hilbert as to how the goodwill issue had been resolved without his +involvement and also alerted CohnReznick’s Chief Risk Officer and its National Director of SEC +Services. + +After the Publication of the Third Quarter Earnings Release, But Before the Filing of +the Quarterly Report on Form 10-Q, Disagreements Among the Engagement Team +and Members of the National Office Arose Within CohnReznick + +32. After evaluating Sequential’s third party fair valuation analysis, the EQCR partner +and the National Director of SEC Services (with whom the EQCR partner had shared Sequential’s +analysis) reached a mutual view that, based on the information they were provided, there was +insufficient evidence to support Sequential management’s assertions that the market was +undervaluing Sequential, and without more, the company needed to record goodwill impairment. + +33. The EQCR partner and the National Director of SEC Services communicated their +views to Wyss, Jackson, and Hilbert, as well as members of the firm’s senior management. + +5 CohnReznick’s procedures and system of quality control required quality reviews conducted by national +office directors or partners for certain engagements. These EQCR reviews were distinct from EQR +reviews, which are required by PCAOB audit standards. + + + +11 +Among other concerns, they expressed the view that the engagement team was not exercising +appropriate professional skepticism with regard to Sequential’s goodwill impairment testing. + +34. Although CohnReznick had previously notified Sequential that changes to the +financial statements were unlikely, due to the internal disagreement at CohnReznick, Wyss notified +Sequential that it had not completed its interim review of the financial statements, which prevented +Sequential from filing its Form 10-Q. In light of the fact that Sequential had already issued its +earnings release, Sequential’s management urged CohnReznick to resolve its concerns as soon as +possible, requesting “minute by minute” status updates and stating in an email to the engagement +partner: “[t]here is no choice but to resolve tonight." + +CohnReznick Resolved the Disagreement in Favor of the Engagement Team Without +Performing Sufficient Audit Procedures + +35. To resolve the disagreement, CohnReznick convened multiple meetings among the +disagreeing staff to review the information provided, as well as an external conference call +between Sequential management, Wyss, Hilbert, Jackson, and the dissenting CohnReznick +partners. None of these calls assisted in resolving the disagreement, as the EQCR partner and +National Director of SEC Services continued to assert that the engagement team had not gathered +sufficient evidence to support Sequential management’s assertions regarding the reconciling +factors and the conclusions of Wyss and Jackson. + +36. Notwithstanding the insufficient evidence supporting the conclusions of Wyss, +Jackson, and Hilbert and the unresolved disagreement, CohnReznick’s senior management +decided, after internal discussion but without directing the engagement team to obtain or review +further evidence or perform additional procedures, that the engagement team could authorize +Sequential to file its quarterly report on Form 10-Q. CohnReznick further determined that, in the +event that the pending disagreement over the reasonableness of Sequential’s goodwill impairment +test could not be resolved with the dissenting partners, the disagreement should be documented in +the work papers, consistent with PCAOB standards. Accordingly, Wyss told Sequential it had +completed its interim review and that the company could file its Form 10-Q. + +Wyss Prepared, and Jackson and Hilbert Concurred with, an Inaccurate +Consultation Memorandum, Which Purported to Document the Engagement Team’s +Analysis, Months After the Third Quarter Interim Review was Complete + +37. In January 2018, months after the third quarter interim review was completed, the +engagement team supplemented the third quarter review file with a work paper entitled “Analysis +of Goodwill and Intangibles – CohnReznick memo.” This work paper purported to describe +Sequential’s goodwill impairment analyses and conclusions throughout 2017, as well the +engagement team’s views of those analyses, and its own internal analyses, to conclude that +management’s goodwill impairment conclusion for the third quarter of 2017 was reasonable. It + + +12 +also purported to memorialize a consultation with Hilbert and reflected his concurrence, as well as +the concurrence of the Jackson. + +38. This work paper, while purportedly describing the engagement team’s analysis and +conclusions prior to the filing of the third quarter Form 10-Q, incorporated new data and +justifications for the engagement team’s impairment conclusions, which were not previously +documented prior to the filing of the Form 10-Q. This memo did not include sufficient and +accurate information to enable an experienced auditor to understand the timing, extent, and results +of the procedures performed and the evidence obtained. + +Jackson Failed In His Role as EQR + +39. Jackson was obligated by professional standards to affirmatively evaluate the +significant judgments and related conclusions of the engagement team. However, despite the +vigorous disagreements that arose between the viewpoint of Wyss and Hilbert, on the one hand, +and the viewpoint of the EQCR partner, the internal valuation specialists, and the National Director +of SEC Services, on the other hand, Jackson failed to reasonably evaluate whether appropriate +consultations had taken place on difficult and contentious matters. + +40. Although present, and aware of the concerns and indicators of impairment, Jackson +did not adequately participate in key discussions at important meetings and decision points. +Although Sequential’s goodwill accounting issue for the third quarter of 2017 generated emails +raising substantive questions about the accounting, as well as a series of meetings in which there +were ongoing concerns on the part of the EQCR partner and the National Director of SEC +Services, Jackson failed to reasonably evaluate the engagement team’s assessment of the +company’s annual goodwill impairment test, which the engagement team had identified as an area +of significant risk. In so doing Jackson failed to exercise due professional care, including +appropriate professional skepticism. + +E. VIOLATIONS + +RULE 102(e) AND SECTION 4C OF THE EXCHANGE ACT + +41. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) provide, in part, that the +Commission may censure or deny, temporarily or permanently, the privilege of appearing or +practicing before the Commission to any person who is found by the Commission to have engaged +in improper professional conduct. 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. Rule 102(e)(1)(iv)(B). As a result of the conduct described above, Wyss, + + +13 +Jackson and Hilbert engaged in “improper professional conduct” within the meaning of Exchange +Act Section 4C(a)(2) and Rule 102(e)(1)(ii). + +42. As set forth above, Wyss, Jackson, and Hilbert should have known, that +Sequential’s goodwill was fully impaired by the 2017 third quarter and that Sequential’s financial +statements were, as a result, materially misstated and not presented in accordance with Generally +Accepted Accounting Principles (“GAAP”). Wyss, Jackson, and Hilbert also should have known +there was not relevant and reliable audit evidence to support Sequential’s accounting conclusion +and in particular the underlying assertions of management. Additionally, in the course of its 2017 +year end audit of Sequential, Wyss, Jackson, and Hilbert should have known that Sequential’s +impairment charge should have been recorded as a third quarter event and that Sequential’s third +quarter financial statements therefore materially overstated the company’s assets and earnings. +Wyss, Jackson, and Hilbert’s unreasonable conduct violated their obligation to adhere to +professional auditing standards. + +Due Professional Care in the Performance of +Work (AS § 1015) + +43. AS § 1015 provides that auditors are to exercise due professional care in the +planning and performance of audits and the preparation of audit reports. + +44. AS § 1015.07 provides that auditors must maintain an attitude of professional +skepticism, which includes “a questioning mind and a critical assessment of audit evidence.” In +addition, AS § 1015.08 states the auditor should “consider the competency and sufficiency of the +evidence. Since evidence is gathered and evaluated throughout the audit, professional skepticism +should be exercised throughout the audit process.” + +45. As a result of their conduct described above, Wyss, Jackson, and Hilbert failed to +exercise due professional care and an attitude of professional skepticism in the Sequential +engagement. + +Audit Risk (AS § 1101) + +46. AS § 1101 discusses the auditor's consideration of audit risk and provides that the +objective of the auditor is to conduct the audit of financial statements in a manner that reduces +audit risk to an appropriately low level. + +47. AS § 1101.03 requires the auditor to “plan and perform the audit to obtain +reasonable assurance about whether the financial statements are free of material misstatement due +to error or fraud.” It further requires the auditor to apply “due professional care, including +obtaining sufficient appropriate audit evidence.” + + + +14 +48. As a result of Wyss’s conduct described above, he failed to perform auditing steps +sufficient to reduce audit risk to an appropriate level in the Sequential engagement. + +Audit Evidence (AS § 1105) + +49. AS § 1105 establishes “requirements regarding designing and performing audit +procedures to obtain sufficient appropriate audit evidence.” It provides that audit evidence +“consists of both information that supports and corroborates management's assertions regarding the +financial statements or internal control over financial reporting and information that contradicts +such assertions.” + +50. AS § 1105.04 requires the auditor to “plan and perform audit procedures to obtain +sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion.” + +51. AS § 1105.08 provides that the “reliability of evidence depends on the nature and +source of the evidence and the circumstances under which it is obtained,” including consideration +of its source and the manner in which the evidence is obtained by the auditor. + +52. As a result of Wyss’s conduct described above, he failed to obtain sufficient audit +evidence to support his opinions in the Sequential engagement. + +Reviews of Interim Financial Information (AS § 4105) + +53. AS § 4105.01 “establish[es] standards and provide[s] guidance on the nature, +timing, and extent of the procedures to be performed by an independent accountant when +conducting a review of interim financial information…” + +54. Specifically, AS § 4105.22 requires an auditor to make additional inquiries or +perform additional procedures when the accountant becomes aware of information indicating that +the interim financials may not conform to GAAP. AS § 4105.28 requires that an auditor refrain +from completing a review and issuing a review report if it is unable to perform necessary review +procedures of the interim financial statements. + +55. As a result of Wyss’s conduct described above, he failed to comply with standards +applicable to a review of interim financial statements, specifically AS §§ 4105.22 and 4105.28, +including by failing to adequately address contradictory views expressed during the interim review +process. + + + +15 +The Auditor’s Responses to the Risks of Material Misstatement (AS § 2301) + +56. AS § 2301 requires that auditors implement appropriate responses to the risk of +material misstatements. + +57. Specifically, AS § 2301.42 provides “[t]he necessary extent of a substantive audit +procedure depend on the materiality of the account or disclosures, the assessed risk of material +misstatement, and the necessary degree of assurance from the procedure.” It goes on to explain +that “increasing the extent of an audit procedure cannot adequately address an assessed risk of +material misstatement unless the evidence to be obtained from the procedure is reliable and +relevant.” + +58. As a result of Wyss’s conduct described above, he failed to obtain reliable and +relevant audit evidence when appropriate and thereby violated this standard. + +Auditing Accounting Estimates (AS § 2501) + +59. AS § 2501 provides guidance to auditors“on obtaining and evaluating sufficient +appropriate evidential matter to support significant accounting estimates in an audit of financial +statements in accordance with the standards of the PCAOB.” + +60. AS § 2501.07 requires the auditor to obtain “sufficient appropriate evidential matter +to provide reasonable assurance that… [t]he accounting estimates are presented in conformity with +applicable accounting principles and are properly disclosed.” + +61. As a result of Wyss’s conduct described above, he failed to adequately evaluate the +reasonableness of management’s fair value estimates and thereby violated the foregoing standards. + +Evaluating Audit Results (AS § 2810) + +62. AS § 2810.03 requires that “[i]n forming an opinion on whether the financial +statements are presented fairly, in all material respects, in conformity with the applicable financial + + +16 +reporting framework, the auditor should take into account all relevant audit evidence, regardless of +whether it appears to corroborate or to contradict the assertions in the financial statements.” + +63. As a result of Wyss’s conduct described above, he failed to sufficiently evaluate the +audit results in the Sequential audit and thereby violated this standard. + +Audit Documentation (AS § 1215) + +64. AS § 1215.06 requires that an “auditor must document the procedures performed, +evidence obtained, and conclusions reached with respect to relevant financial statement +assertions. Audit documentation must clearly demonstrate that the work was in fact performed.” + +65. As a result of Wyss’s conduct described above, he failed to properly and timely +document the steps taken in reaching its audit conclusions and thereby violated this standard. + +Engagement Quality Review (AS § 1220) + +66. §§ AS 1220.17 and 1220.12 state the EQR “may provide concurring approval of +issuance” of review or audit “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.” + +67. AS § 1220.14 requires the EQR “evaluate the significant judgments made by the +engagement team and the related conclusions reached in forming the overall conclusion on the +engagement” in a review. + +68. AS § 1220.11 requires an EQR, in an audit, to “evaluate whether the engagement +documentation that he or she reviewed…indicates that the engagement team responded +appropriately to significant risks, and supports the conclusions reached by the engagement team +with respect to the matters reviewed.” + +69. As a result of Jackson’s conduct described above, he failed to act with due +professional care and improperly provided his concurrence on both the 2017 third quarter Form 10- +Q and 2017 annual report filed on Form 10-K, thereby violating this standard. + +WYSS, JACKSON AND HILBERT WERE A CAUSE OF COHNREZNICK’S +VIOLATION OF RULE 2-02(b)(1) OF REGULATION S-X +70. During the time period at issue herein, Rule 2-02(b)(1) of Regulation S-X required +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, + + +17 +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). + +71. Through their conduct described above, Wyss, Jackson and Hilbert caused +CohnReznick to violate Regulation S-X Rule 2-02(b)(1) when CohnReznick issued its audit report +dated March 16, 2018, stating that CohnReznick had conducted its audit of Sequential’s 2017 +financial statements in accordance with PCAOB standards when it had not. + + + + +18 + +WYSS, JACKSON, AND HILBERT WERE A CAUSE OF SEQUENTIAL’S +VIOLATIONS OF SECTIONS 13(a) AND 13(b)(2)(A) OF THE +EXCHANGE ACT AND RULES 12b-20, 13a-1, 13a-11 AND 13a-13 THEREUNDER + +72. Section 13(a) of the Exchange Act requires all issuers with securities registered +under Section 12 of the Exchange Act to file periodic and other reports with the Commission +containing such information as the Commission’s rules prescribe. Pursuant to Section 13(a), the +Commission promulgated Rules 13a-1, 13a-11, and 13a-13, which require issuers to file annual, +current, and quarterly reports, respectively. + +73. Section 13(b)(2)(A) of the Exchange Act requires all issuers with securities +registered under Section 12 to make and keep books, records and accounts which, in reasonable +detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. In +addition, Exchange Act Rule 12b-20 requires that reports contain 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. Scienter is not an element of these reporting provisions. + +74. In administrative proceedings, the Commission may impose sanctions upon any +person that is, was, or would be a cause of a violation, due to an act or omission the person knew or +should have known would contribute to such violation. In order to establish that a person caused a +non-scienter based violation, a showing of negligence will suffice. + +75. Sequential’s failure to record goodwill impairment in a timely manner rendered its +books, records and accounts materially inaccurate. Similarly, the financial statements that were +included in Sequential’s third quarter 2017 Form 10-Q, 2017 Form 10-K, and its third quarter +earnings release furnished on Form 8-K were materially misleading. The failures by Wyss, +Jackson, and Hilbert to abide by applicable PCAOB standards and perform appropriate audit and +review procedures were a cause of Sequential’s violations of Sections 13(a) and 13(b)(2)(A) of the +Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. + +F. FINDINGS + +76. Based on the foregoing, the Commission finds that Respondents engaged in +improper professional conduct pursuant to Sections 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii). + +77. Based on the foregoing, the Commission finds that Respondents caused +CohnReznick’s violations of Rule 2-02(b)(1) of Regulation S-X. + + + +19 +78. Based on the foregoing, the Commission finds that Respondents caused +Sequential’s violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, +13a-1, 13a-11 and 13a-13 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. Respondents Wyss, Jackson and Hilbert shall cease and desist from committing or +causing any violations and any future violations of Rule 2-02(b)(1) of Regulation S-X +and Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a- +11, and 13a-13 promulgated thereunder. + +B. Respondent Wyss is denied the privilege of appearing or practicing before the +Commission as an accountant. + +1. After three years from the date of the Order, Respondent Wyss may request +that the Commission consider his reinstatement by submitting an application +to the attention of the Office of the Chief Accountant. + +2. In support of any application for reinstatement to appear and practice before +the Commission as a preparer or reviewer, or a person responsible for the +preparation or review, of financial statements of a public company to be +filed with the Commission, other than as a member of an audit committee, +as that term is defined in Section 3(a)(58) of the Exchange Act, Respondent +Wyss shall submit a written statement attesting to an undertaking to have +Respondent Wyss’s work reviewed by the independent audit committee of +any public company for which Respondent Wyss works or in some other +manner acceptable to the Commission, as long as Respondent Wyss +practices before the Commission in this capacity and will comply with any +Commission or other requirements related to the appearance and practice +before the Commission as an accountant. + +3. In support of any application for reinstatement to appear and practice before +the Commission as a member of an audit committee, as that term is defined +in Section 3(a)(58) of the Exchange Act, as a preparer or reviewer, or as a +person responsible for the preparation or review, of any public company’s +financial statements that are filed with the Commission, Respondent Wyss +shall submit a statement prepared by the audit committee(s) with which +Respondent Wyss will be associated, including the following information: + + +20 + +a. A summary of the responsibilities and duties of the specific audit +committee(s) with which Respondent Wyss will be associated; + +b. A description of Respondent Wyss’s role on the specific audit +committee(s) with which Respondent Wyss will be associated; + +c. A description of any policies, procedures, or controls designed to +mitigate any potential risk to the Commission by such service; + +d. A description relating to the necessity of Respondent Wyss’s service on +the specific audit committee; and + +e. A statement noting whether Respondent Wyss will be able to act +unilaterally on behalf of the Audit Committee as a whole. + +4. In support of any application for reinstatement to appear and practice before +the Commission as an independent accountant (auditor) before the +Commission, Respondent Wyss must be associated with a public accounting +firm registered with the Public Company Accounting Oversight Board (the +“PCAOB”) and Respondent Wyss shall submit the following additional +information: + +a. A statement from the public accounting firm (the “Firm”) with which +Respondent Wyss is associated, stating that the firm is registered with +the PCAOB in accordance with the Sarbanes-Oxley Act of 2002; + +b. A statement from the Firm with which the Respondent Wyss is +associated that the Firm has been inspected by the PCAOB and that the +PCAOB did not identify any criticisms of or potential defects in the +Firm’s quality control system that would indicate that Respondent Wyss +will not receive appropriate supervision; and + +c. A statement from Respondent Wyss indicating that the PCAOB has +taken no disciplinary actions against Respondent Wyss since seven (7) +years prior to the date of the Order other than for the conduct that was +the basis for the Order. + +5. In support of any application for reinstatement, Respondent Wyss shall +provide documentation showing that Respondent Wyss is currently licensed +as a certified public accountant (“CPA”) and that Respondent Wyss has +resolved all other disciplinary issues with any applicable state boards of +accountancy. If Respondent Wyss is not currently licensed as a CPA, + + +21 +Respondent Wyss shall provide documentation showing that Respondent +Wyss’s licensure is dependent upon reinstatement by the Commission. + +6. In support of any application for reinstatement, Respondent Wyss shall also +submit a signed affidavit truthfully stating, under penalty of perjury: + +a. That Respondent Wyss has complied with the Commission suspension +Order, and with any related orders and undertakings, including any +orders in In the Matter of CohnReznick LLP, or any related Commission +proceedings, including any orders requiring payment of disgorgement or +penalties; + +b. That Respondent Wyss undertakes to notify the Commission +immediately in writing if any information submitted in support of the +application for reinstatement becomes materially false or misleading or +otherwise changes in any material way while the application is pending; + +c. That Respondent Wyss, since the entry of the Order, has not been +convicted of a felony or a misdemeanor involving moral turpitude that +would constitute a basis for a forthwith suspension from appearing or +practicing before the Commission pursuant to Rule 102(e)(2); + +d. That Respondent Wyss, since the entry of the Order: + +1) has not been charged with a felony or a misdemeanor involving +moral turpitude as set forth in Rule 102(e)(2) of the +Commission’s Rules of Practice, except for any charge +concerning the conduct that was the basis for the Order; + +2) has not been found by the Commission or a court of the United +States to have committed a violation of the federal securities +laws, and has not been enjoined from violating the federal +securities laws, except for any finding or injunction concerning +the conduct that was the basis for the Order; + +3) has not been charged by the Commission or the United States +with a violation of the federal securities laws, except for any +charge concerning the conduct that was the basis for the Order; + +4) has not been found by a court of the United States (or any +agency of the United States) or any state, territory, district, +commonwealth, or possession, or any bar thereof to have +committed an offense (civil or criminal) involving moral + + +22 +turpitude, except for any finding concerning the conduct that +was the basis for the Order; and + +5) has not been charged by the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, civilly or criminally, with having committed an act +of moral turpitude, except for any charge concerning the conduct +that was the basis for the Order. + +e. That Respondent Wyss’s conduct is not at issue in any pending +investigation of the Commission’s Division of Enforcement, the +PCAOB’s Division of Enforcement and Investigations, any criminal law +enforcement investigation, or any pending proceeding of a State Board +of Accountancy, except to the extent that such conduct concerns that +which was the basis for the Order. + +f. That Respondent Wyss has complied with any and all orders, +undertakings, or other remedial, disciplinary, or punitive sanctions +resulting from any action taken by any State Board of Accountancy, or +other regulatory body. + +7. Respondent Wyss shall also provide a detailed description of: + +a. Respondent Wyss’s professional history since the imposition of the +Order, including: + +1) all job titles, responsibilities and role at any employer; + +2) the identification and description of any work performed for +entities regulated by the Commission, and the persons to whom +Respondent Wyss reported for such work; and + +b. Respondent Wyss’s plans for any future appearance or practice before +the Commission. + +8. The Commission may conduct its own investigation to determine if the +foregoing attestations are accurate. + +9. If Respondent Wyss provides the documentation and attestations required in +this Order and the Commission (1) discovers no contrary information +therein, and (2) determines that Respondent Wyss truthfully and accurately +attested to each of the items required in Respondent Wyss’s affidavit, and +the Commission discovers no information, including under Paragraph B.8, + + +23 +indicating that Respondent Wyss has violated a federal securities law, rule +or regulation or rule of professional conduct applicable to Respondent Wyss +since entry of the Order (other than by conduct underlying Respondent +Wyss’s original Rule 102(e) suspension), then, unless the Commission +determines that reinstatement would not be in the public interest, the +Commission shall reinstate Respondent Wyss for cause shown. + +10. If Respondent Wyss is not able to provide the documentation and truthful +and accurate attestations required in this Order or if the Commission has +discovered contrary information, including under Paragraph B.8, the burden +shall be on the Respondent Wyss to provide an explanation as to the facts +and circumstances pertaining to the matter setting forth why Respondent +Wyss believes cause for reinstatement nonetheless exists and reinstatement +would not be contrary to the public interest. The Commission may then, in +its discretion, reinstate Respondent Wyss for cause shown. + +11. If the Commission declines to reinstate Respondent Wyss pursuant to +Paragraphs B.9 and B.10, it may, at Respondent Wyss’s request, hold a +hearing to determine whether cause has been shown to permit Respondent +Wyss to resume appearing and practicing before the Commission as an +accountant. + +C. Respondent Jackson is denied the privilege of appearing or practicing before the +Commission as an accountant. + +1. After one year from the date of the Order, Respondent Jackson may request +that the Commission consider his reinstatement by submitting an +application to the attention of the Office of the Chief Accountant. + +2. In support of any application for reinstatement to appear and practice before +the Commission as a preparer or reviewer, or a person responsible for the +preparation or review, of financial statements of a public company to be +filed with the Commission, other than as a member of an audit committee, +as that term is defined in Section 3(a)(58) of the Exchange Act, Respondent +Jackson shall submit a written statement attesting to an undertaking to have +Respondent Jackson’s work reviewed by the independent audit committee +of any public company for which Respondent Jackson works or in some +other manner acceptable to the Commission, as long as Respondent Jackson +practices before the Commission in this capacity and will comply with any +Commission or other requirements related to the appearance and practice +before the Commission as an accountant. + + + +24 +3. In support of any application for reinstatement to appear and practice before +the Commission as a member of an audit committee, as that term is defined +in Section 3(a)(58) of the Exchange Act, as a preparer or reviewer, or as a +person responsible for the preparation or review, of any public company’s +financial statements that are filed with the Commission, Respondent +Jackson shall submit a statement prepared by the audit committee(s) with +which Respondent Jackson will be associated, including the following +information: + +a. A summary of the responsibilities and duties of the specific audit +committee(s) with which Respondent Jackson will be associated; + +b. A description of Respondent Jackson’s role on the specific audit +committee(s) with which Respondent Jackson will be associated; + +c. A description of any policies, procedures, or controls designed to +mitigate any potential risk to the Commission by such service; + +d. A description relating to the necessity of Respondent Jackson’s service +on the specific audit committee; and + +e. A statement noting whether Respondent Jackson will be able to act +unilaterally on behalf of the Audit Committee as a whole. + +4. In support of any application for reinstatement to appear and practice before +the Commission as an independent accountant (auditor) before the +Commission, Respondent Jackson must be associated with a public +accounting firm registered with the PCAOB and Respondent Jackson shall +submit the following additional information: + +a. A statement from the public accounting firm (the “Firm”) with which +Respondent Jackson is associated, stating that the firm is registered with +the PCAOB in accordance with the Sarbanes-Oxley Act of 2002; + +b. A statement from the Firm with which the Respondent Jackson is +associated that the Firm has been inspected by the PCAOB and that the +PCAOB did not identify any criticisms of or potential defects in the +Firm’s quality control system that would indicate that Respondent +Jackson will not receive appropriate supervision; and + +c. A statement from Respondent Jackson indicating that the PCAOB has +taken no disciplinary actions against Respondent Jackson since seven + + +25 +(7) years prior to the date of the Order other than for the conduct that +was the basis for the Order. + +5. In support of any application for reinstatement, Respondent Jackson shall +provide documentation showing that Respondent Jackson is currently +licensed as a CPA and that Respondent Jackson has resolved all other +disciplinary issues with any applicable state boards of accountancy. If +Respondent Jackson is not currently licensed as a CPA, Respondent Jackson +shall provide documentation showing that Respondent Jackson’s licensure +is dependent upon reinstatement by the Commission. + +6. In support of any application for reinstatement, Respondent Jackson shall +also submit a signed affidavit truthfully stating, under penalty of perjury: + +a. That Respondent Jackson has complied with the Commission +suspension Order, and with any related orders and undertakings, +including any orders in In the Matter of CohnReznick LLP, or any +related Commission proceedings, including any orders requiring +payment of disgorgement or penalties; + +b. That Respondent Jackson undertakes to notify the Commission +immediately in writing if any information submitted in support of the +application for reinstatement becomes materially false or misleading or +otherwise changes in any material way while the application is pending; + +c. That Respondent Jackson, since the entry of the Order, has not been +convicted of a felony or a misdemeanor involving moral turpitude that +would constitute a basis for a forthwith suspension from appearing or +practicing before the Commission pursuant to Rule 102(e)(2); + +d. That Respondent Jackson, since the entry of the Order: + +1) has not been charged with a felony or a misdemeanor involving +moral turpitude as set forth in Rule 102(e)(2) of the +Commission’s Rules of Practice, except for any charge +concerning the conduct that was the basis for the Order; + +2) has not been charged with a felony or a misdemeanor involving +moral turpitude as set forth in Rule 102(e)(2) of the +Commission’s Rules of Practice, except for any charge +concerning the conduct that was the basis for the Order; + + + +26 +3) has not been found by the Commission or a court of the United +States to have committed a violation of the federal securities +laws, and has not been enjoined from violating the federal +securities laws, except for any finding or injunction concerning +the conduct that was the basis for the Order; + +4) has not been charged by the Commission or the United States +with a violation of the federal securities laws, except for any +charge concerning the conduct that was the basis for the Order; + +5) has not been found by a court of the United States (or any +agency of the United States) or any state, territory, district, +commonwealth, or possession, or any bar thereof to have +committed an offense (civil or criminal) involving moral +turpitude, except for any finding concerning the conduct that +was the basis for the Order; and + +6) has not been charged by the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, civilly or criminally, with having committed an act +of moral turpitude, except for any charge concerning the conduct +that was the basis for the Order. + +e. That Respondent Jackson’s conduct is not at issue in any pending +investigation of the Commission’s Division of Enforcement, the +PCAOB’s Division of Enforcement and Investigations, any criminal law +enforcement investigation, or any pending proceeding of a State Board +of Accountancy, except to the extent that such conduct concerns that +which was the basis for the Order. + +f. That Respondent Jackson has complied with any and all orders, +undertakings, or other remedial, disciplinary, or punitive sanctions +resulting from any action taken by any State Board of Accountancy, or +other regulatory body. + +7. Respondent Jackson shall also provide a detailed description of: + +a. Respondent Jackson’s professional history since the imposition of the +Order, including: + +1) all job titles, responsibilities and role at any employer; + + + +27 +2) the identification and description of any work performed for +entities regulated by the Commission, and the persons to whom +Respondent Jackson reported for such work; and + +b. Respondent Jackson’s plans for any future appearance or practice before +the Commission. + +8. The Commission may conduct its own investigation to determine if the +foregoing attestations are accurate. + +9. If Respondent Jackson provides the documentation and attestations required +in this Order and the Commission (1) discovers no contrary information +therein, and (2) determines that Respondent Jackson truthfully and +accurately attested to each of the items required in Respondent Jackson’s +affidavit, and the Commission discovers no information, including under +Paragraph C.8, indicating that Respondent Jackson has violated a federal +securities law, rule or regulation or rule of professional conduct applicable +to Respondent Jackson since entry of the Order (other than by conduct +underlying Respondent Jackson’s original Rule 102(e) suspension), then, +unless the Commission determines that reinstatement would not be in the +public interest, the Commission shall reinstate Respondent Jackson for +cause shown. + +10. If Respondent Jackson is not able to provide the documentation and truthful +and accurate attestations required in this Order or if the Commission has +discovered contrary information, including under Paragraph C.8, the burden +shall be on the Respondent Jackson to provide an explanation as to the facts +and circumstances pertaining to the matter setting forth why Respondent +Jackson believes cause for reinstatement nonetheless exists and +reinstatement would not be contrary to the public interest. The Commission +may then, in its discretion, reinstate Respondent Jackson for cause shown. + +11. If the Commission declines to reinstate Respondent Jackson pursuant to +Paragraphs C.9 and C.10, it may, at Respondent Jackson’s request, hold a +hearing to determine whether cause has been shown to permit Respondent +Jackson to resume appearing and practicing before the Commission as an +accountant. + +D. Respondent Hilbert is censured. + +E. Respondents shall, within 10 days of the entry of this Order, pay a civil money penalty +in the amounts as follows: + + + +28 +1) $30,000 for Wyss; +2) $20,000 for Jackson; and +3) $30,000 for Hilbert + +to the Securities and Exchange Commission for transfer to the general fund of the +United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment +is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +F. 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 +Wyss, Jackson or Hilbert as Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Melissa +Hodgman, 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, 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" + + +29 +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 +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 + + +30 +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/2022/AAER-4313.txt b/raw/aaer/2022/AAER-4313.txt new file mode 100644 index 0000000000000000000000000000000000000000..c6af5cac0a297cab01c5fd1454b86817a9fd120f --- /dev/null +++ b/raw/aaer/2022/AAER-4313.txt @@ -0,0 +1,702 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95167 / June 28, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4313 / June 28, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20911 + + +In the Matter of + +Ernst & Young LLP, + +Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE 102(e) +OF THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“SEC” or “Commission”) deems it appropriate +that public administrative and cease-and-desist proceedings be, and hereby are, instituted against +Respondent Ernst & Young LLP (“EY”) 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 l acking 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 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: + +2 + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”) that the Commission has determined to accept. Respondent admits the +facts set forth in Sections III.B and III.C below, acknowledges 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: + +A. SUMMARY + +1. This case involves Ernst & Young’s failures to act with the integrity required of a +public company auditor. Over multiple years, a significant number of EY audit professionals +cheated on the ethics component of the Certified Public Accountant (CPA) exam, as well as on a +variety of other examinations required to maintain their CPA licenses. As this was ongoing, EY +withheld this misconduct from SEC staff conducting an investigation of potential cheating at the +firm. EY audit professionals’ repeated cheating on exams and the firm’s misrepresentations to the +SEC violated ethics and integrity standards and discredited the accounting profession. +2. To become licensed as a CPA, applicants in most states must pass ethics +examinations. These are designed to keep accountants who do not sufficiently understand their +ethical responsibilities from the essential role CPAs play in serving the public interest. State +accountancy boards require CPAs to complete continuing professional education (CPE) courses to +ensure they remain knowledgeable about their ethical obligations and current accounting standards. +CPAs must pass examinations designed to test their understanding of these materials in order to get +credit for these courses and maintain their licenses. +3. Over multiple years, a significant number of EY audit professionals cheated on +these exams by using answer keys and sharing them with their colleagues. From 2017 to 2021, 49 +EY audit professionals sent and/or received answer keys to CPA ethics exams. In addition, +hundreds of other audit professionals cheated on CPE courses, including those addressing CPAs’ + + 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 +ethical obligations. And a significant number of EY professionals who did not cheat themselves, +but knew their colleagues were cheating and facilitating cheating, violated the firm’s Code of +Conduct by failing to report this misconduct. +4. This sharing of answer keys is not the first time in recent years that a large number +of EY audit professionals cheated on exams. From 2012 to 2015, over 200 EY audit professionals +across the country exploited a software flaw in EY’s CPE testing platform to pass exams while +answering only a low percentage of questions correctly. Following EY’s discovery of that earlier +cheating scheme, the firm took disciplinary actions and repeatedly warned its audit professionals +not to cheat on exams. Still, the cheating continued. +5. Just as many of its audit professionals failed to report their colleagues’ cheating as +required, EY withheld this misconduct from the SEC during an investigation about cheating at the +firm. In June 2019, the SEC’s Division of Enforcement sent EY a formal request for information +about complaints the firm had received regarding cheating on training exams. On the same day EY +received this request, the firm received a tip that an audit professional had shared an answer key to +a CPA ethics exam. EY did not disclose this information to the SEC. To the contrary, its +submission indicated that the firm did not have any current issues with cheating. In light of the tip +it had received, EY’s June 20 submission was materially misleading. But EY never corrected its +submission. Even after the firm began an internal investigation, confirmed there had been +cheating, and the matter was discussed among senior lawyers at the firm and with members of the +firm’s senior management, EY still did not correct its misleading submission. +6. Investors rely on independent audit firms to serve critical gatekeeping roles with +respect to financial reporting. This gatekeeping role depends on the integrity not only of the +independent audit firms’ audit personnel, but of its management and its attorneys. Thus, the +federal securities laws provide remedies for those accountants, audit firms, and attorneys found to +be lacking in integrity.4 Moreover, EY is required by PCAOB rules and the Code of Professional +Conduct of the American Institute of Certified Public Accountants (“AICPA”) to act with integrity +in connection with the professional services it provides its clients.5 PCAOB Quality Control +Standards require EY to have a system of quality control that provides reasonable assurance that its +audit personnel “perform all professional responsibilities with integrity.”6 Subject to maintaining +client confidences, certified public accountants are required to be “honest and candid.”7 And the + +4 See Commission Rule of Practice 102(e)(1)(ii), 17 C.F.R. § 201.102(e)(1)(ii); see also Exchange Act +Section 4C(a)(2). + +5 PCAOB Rule 3500T requires EY to maintain integrity when performing any professional service in +connection with the preparation or issuance of any audit report. As an AICPA member, EY 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. + +6 QC § 20, System of Quality Control for a CPA Firm’s Accounting and Auditing Practice, at §§ 20.01 and +20.09. + +7 See “Principles of Professional Conduct,” ET Section 54 (codified as AICPA Code of Professional Conduct +0.300.040). +4 +AICPA prohibits members from committing acts “discreditable to the profession.”8 EY violated +all of these strictures. + +B. RESPONDENT + +7. Ernst & Young LLP is a limited liability partnership and professional services firm +headquartered in New York, New York. It is a member firm of Ernst & Young Global Limited, a +UK entity. + +C. FACTS + +EY AUDIT PROFESSIONALS EXPLOIT SOFTWARE FLAW TO CHEAT + +8. In December 2014, an internal EY whistleblower reported a flaw in the firm’s +software that allowed professionals to pass CPE exams without the required number of correct +responses. This vulnerability allowed exam takers to achieve a passing score while answering as +little as one question correctly. The firm’s investigation of this matter determined that from 2012 +to 2015, over 200 EY audit professionals in multiple offices exploited this flaw to pass CPE +exams. +9. EY took a variety of disciplinary actions against the audit professionals who +engaged in this misconduct. To prevent further cheating, EY added prominent warnings to CPE +exams reminding test-takers that assessments must be taken independently, and that a failure to do +so reflected a lack of integrity.9 The firm repeatedly reminded its personnel that cheating on exams +was highly improper and violates EY’s Code of Conduct, which requires professionals to act with +integrity and requires those who become aware of misconduct to report any deviations or +violations of the Code to the firm. +10. However, EY learned that, despite these warnings, certain audit personnel were +continuing to cheat. For example, in 2016, EY learned that professionals in its Denver office +improperly shared answer keys. In response, the office’s managing partner warned staff that these +actions constituted a serious violation of the firm’s Code of Conduct and underscored the +importance of ethical behavior in connection with CPE. After the firm learned of two employees +who had cheated on a CPA ethics exam in 2017, EY issued the following warning to U.S. +personnel: + + +8 See AICPA Code of Professional Conduct 1.400.001 (“Acts Discreditable Rule”). + +9 For example, one warning stated: + +You must complete the assessment without assistance from others. Adherence to that +requirement is part of yo ur acceptance of and commitment to the EY Global Code of +Conduct which includes acting with integrity in connection with professional education. +Acting with integrity also means that you should not share or discuss the contents of the +assessment, or your responses, with anyone who has yet to complete it. Failure to adhere +to these requirements may result in disciplinary action. +5 +“Cheating” on internal or external tests, assessments or evaluations can result in +disciplinary action, including termination. You must complete them without +assistance from others. Assessments will further your professional development. +Not completing a test on your own or sharing or soliciting answers from others during +an assessment, is CHEATING. This conduct is contrary to our Global Code of +Conduct and our values. Take it seriously! +11. These recurring instances of cheating reflected that the problem was persisting +notwithstanding the firm’s warnings. Though EY continued to warn its personnel not to cheat, it +did not implement any additional controls to detect this misconduct during the relevant period. +EY’S SUBMISSION TO THE SEC’S ENFORCEMENT DIVISION + +12. On June 17, 2019, the SEC issued an order finding that another large audit firm +engaged in misconduct that included, among other things, cheating on internal training exams. The +SEC imposed a $50 million penalty on that firm.10 +13. On June 19, 2019, EY’s U.S. Chair and Managing Partner sent a message to all +U.S. personnel regarding that matter. The message warned, “[s]haring answers on internal or +external tests or evaluations is highly unethical behavior, in violation of our Code of Conduct, and +will not be tolerated at EY.” The SEC’s action against the other firm, she wrote, “serves as an +important reminder of our responsibility to serve the public interest and the need to always act with +integrity and honesty.” +14. That day, the SEC’s Division of Enforcement sent EY a formal request asking +whether EY had received any ethics or whistleblower complaints regarding testing associated with +any EY training program or continuing professional education course. +15. As requested, EY responded on June 20. EY provided a narrative submission that +described five matters “related to cheating or other misconduct on training programs and +assessments.” One of those matters was the 2017 tip about two employees cheating on a CPA +ethics exam. None of the matters in EY’s submission involved potentially ongoing misconduct by +current employees or misconduct that the firm did not appear to have appropriately addressed. +16. EY’s June 20 submission created the impression that EY did not have current issues +with cheating – either on training programs and assessments or CPA ethics exams. However, on +June 19, the day before EY made its submission, an employee reported to a manager that a +professional in the firm’s audit group had emailed the employee answers to a CPA ethics exam. +That afternoon, the manager informed an EY human resources employee of the tip, which was then +relayed to others in EY’s human resources group. + + +10 See In the Matter of KPMG LLP, Exchange Act Rel. No. 86118 (June 17, 2019). + +6 +17. Various senior EY attorneys received the SEC Division of Enforcement’s June 19 +request. They reviewed EY’s June 20 submission, which conveyed that the firm’s personnel were +not cheating on exams. And by no later than June 21, they were apprised of the employee’s June +19 tip about receiving an answer key to a CPA ethics exam. +18. The tip EY’s submission failed to include involved cheating on a CPA ethics exam. +It was sufficiently concerning to the firm that it began an extensive investigation. Yet, despite the +message from EY’s U.S. Chair and Managing Partner only two days earlier about the importance +of integrity and honesty, EY did not correct its submission to the SEC’s Enforcement Division. +EY FAILS TO CORRECT SUBMISSION AS IT LEARNS OF MORE CHEATING + +19. By the fall of 2019, EY’s investigation revealed significant misconduct: despite all +of the warnings, EY audit professionals had continued to cheat by using answer keys they had +received from colleagues to pass exams and sharing answer keys with others. The investigation +confirmed that audit professionals in multiple offices cheated on CPA ethics exams. They also +cheated on a wide variety of CPE courses, including courses on ethics and other topics, such as the +Summary of Audit Differences, which are designed to ensure that audit professionals can properly +evaluate whether clients’ financial statements are presented fairly in all material respects and +comply with Generally Accepted Accounting Principles. +20. Many professionals acknowledged during the firm’s investigation that they knew +their conduct violated EY’s Code of Conduct, but they cheated because of work commitments or +an inability to pass training exams after multiple attempts.11 +21. Notably, 91 audit professionals requested, used, or shared answer keys with +colleagues after EY’s U.S. Chair and Managing Partner sent the message highlighting the SEC +enforcement action against the other large audit firm, yet again reminding personnel not to cheat, +and yet again discussing the importance of integrity. +22. Despite the requirement in EY’s Code of Conduct and the firm-wide warnings that +audit professionals are obligated to report unethical conduct, a significant number of audit +professionals who knew their colleagues were using and sharing answer keys failed to report this +misconduct. Many of these EY professionals attributed their silence to a lack of appreciation that +sharing exam answers constituted cheating and violated EY’s Code of Conduct, and a desire to +avoid getting colleagues in trouble. +23. EY’s General Counsel’s Office discussed the firm’s investigation as it was ongoing +with the firm’s Executive Committee in October 2019. By then, members of the firm’s senior +management and various EY senior attorneys understood that (i) the SEC had sanctioned another +large audit firm for exam cheating by its professionals, (ii) SEC staff had asked EY about tips it +had received involving exam-related misconduct, (iii) EY had received a tip about sharing answer + +11 Based on its investigation, the firm has imposed a range of disciplinary actions on numerous professionals +depending on the severity of the violations and other factors. +7 +keys to a CPA ethics exam, (iv) the cheating involved more than a small number of individuals in a +single office; and (v) the firm had not disclosed the tip to the SEC. +24. Following these discussions, EY broadened its investigation. Yet, despite the U.S. +Chair and Managing Partner’s message to others about integrity,12 EY did not correct its +submission to the SEC. +25. Instead, EY decided to inform the PCAOB. However, it would not do so yet. EY +decided to delay disclosing the misconduct even to the PCAOB until “the extent of the misconduct +within the Firm was clearer and EY had a credible plan in place to address the problem.” That +took four more months. +26. The SEC did not learn about the issue until March 2020 – almost nine months after +the June 19, 2019 request – when the PCAOB notified the SEC that EY had disclosed that a +significant number of its employees had cheated on training exams. +D. EY’S CONDUCT DURING THE INVESTIGATION +27. EY conducted a robust investigation of the underlying cheating and provided +substantial information to the Commission about that misconduct. EY has also taken remedial +steps to reduce the risk of the conduct recurring, including various employment actions (up to and +including terminating employees). +28. However, with respect to its misleading submission to the SEC, EY did not self- +police, self-report, remediate, or cooperate in the Commission’s investigation. For example, EY +did not “do a thorough review of the nature, extent, origins and consequences of the conduct and +related behavior;” “voluntarily disclose information our staff did not directly request and otherwise +might not have uncovered;” or adopt “new and more effective [policies and procedures] designed +to prevent a recurrence of the misconduct.”13 +29. To the contrary, by withholding information about misconduct that EY knew SEC +staff was investigating, EY’s continued misrepresentations to the SEC’s Division of Enforcement +significantly hindered the SEC’s ability to take action that would protect investors from audit +professionals who do not understand their ethical obligations, fail to act with appropriate + +12 The June 19 message from EY’s U.S. Chair and Managing Partner warned, “No client or external +relationship and no metric is more important than the ethics, integrity and reputation of EY. We all play a vital role +in instilling confidence in capital markets. We must always be committed to each other as colleagues, holding +ourselves and each other accountable and maintaining zero tolerance of those who do not live our values. As stated +in our Global Code of Conduct, we are people who demonstrate integrity, respect and always doing the right thing. ” + +13 See Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and +Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions , Rel. No. 34-44969 +(Oct. 23, 2001). + +8 +professional integrity, and have not met – or needed to cheat in order to meet – minimum +professional requirements to demonstrate their knowledge of important accounting principles. +E. VIOLATIONS + +30. As a result of the conduct of personnel described above, EY willfully14 violated +PCAOB Rule 3500T, which requires EY and associated persons to comply with ethics standards, +including to maintain integrity, as described in the AICPA’s Code of Professional Conduct when +performing any professional service in connection with the preparation or issuance of any audit +report,15 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. +31. The AICPA Code of Professional Conduct requires that a member not commit any +act discreditable to the profession. AICPA Code of Professional Conduct 1.400.001. As a result +of the conduct of personnel described above, EY failed to comply with AICPA Code of +Professional 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. +32. 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. +33. PCAOB Quality Control Standards also direct the firm on the professional +development of its staff. A firm should have policies and procedures to provide it with reasonable +assurance that “[w]ork is assigned to personnel having the degree of technical training and +proficiency required in the circumstances” and that “personnel participate in general and industry- +specific continuing professional education and other professional development activities that +enable them to fulfill responsibilities assigned, and satisfy applicable continuing professional +education requirements of regulatory agencies.”16 + +14 “Willfully” for purposes of imposing relief under Exchange Act Section 4C 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). + +15 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. + +16 QC § 20.13.b-.c. + +9 +34. To provide reasonable assurance that the policies and procedures underlying a +firm’s system of quality control are suitably designed and being effectively applied, PCAOB +quality control standards recognize the necessity of “Monitoring,” which involves “an ongoing +consideration and evaluation of, among other things, the effectiveness of professional development +activities and compliance with the firm’s policies and procedures.”17 +35. As a result of the conduct described above, EY 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. +F. FINDINGS + +36. Based on the foregoing, the Commission finds that EY 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. +37. Based on the foregoing, the Commission finds that EY engaged in conduct that +provides a basis to impose remedies against the firm pursuant to Exchange Act Section 4C(a)(2) +and Rule 102(e)(1)(ii). +G. UNDERTAKINGS + + EY has undertaken to complete the following actions: + +EY Review of Policies and Procedures + +38. EY Review. Within 120 days after the entry of this Order, EY shall evaluate (“EY +Review”) the sufficiency and adequacy of its quality controls, policies, and procedures relevant to +ethics and integrity and to responding to Information Requests18 (collectively, EY’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, including those relating to +ethics and integrity applicable to accountants and attorneys, related to the subjects below. EY’s +evaluation shall include assessing: +a. the adequacy and sufficiency of ethics and integrity training and guidance, +including regarding anti-retaliation and whistleblowing; + +17 QC § 20.20.c-.d. + +18 As used in this Order, “Information Requests” means any solicitation of information from the Commission, +including from the Division of Enforcement, and irrespective of form – for example, including solicitations of +information pursuant to oral voluntary requests, written subpoenas, or any other solicitation of information from the +Commission and its staff. +10 +b. whether EY’s culture is supportive of ethical and compliant conduct and +maintaining integrity, including strong, explicit, and visible support and commitment by the firm’s +management; +c. whether the firm has designed and implemented appropriate policies and +procedures relating to responding to Information Requests, including those relating to analyzing +Information Requests, collecting responsive information, producing the information requested, +communicating accurately, and correcting false or misleading statements or omissions in +submissions responsive to Information Requests; and +d. whether EY has designed and implemented appropriate policies and +procedures and deploys proper resources and oversight to comply with all professional standards +relating to the subjects discussed in paragraph 38, including (i) monitoring to detect non- +compliance; (ii) having appropriate reporting lines, compensation, and rewards; (iii) assigning +responsibility for overseeing compliance to senior executives and managers with access to relevant +information and personnel; and (iv) ensuring consistent discipline. +39. EY Report to the Commission. Within 60 days of completing the EY Review, EY +shall deliver to the Commission staff a detailed written report (“EY Report to the Commission”) +summarizing its review and any changes it has made to EY’s Policies and Procedures relating to +the subjects described in paragraph 38. The EY 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 the subjects discussed in paragraph 38 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 EY agrees to provide such evidence. +The EY 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 EY +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. + +Independent Review of EY’s Policies and Procedures + +40. Independent Consultant Review of Policies and Procedures. EY shall retain, +within 60 days after the entry of this Order, an independent consultant (the “Policies and +Procedures IC”) not unacceptable to the Commission staff. The Policies and Procedures IC shall +have, at a minimum, demonstrated expertise designing or reviewing compliance policies, +procedures, and controls relating to ethics and integrity. EY shall provide to the Commission +staff a copy of the engagement letter detailing the scope of the Policies and Procedures IC’s +responsibilities. EY shall deliver to the Policies and Procedures IC the EY Report to the +Commission at the same time as EY provides such report to the Commission staff as specified in +paragraph 39. EY shall require that the Policies and Procedures IC conduct a review of EY’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 the subjects described in paragraph 38 (the “Policies and Procedures IC Review”). +11 +41. EY shall cooperate fully with the Policies and Procedures IC and shall provide +reasonable access to information and records as the Policies and Procedures IC may reasonably +request, subject to EY’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 Policies and Procedures IC shall have the right to interview any partner, +employee, agent, or consultant of EY concerning any matter within or relating to the Policies and +Procedures IC Review. The Policies and Procedures IC will not have access to EY’s client +materials or materials that reflect client confidential information. + +42. Report of Policies and Procedures IC. After the Policies and Procedures IC Review +is completed, but no later than 90 days after Commission staff receives the EY Report, the Policies +and Procedures IC shall issue a detailed written report (the “Policies and Procedures IC Report”) to +EY: (i) summarizing its work; (ii) making recommendations, as the Policies and Procedures IC +deems appropriate, reasonably designed to ensure that EY’s Policies and Procedures relating to the +subjects described in paragraph 38 are adequate and sufficient to provide reasonable assurance of +compliance with all professional standards relating to the subjects described in paragraph 38; and +(iii) describing its review of EY’s training and making additional recommendations, as the Policies +and Procedures IC deems appropriate. EY shall require the Policies and Procedures IC to provide +a copy of the Policies and Procedures IC Report to the Commission staff when it is issued. +43. Adoption of Recommendations. EY shall adopt, as soon as practicable, all +recommendations of the Policies and Procedures IC in its report. Provided, however, that within +30 days of issuance of the Policies and Procedures IC Report, EY may advise the Policies and +Procedures IC in writing of any recommendation that it considers to be unnecessary, unjust, +outside the scope of this Order, unduly burdensome, or impractical. EY need not adopt any such +unnecessary, unjust, outside the scope of this Order, unduly burdensome, or impractical +recommendation at that time, but instead may propose in writing to the Policies and Procedures IC +an alternative recommendation (an “Alternative Recommendation”) designed to achieve the same +objective or purpose. EY will provide any such Alternative Recommendation(s) to the +Commission staff at the same time that EY submits such Alternative Recommendation(s) to the +Policies and Procedures IC. EY and the Policies and Procedures IC shall engage in good faith +negotiations in an effort to reach agreement on any recommendations objected to by EY. In the +event that the Policies and Procedures IC and EY are unable to agree on any Alternative +Recommendation(s) within 60 days of the issuance of the Policies and Procedures IC Report, EY +shall abide by the determinations of the Policies and Procedures IC. +44. Privilege. EY shall not be in, and shall not have or claim an attorney-client +relationship with the Policies and Procedures IC. Accordingly, EY shall not seek to invoke the +attorney-client privilege or any other doctrine or privilege to prevent the Policies and Procedures +IC from transmitting any information, reports, or documents to Commission staff. +45. Certification by Principal Executive Officer.19 Within 60 days of issuance of the +Policies and Procedures IC Report as described in paragraph 42, but not sooner than 30 days after a +copy of the Policies and Procedures IC Report is provided to the Commission staff, EY’s Principal + +19 As used in this Order, “Principal Executive Officer” means the Chief Executive Officer or equivalent. +12 +Executive Officer must certify to the Commission staff in writing that (i) EY has adopted and has +implemented or will implement all recommendations of the Policies and Procedures IC in its +report, if any; and (ii) the Policies and Procedures IC agrees with EY’s adoption and +implementation of the recommendations. To the extent that EY has not implemented all +recommendations of the Policies and Procedures IC within 60 days of issuance of the Policies and +Procedures IC Report, EY’s Principal Executive Officer must certify to the Commission staff in +writing, 30 days after their implementation, that (i) EY has adopted and has implemented all +recommendations of the Policies and Procedures IC; and (ii) the Policies and Procedures IC agrees +that the recommendations have been adequately adopted and implemented by EY. The +certification(s) by EY’s Principal Executive Officer shall provide written evidence of the +implementation of the Policies and Procedures IC’s recommendations in the form of a narrative +description, and be supplemented with supporting exhibits. The Commission staff may request +further evidence of the implementation of any of the Policies and Procedures IC’s +recommendations, and EY agrees to provide such evidence within a reasonable time period to the +satisfaction of Commission staff. If, because of changed circumstances, EY determines during the +pendency of these Undertakings that certain changes are necessary to recommendations already +implemented, EY should notify the Commission staff in advance of making any such changes, and +the Commission staff may determine, in their discretion, whether to permit such modification. +Independent Review of EY’s Disclosure Failures + +46. Independent Consultant Review of EY’s Conduct Relating to the Commission +Staff’s June 2019 Information Request. EY shall, within 30 days after the entry of this Order, +designate a three-person committee of EY senior personnel who had no involvement in EY’s +conduct relating to the June 2019 Enforcement Division Request, including its failure to correct its +submission, and who will have authority to direct and oversee employment and other remedial +actions on behalf of the firm (the “Special Review Committee”). The Special Review Committee +shall retain, within 60 days after the entry of this Order, an independent consultant (the +“Remedial IC”), not unacceptable to the Commission staff. The Remedial IC shall have, at a +minimum, demonstrated expertise: (i) conducting investigations; and (ii) assessing the +reasonableness of how entities and attorneys have responded to subpoenas, document requests, +and/or information requests. EY’s Special Review Committee shall provide to the Commission +staff a copy of the engagement letter detailing the scope of the Remedial IC’s responsibilities, +which the Commission understands will provide that the Remedial IC is to conduct a review +covered by the attorney-client privilege. EY’s Special Review Committee shall require that the +Remedial IC conduct a review (the “Remedial IC Review”) of EY’s conduct relating to the +Commission staff’s June 2019 Information Request, including whether any member of EY’s +executive team, General Counsel’s Office, compliance staff, or other EY employees contributed to +the firm’s failure to correct its misleading submission. + +47. Privilege. EY shall cooperate fully with the Remedial IC and shall provide +reasonable access to information and records as the Remedial IC may reasonably request. +Consistent with EY’s right to enter into an attorney-client relationship with the Remedial IC, this +access shall not exclude any information or records protected by any privilege such as the attorney- +client privilege or the attorney work product doctrine. The Remedial IC shall have the right to +interview any partner, employee, agent, or consultant of EY concerning any matter within or +13 +relating to the Remedial IC Review. The Commission will not have a right to access any +information obtained or produced by the Remedial IC. + +48. Report of the Remedial IC Review. After the Remedial IC Review is completed, +but in no event later than 90 days after the Remedial IC is retained, the Remedial IC shall issue a +detailed written report (the “Remedial IC Report”) to the Special Review Committee (i) +summarizing its work and (ii) making recommendations, as the Remedial IC deems appropriate, as +to employment actions or other remedial steps. + +49. Adoption of Remedial IC Recommendations. The Special Review Committee shall +ensure that the firm adopts, as soon as practicable, all recommendations of the Remedial IC in the +Remedial IC Report. Provided, however, that within 14 days of issuance of the Remedial IC +Report, the Special Review Committee may advise the Remedial IC in writing of any +recommendation that it disagrees with. EY need not adopt any such recommendation at that time, +but the Special Review Committee instead may propose in writing to the Remedial IC an +alternative approach. The Special Review Committee and the Remedial IC shall engage in good +faith negotiations in an effort to reach agreement on any recommendations objected to by the +Special Review Committee. In the event that the Remedial IC and the Special Review Committee +are unable to agree on an alternative proposal within 30 days of the issuance of the Remedial IC +Report, the Special Review Committee shall abide by the determinations of the Remedial IC. + +50. Certification by Principal Executive Officer and the Special Review Committee. +Within 60 days of issuance of the Remedial IC Report, but not sooner than 30 days after a copy of +the Remedial IC Report is provided to the Special Review Committee, EY’s Principal Executive +Officer and the Special Review Committee must certify to the Commission staff in writing that (i) +EY has adopted and has implemented or will implement all recommendations of the Remedial IC, +if any; and (ii) the Remedial IC agrees with EY’s adoption and implementation of the +recommendations. To the extent that EY has not implemented all recommendations of the +Remedial IC within 60 days of issuance of the Remedial IC Report, EY’s Principal Executive +Officer and Special Review Committee must certify to the Commission staff in writing, 30 days +after their implementation, that (i) EY has adopted and has implemented all recommendations of +the Remedial IC; and (ii) the Remedial IC agrees that the recommendations have been adequately +adopted and implemented by EY. The certifications by EY’s Principal Executive Officer and +Special Review Committee shall provide written evidence of all employment or other disciplinary +actions taken following the Remedial IC’s work. +The Independent Consultants’ Hiring Authority and Compensation + +51. Hiring Authority and Compensation. The Policies and Procedures IC and the +Remedial IC (collectively, the “Independent Consultants”) shall have the authority to employ legal +counsel, consultants, investigators, experts, and other personnel necessary to assist in the proper +discharge of the Independent Consultants’ duties. The Independent Consultants’ compensation +and expenses shall be borne exclusively by EY. To ensure the independence of the Independent +Consultants, EY: (i) shall not have the authority to terminate the Independent Consultants or +substitute other independent consultants for the initial Policies and Procedures IC or Remedial IC, +without the prior written approval of the Commission staff; and (ii) shall compensate the +14 +Independent Consultants and persons engaged to assist the Independent Consultants for services +rendered pursuant to this Order at their reasonable and customary rates. +52. Independence. EY shall require the Independent Consultants to enter into +agreements that provide that, for the period of their engagement and for a period of two years from +completion of each of their engagements, the Independent Consultants shall not enter into any +employment, consultant, attorney-client, auditing or other professional relationship with EY, or +any of its present or former affiliates, directors, officers, employees, or agents acting in their +capacity as such. The agreements shall also provide that the Independent Consultants will require +that any firm with which either is affiliated or of which either is a member, and any person +engaged to assist the Independent Consultants in performance of their 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 EY, or any of its present +or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the +period of their engagement and for a period of two years after each of their engagements. +Notice to Audit Clients, Training, and Certifications +53. Notification. Within 10 business days after entry of this Order, EY shall provide all +of its issuer audit clients and SEC-registered broker-dealer audit clients a copy of this Order. +54. First Certification. By no later than 15 months after the entry of this Order, unless +otherwise extended by the Commission staff, EY’s Principal 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 compliance. The Commission staff may request further evidence of compliance, and +EY agrees to provide such evidence in a reasonable period of time to the satisfaction of +Commission staff, subject to EY’s right to withhold information and records relating to the +Remedial IC’s work based on applicable protections or privileges, such as the attorney-client +privilege or the attorney work product doctrine. +55. Ethics and Integrity Training for EY Audit Professionals. Beginning within 30 +days and ending no earlier than 36 months after the entry of this Order, all audit professionals and +all EY partners and employees who, at any time prior to March 3, 2020, were aware (i) of the +Division of Enforcement’s June 19, 2019 request, (ii) of EY’s June 20, 2019 response, and (iii) that +an employee had made a tip on June 19, 2019 concerning cheating shall complete a minimum of 6 +hours every 6 months of ethics and integrity training by an independent training provider not +unacceptable to the Commission staff. +56. Annual Certification. With respect to calendar years 2023, 2024, and 2025, EY’s +Principal Executive Officer shall certify that EY has assessed whether EY’s Policies and +Procedures relating to the topics discussed in paragraph 38 are adequate and sufficient to provide +reasonable assurance of compliance with all professional standards relating to the subjects +described in paragraph 38 by, among other things, testing the firm’s implementation of EY’s +Policies and Procedures during the twelve (12) months preceding the certification (“Annual +Certification”). The Annual Certification shall describe the nature and scope of EY’s testing. The +15 +Annual Certification shall represent that the Principal Executive Officer has reviewed and +evaluated the firm’s assessment and testing process and that, based on belief and after reasonable +inquiry, the Principal Executive Officer believes that EY’s Policies and Procedures relating to the +topics discussed in paragraph 38 are adequate and sufficient to provide reasonable assurance of +compliance with all relevant professional standards. EY’s Principal Executive Officer shall also +certify that the training requirements discussed in paragraph 55 have been completed. If the +Principal Executive Officer cannot represent that EY’s Policies and Procedures are adequate and +sufficient or that the training requirements have been completed, then the Principal Executive +Officer shall describe in reasonable detail the reasons for the inability to so certify. The Principal +Executive Officer shall provide the Annual Certifications to the Commission’s staff within 60 days +of the end of the annual period. EY shall preserve and retain all documentation regarding the +Principal Executive Officer’s Annual Certification for 7 years and will make it available to the +staffs of the Commission or the PCAOB upon request. +57. 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. +58. 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 EY’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. EY shall cease and desist from committing or causing any violations and any future +violations of PCAOB Rule 3500T. + +B. EY be, and hereby is, censured. + +C. EY shall comply with the undertakings enumerated in paragraphs 38 through 58 +above. + +D. EY shall, within 10 days of the entry of this Order, pay a civil money penalty in the +amount of $100 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: + +16 +(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 EY as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be 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 +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/2022/AAER-4314.txt b/raw/aaer/2022/AAER-4314.txt new file mode 100644 index 0000000000000000000000000000000000000000..81de3b1d0d8d2f5388d8782e463d317d44001560 --- /dev/null +++ b/raw/aaer/2022/AAER-4314.txt @@ -0,0 +1,408 @@ + + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95193 / July 1, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4314 / July 1, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20923 + + +In the Matter of + +VOXELJET AG + +and + +RUDOLF FRANZ, + +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 voxeljet AG and Rudolf Franz (“voxeljet” and +“Franz,” respectively, or collectively the “Respondents”). + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V as to Respondent +Franz, 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 concern voxeljet’s reporting during two quarters in 2019 +of its compliance with a Finance Contract it entered into with the European Investment +Bank (“EIB”) and the state of its internal accounting controls. + +Respondents + +2. voxeljet AG (“voxeljet” or the “Company”) is a Foreign Private Issuer +incorporated in Germany and headquartered in Friedberg, Germany. The Company is a +provider of 3D printers and on-demand parts services to industrial and commercial +customers. In 2013, voxeljet conducted an initial public offering of American Depositary +Shares (ADSs). During the relevant period, the Company’s ADSs were registered with the +Commission pursuant to Section 12(b) of the Exchange Act and were listed on the New +York Stock Exchange. voxeljet’s ADSs are currently listed on the Nasdaq Capital Market +under the ticker symbol VJET. + +3. Rudolf Franz (“Franz”) serves as voxeljet’s Chief Financial Officer +(“CFO”) and Chief Operating Officer (“COO”). Franz resides in Germany. + +Background + +4. In November 2017, voxeljet entered into a Finance Contract with the EIB. +The Finance Contract provided that the EIB would disburse a credit of up to €25 million to +voxeljet, in three tranches. In December 2017, the EIB disbursed the first tranche of €10 +million to voxeljet. + +5. In 2019 and 2020, the €10 million loan was material to voxeljet’s current +liabilities and to its long-term liabilities. The financing provided by the EIB was also +material to voxeljet’s ability to continue as a going concern. + +6. The Finance Contract required voxeljet to comply with debt covenants. +One of the debt covenants was a ratio of Total Net Financial Debt to EBITDA (earnings + +1 The findings herein are made pursuant to the Respondents’ Offers of Settlement and are +not binding on any other person or entity in this or any other proceeding. + + + + 3 +before interest, taxes, depreciation, and amortization) (hereafter, “EBITDA Covenant”). +The first testing date for the debt covenants was June 30, 2019. + +voxeljet Breached the EBITDA Covenant + +7. According to a “Progress Report” that voxeljet generated for the EIB on or +about June 26, 2019, voxeljet would not be in compliance with the EBITDA Covenant on +the June 30, 2019 testing date. + +8. Although the EIB took the position that it had the right to demand +repayment of the loan as a result of the noncompliance with the EBITDA Covenant, EIB +exercised its business judgment and chose to engage in discussions with voxeljet with a +view toward reaching agreement on a waiver. The Company noted the existence of these +discussions in the June 30, 2019 Compliance Certificate that it provided the EIB. If the +EIB instead had sought repayment it could also have required voxeljet to make a cash +payment to the EIB pursuant to a Synthetic Warrant Agreement between the two parties. + +9. Although the EIB did not send a formal notice of breach of the EBITDA +Covenant, voxeljet remained in breach of the EBITDA Covenant throughout 2019. + +10. As a result, voxeljet and the EIB thereafter engaged in discussions about the +possibility of amending the EBITDA Covenant and the issuance of a waiver of the +EBITDA Covenant. The negotiations began after the June 30, 2019 testing date, and +continued until March 2020 when the EIB ultimately issued a written waiver to voxeljet. + +11. In or about June 2019, Franz became aware that voxeljet had breached the +EBITDA Covenant. During the second half of 2019, he participated in face-to-face +negotiations with EIB representatives, and written communications with them, concerning +how to remedy the breach. + + + 4 +voxeljet’s Interim Financial Results + +12. On August 15, 2019, on Form 6-K, voxeljet furnished to the Commission its +interim financial statements for the quarter ended June 30, 2019 (“Q2 Financial +Statements”). On November 14, 2019, voxeljet filed a Form 6-K which furnished its +interim financial statements for the quarter ended September 30, 2019 (“Q3 Financial +Statements”). + +13. Franz signed the Forms 6-K through which voxeljet furnished the Q2 +Financial Statements and the Q3 Financial Statements to the Commission. + +14. The Q2 Financial Statements and the Q3 Financial Statements each +represented that “[T]hese financial statements were prepared in accordance with the +disclosure requirements . . . for interim financial reporting purposes specified by IAS 34.” +(IAS refers to International Accounting Standards.) + +15. The Q2 and Q3 Financial Statements were not, however, prepared in +accordance with IAS 34’s requirements, as they did not disclose voxeljet’s breach of the +EBITDA Covenant. IAS 34.15B provides examples of events and transactions for which +disclosures are required if significant. One of the listed examples is: “Any loan default or +breach of a loan agreement that has not been remedied on or before the end of the reporting +period.” Franz knew, or should have known, that voxeljet should have disclosed the +EBITDA Covenant breach. + +16. In addition, the Q2 and Q3 Financial Statements misclassified the €10 +million loan as a non-current liability. The Company should have recorded the debt as a +current liability, because IAS 1.74 provides, in part: “When an entity breaches a provision +of a long-term loan arrangement on or before the end of the reporting period with the effect +that the liability becomes payable on demand, it classifies the liability as current . . . .” +Franz knew, or should have known, that voxeljet should have classified the debt as a +current liability. + +In 2020, the EIB Granted a Waiver and voxeljet Disclosed the Breach + +17. In 2020, the EIB granted voxeljet a waiver of the EBITDA Covenant +breach. On March 12, 2020, the EIB and voxeljet entered into an agreement in which the +EIB waived voxeljet’s covenant breach. In exchange for the waiver, voxeljet collateralized +the loan by providing the EIB a security interest in voxeljet’s land and facility in Friedberg, +Germany, valued at approximately €10 million. The Company also agreed to pay a waiver +fee of €30,000. + +18. In a Form 6-K dated March 18, 2020, voxeljet for the first time disclosed +that it had breached the EBITDA Covenant. + + + 5 +19. On May 7, 2020, voxeljet filed with the Commission its annual report on +Form 20-F for the fiscal year ended December 31, 2019. The Form 20-F also disclosed the +EBITDA Covenant breach: “We have breached our Total Net Financial Debt to EBITDA +ratio financial covenant . . . with the European Investment Bank (“EIB”), during the fiscal +year and remain in default as at December 31, 2019.” The Form 20-F further disclosed: +“Consequently, the EIB could have called the loan due, however after discussions which +started in July 2019, in March 2020, we received a waiver for the covenant breaches in +2019 . . . .” + +20. The Company also disclosed in its Form 20-F that, as a result of the +EBITDA Covenant breach, voxeljet reclassified the €10 million debt from a non-current +liability to a current liability. + +voxeljet’s Material Weaknesses in Internal Control Over Financial Reporting + +21. For several years following voxeljet’s initial public offering—including +2018 to 2021—the Company disclosed material weaknesses in internal control over +financial reporting. As a result, the Company’s disclosure controls and procedures were +also not effective. For fiscal 2018, voxeljet’s auditor expressed an adverse opinion on the +effectiveness of the Company’s internal control over financial reporting. + +22. In July 2018, voxeljet’s Internal Audit staff drafted internal controls +concerning the financial covenants of the EIB loan. However, the Company had not +implemented these internal controls by the time that the Company reported the Q2 and Q3 +Financial Statements. + +23. Each year after voxeljet’s IPO, Company management, including Franz, +conducted an evaluation of the effectiveness of the design and operation of voxeljet’s +disclosure controls and procedures. Each year, Franz and the CEO concluded that +voxeljet’s disclosure controls were ineffective. + +24. As an example of voxeljet’s ineffective internal controls, the company’s +independent auditor was not appropriately informed of the EBITDA Covenant breach +during its reviews of the Q2 and Q3 Financial Statements. Information about the covenant +breach was not adequately documented and shared with the auditor at the time of those +reviews. voxeljet’s internal processes for the review and tracking of financial reporting and +disclosure were not sufficiently formalized, documented, and reviewed by the audit +committee and the supervisory board. + +25. As a result of the conduct described above, during the second and third +quarters of 2019, voxeljet’s internal accounting controls were not designed or maintained to +provide reasonable assurance that the Company’s financial statements would be presented +in conformity with International Financial Reporting Standards (IFRS). + + + 6 +Violations + +26. As a result of the conduct described above, voxeljet violated Section 13(a) +of the Exchange Act and Rules 13a-16, and 12b-20 thereunder. Section 13(a) and Rule +12b-20 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. +Rule 13a-16 of the Exchange Act requires foreign private issuers with classes of securities +registered pursuant to Section 12 to furnish to the Commission accurate reports on Form 6- +K. + +27. As a result of the conduct described above, voxeljet 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. + +28. As a result of the conduct described above, voxeljet violated Section +13(b)(2)(B) of the Exchange Act, which requires reporting companies, among other things, +to devise and maintain a system of internal accounting controls sufficient to provide +reasonable assurances that transactions are recorded as necessary to permit preparation of +financial statements in conformity with generally accepted accounting principles or any +other criteria applicable to such statements. + +29. As a result of the conduct described above, Franz caused voxeljet’s +violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules +12b-20, and 13a-16 thereunder. + +The Respondents’ Cooperation and Remedial Efforts + +30. In determining to accept the Respondents’ Offers, the Commission +considered cooperation afforded the Commission staff and remedial acts promptly +undertaken by the Respondents. + +31. voxeljet self-reported and shared facts developed in its internal +investigation, including providing regular updates and analyses and identifying key +documents, and also facilitated the Commission staff’s interviews and testimony with +witnesses. + + + 7 +32. voxeljet also has taken certain remedial measures, including expanding its +accounting and internal controls personnel and hiring an IFRS expert who reports to the +audit committee. In particular, the Company has implemented new controls over the +documentation, review, and reporting of the Company’s compliance with its debt +covenants. + +33. In 2020, voxeljet prepared and began implementing a remediation plan (the +“Plan”). The Company then hired an outside accounting expert to review the Plan against +the 2013 Internal Control—Integrated Framework of the Committee of Sponsoring +Organizations of the Treadway Commission (COSO), enhance the Plan, and assist the +Company in implementing the Plan. + +Undertakings + +34. voxeljet has undertaken to: + +a. Complete, fully implement, and test its Plan by March 31, 2023, +unless an extension has been provided by the Commission’s staff +pursuant to paragraph 34(b) below, and submit a report to the +Commission staff no later than May 1, 2023. The report shall +describe the implementation, testing, and completion of the Plan, +and whether the Plan has, in management’s opinion, fully +remediated the material weaknesses in voxeljet’s internal control +over financial reporting identified in its 2020 and 2021 Forms 20- +F. + +b. For good cause shown, the Commission’s staff may extend any of +the procedural dates set forth above in Paragraph 34(a). In the +event voxeljet decides to request an extension of any such dates, it +shall provide the Commission’s staff a written extension request +that explains the circumstances and rationale for such request. The +written extension request shall be submitted to C. Joshua Felker, +Assistant Director, no later than thirty (30) days before the +applicable deadline. + +c. 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 voxeljet agrees to provide such +evidence. The certification and supporting material shall be +submitted to C. Joshua Felker, Assistant Director, with a copy to +the Office of Chief Counsel of the Enforcement Division, no later + + 8 +than sixty (60) days from the date of the completion of the +undertakings. + +d. The report submitted by voxeljet will likely include confidential +financial, proprietary, competitive business or commercial +information. Public disclosure of the report could discourage +cooperation, impede pending or potential government investigations +or undermine the objectives of the reporting requirement. For these +reasons, among others, the report and the contents thereof are +intended to remain and shall remain non-public, except (1) pursuant +to court order, (2) as agreed to by the parties in writing, (3) to the +extent that the Commission determines in its sole discretion that +disclosure would be in furtherance of the Commission’s discharge +of its duties and responsibilities, or (4) as otherwise required by law. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents voxeljet’s and Franz’s Offers. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondents voxeljet and Franz cease +and desist from committing or causing any violations and an y future violations of Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, and 13a-16 thereunder. + + B. Respondent voxeljet shall comply with the undertakings enumerated in Paragraph 34, +above. + + C. Respondents voxeljet and Franz shall, within 30 days of the entry of this Order, pay +a civil money penalty in the respective amounts of $175,000 and $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. + +D. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + + 9 +(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 +voxeljet AG and Rudolf Franz 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 Melissa +Hodgman, Associate Director, Division of Enforcement, Securities and Exchange Commission, +100 F St., NE, 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, Respondents agree that in any Related Investor +Action, Respondents 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. + + + + 10 +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section 523 of +the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent Franz, and further, any debt for disgorgement, prejudgment interest, civil penalty or +other amounts due by Respondent Franz 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 Franz 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/2022/AAER-4315.txt b/raw/aaer/2022/AAER-4315.txt new file mode 100644 index 0000000000000000000000000000000000000000..722b891d2b826ec84c453241121a2dd9ab2b7f0e --- /dev/null +++ b/raw/aaer/2022/AAER-4315.txt @@ -0,0 +1,112 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95223 / July 8, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4315 / July 8, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20930 + +In the Matter of + +STEVEN J. +SHEINFELD, 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 Steven +J. Sheinfeld (“Respondent” or “Sheinfeld”) pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in paragraph 3 of Section III 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. Sheinfeld, age 69, was and has been a certified public accountant licensed to practice +in the State of New York. He worked at Rite Aid Corporation (“Rite Aid”) from 1994 until his +retirement in April 2017. During the relevant time period, Sheinfeld was Vice President of Internal +Assurance Services, and reported to Rite Aid’s Chief Compliance Officer. + +2. Rite Aid is a Delaware corporation with its principal place of business in Camp Hill, +Pennsylvania. Rite Aid is a retail pharmacy chain. At all relevant times, Rite Aid’s common stock +was registered with the Commission pursuant to Section 12(b) of the Securities Exchange Act of +1934 (“Exchange Act”), and traded on the New York Stock Exchange under the symbol “RAD.” + +3. On September 17, 2020, the Commission filed a complaint against Sheinfeld in +SEC v. Steven J. Sheinfeld, Civil Action No. 20-cv-1692-YK (M.D. Pa.). On June 17, 2022, the +court entered an order permanently enjoining Sheinfeld, by consent, from future violations of +Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Sheinfeld was also ordered to pay a +$305,129 civil money penalty. + +4. The Commission’s complaint alleged, among other things, that in January 2017, +through the course of his duties at Rite Aid, Sheinfeld learned material non-public information +regarding the status of a publicly-announced merger (the “Planned Merger”) of Rite Aid with +Walgreens Boots Alliance, Inc. (“Walgreens”), and that, based on that information, Sheinfeld +traded Rite Aid securities in both his own and two family members’ accounts. The complaint +further alleged that Sheinfeld knew, or recklessly avoided knowing, that the information he learned +about the Planned Merger would cause Rite Aid’s stock price to fall, and that he knew he was +prohibited from trading on material nonpublic information about Rite Aid or the Planned Merger. +As alleged in the complaint, Sheinfeld’s trades in his and his family members’ accounts avoided +losses of more than $150,000. + + + + + + 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 Sheinfeld’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Steven J. Sheinfeld 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/2022/AAER-4316.txt b/raw/aaer/2022/AAER-4316.txt new file mode 100644 index 0000000000000000000000000000000000000000..c4db5fd62385412853b0f9d5a9304cc1e538e19d --- /dev/null +++ b/raw/aaer/2022/AAER-4316.txt @@ -0,0 +1,99 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95224 / July 8, 2022 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4316 / July 8, 2022 +ADMINISTRATIVE PROCEEDING +File No. 3-13421 + +In the Matter of +ARCANGELO +LOBERTO, CPA, CA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN +ACCOUNTANT RESPONSIBLE FOR THE +PREPARATION OR REVIEW OF FINANCIAL +STATEMENTS REQUIRED TO BE FILED WITH +THE COMMISSION + +On March 30, 2009, the Commission issued an Order Instituting Administrative +Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, Making Findings +and Imposing Remedial Sanctions (the “Suspension Order”) against Respondent Arcangelo +Loberto.1 The Suspension Order suspended Loberto from appearing or practicing before the +commission as an accountant but permitted Loberto, after five years from the date of the +Suspension Order and if certain conditions were met, to request that the Commission consider +his reinstatement to resume appearing or practicing before the Commission as (1) a preparer or +reviewer, or a person responsible for the preparation or review, of financial statements that are +required to be filed with the Commission; or (2) an independent accountant. +This order is issued in response to Loberto’s application for reinstatement to appear and +practice before the Commission as an accountant responsible for the preparation or review of +financial statements required to be filed with the Commission. +In the Suspension Order, the Commission found that Loberto had been permanently +enjoined from future violations of certain provisions of the federal securities laws and rules +thereunder. In the underlying civil injunctive action before the United States District Court for +the District of Columbia, the Commission alleged that Loberto, acting in concert with others, +illegally granted undisclosed, in-the-money options to executives and employees of Research in +Motion, Inc. by backdating approximately 1,400 stock option grants to coincide with historically + +1 See Accounting and Auditing Enforcement Release No. 2958, dated March 30, 2009. + + 2 +low closing prices for the Company’s stock. Loberto ignored certain information relating to +these grants and failed to record compensation expense for the backdated in-the-money options +that were granted between 1999 and the first quarter of 2007. + +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. + +Loberto has shown good cause for reinstatement and has met all of the conditions set +forth in the Suspension Order to be reinstated to appear and practice before the Commission as a +person responsible for the preparation or review of financial statements required to be filed with +the Commission and in this capacity has attested that he will have his work reviewed by the +independent audit committee of any company for which he works, or in some other manner +acceptable to the Commission, while practicing before the Commission in this capacity. Loberto +is not, at this time, seeking to appear or practice before the Commission as an independent +accountant. If, in the future, Loberto 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, among other things, that he has complied and will comply with the terms +of the Suspension Order. + +On the basis of information supplied, representations made, and undertakings agreed to +by Loberto, it appears that he has complied with the terms of the Suspension Order. No +information has come to the attention of the Commission relating to his character, integrity, +professional conduct or qualifications to practice before the Commission that would be a basis +for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of Practice. In +addition, Loberto has undertaken to have his work reviewed by the independent audit committee +of any company for which he works, or in some other manner acceptable to the Commission. As +a result, Loberto 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 +Arcangelo Loberto, CPA, CA is hereby reinstated to appear and practice before the Commission +as an accountant responsible for the preparation or review of financial statements required to be +filed with the Commission. + +By the Commission. + + +Vanessa Countryman +Secretary + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4317.pdf b/raw/aaer/2022/AAER-4317.pdf new file mode 100644 index 0000000000000000000000000000000000000000..fe0924df19d827b6ccc633d30e3c83b5306570b9 Binary files /dev/null and b/raw/aaer/2022/AAER-4317.pdf differ diff --git a/raw/aaer/2022/AAER-4321.txt b/raw/aaer/2022/AAER-4321.txt new file mode 100644 index 0000000000000000000000000000000000000000..019bcb58a252125c2e649c3bfd3e13d829dc96b8 --- /dev/null +++ b/raw/aaer/2022/AAER-4321.txt @@ -0,0 +1,581 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11092 / August 16, 2022 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95505 / August 16, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4321 / August 16, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20963 + + + +In the Matter of + +EAGLE BANCORP, INC. + +Respondent. + +CORRECTED 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 Eagle Bancorp, Inc. (“Eagle” 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. These proceedings concern material misstatements and omissions that Eagle, a +Bethesda, Maryland-based bank holding company, made about related party loans extended by +Eagle’s principal subsidiary, EagleBank, to family trusts affiliated with Ronald D. Paul (“Paul”), +Eagle’s former Chairman, CEO, and President, and to other related parties. + +2. From March 2015 through April 2018, Eagle failed to include these undisclosed +loans – which were hundreds of millions of dollars in the aggregate and over twice the amounts it +had publicly disclosed – in the related party loan balances included in its annual reports and proxy +statements filed with the Commission. Both Commission regulations and U.S. Generally Accepted +Accounting Principles (“GAAP”) in effect during the relevant period required Eagle to disclose +material related party transactions. Adequate disclosure of related party transactions is essential to +enable investors to evaluate an issuer’s corporate governance. + +3. In addition, following a report by a short seller in December 2017 that alleged, +among other things, that Eagle had made significant undisclosed loans to Paul’s family trusts, +Eagle and Paul falsely asserted that those loans were not related party loans and that Eagle was in +compliance with all related party loan requirements. Specifically, Eagle immediately issued two +separate press releases, one on the day of the short seller’s report and another two days later, +essentially denying the allegations and asserting that all relevant loans were in compliance with the +law. + +4. After the release of the short seller report, numerous Eagle investors inquired of +Eagle and Paul about the nature and amount of these loans to Paul’s family trusts, and whether they +were or should be disclosed as related party loans. Despite being aware of these inquiries, and +instead of undertaking a thorough and independent investigation of the short report’s allegations, +Eagle relied on Paul’s false assertions about the facts necessary for an accurate analysis of whether +the loans to Paul’s family trusts were related party transactions that should have been disclosed. + +5. In response to these direct questions from investors and securities analysts, in +meetings and on phone calls, Paul falsely asserted that, due to certain facts about his relationship +with the trusts, the loans were not related party transactions and that Eagle’s related party loan +disclosures were accurate. In January 2018, Paul learned from Eagle’s primary regulator that it +considered his family trusts to be related interests under applicable banking regulations. + +6. In its 2017 annual report filed with the Commission on March 1, 2018, Eagle again +omitted the loans to Paul’s family trusts from its related party loan balances. While Eagle did +disclose in that report the existence of loans to an unspecified trust “established by an executive + +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 +officer and director,” it falsely stated that those loans were not related party loans. Eagle repeated +these inaccurate disclosures in its proxy statement filed April 3, 2018. + +7. In advance of filing its annual report for 2018, Eagle reassessed and enhanced its +process for identifying and disclosing related party loans. In that annual report, filed with the +Commission on March 1, 2019, Eagle finally disclosed the loans to Paul’s family trusts in its +related party loan balances, and also reported previously-undisclosed related party loans to other +Eagle directors and their families. As a result, Eagle revised and increased its related party loan +balances to $238 million as of December 31, 2017, from a previously-reported balance of $61 +million, and to $138 million as of December 31, 2016, from a previously-reported balance of $53 +million. + +8. Based on this conduct, and as described in further detail below, Eagle violated +Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), +and 14(a) of the Exchange Act and Rules 12b-20, 13a-1 and 14a-9 thereunder. + +Respondent + +9. Eagle, a Maryland corporation based in Bethesda, Maryland, is a bank holding +company for EagleBank. Its common stock is registered under Section 12(b) of the Exchange Act +and trades on the NASDAQ Capital Market. During the relevant period, Eagle sold securities to +the public pursuant to registration statements filed with the Commission. + +Eagle’s Related Party Loan Disclosures + +10. FASB Accounting Standards Codification Topic 850, “Related Party Disclosures” +(“ASC 850”) requires companies to disclose in their financial statements material related party +transactions. Related parties include management, directors, and their immediate family members, +and “other parties that can significantly influence the management or operating policies of the +transacting parties or that have an ownership interest in one of the transacting parties and can +significantly influence the other to an extent that one or more of the transacting parties might be +prevented from fully pursuing its own separate interests.” (emphasis added) + +11. Rule 9-03 of Regulation S-X (“Rule 9-03”) requires bank holding companies to +disclose the aggregate dollar amount of loans exceeding $60,000 made to directors, executive +officers or shareholders or to any associates of such persons, as long as the aggregate amount of +such loans exceeds 5% of shareholders’ equity. “Associate” includes immediate family members, +entities in which such person has at least 10% ownership, and trusts “for which such person serves +as trustee or in a similar capacity.” + +12. Before March 2019, Eagle’s related party loan disclosures were not in accordance +with GAAP or Rule 9-03. The related party loan balances in Eagle’s financial statements and +proxy statements did not include loans that EagleBank extended to a trust established by Paul for +the benefit of his daughters, a trust established by Paul for the benefit of his siblings, nieces, and + 4 +nephews (“Trusts”), and entities in which the Trusts had a 10% or greater ownership interest +(“Trust Loans”). + +13. The Trust Loans were related party loans under ASC 850 since Paul could +“significantly influence the management or operating policies” of the Trusts and EagleBank. +Similarly, the Trust Loans were required to be disclosed under Rule 9-03 because Paul served the +Trusts “in a similar capacity” as a trustee. During the relevant period, the trustee of the Trusts was +Paul’s employee at his wholly-owned real estate development company. Pursuant to the Trusts’ +formation documents, Paul retained various powers over the Trusts, including the authority to +remove the trustee, with or without cause, and appoint a new trustee, and the power to swap assets +out of the Trusts for assets of equal value. Paul and the Trusts had management agreements in +place, under which Paul served as a manager of the Trusts. Pursuant to other agreements, Paul and +his real estate development company were entitled to development, management, and +administrative fees in connection with certain projects the Trusts owned. Paul also exercised +control over the Trusts as a practical matter by routinely directing the Trusts to invest in real estate +and other business ventures, take loans from Paul personally and from EagleBank, pay down those +loans, and to make distributions to beneficiaries. Paul also served as a manager of certain entities +owned by the Trusts that received loans from EagleBank. Paul engaged in these activities for his +own personal gain, including as the owner or an agent of his real estate development company, and +not as a director or officer of Eagle. + +Eagle’s Failure to Classify the Trust Loans as Related Party Loans + +14. Before March 2019, Eagle identified and reported related party loans in annual +reports and proxy statements using the list of loans it classified as subject to Federal Reserve +Regulation O. Regulation O governs loans to a bank’s executive officers, directors, and principal +shareholders, and any entity controlled by such person, including any entity over which any such +person has “the power to exercise a controlling influence over the management or policies.” 12 +C.F.R § 215. Prior to the second quarter of 2018, Eagle had no separate process for identifying and +reporting related party loans under ASC 850 and Rule 9-03. Nevertheless, under any of these +rules, Eagle should have classified the Trust Loans as related party loans. + +15. Prior to the second quarter of 2018, Eagle attempted to identify all Regulation O +loans by sending an annual survey to its officers and directors, asking them to disclose all entities – +including trusts – that they controlled, and all entities for which they had “the power to exercise a +controlling influence over the management or policies.” As part of this process, Eagle officers and +directors received annual Regulation O training and a separate memorandum with a primer on +Regulation O. + +16. In February 2014, Eagle sent out the annual Regulation O survey, as well as a list of +entities disclosed in response to the prior year’s survey. At that time, Paul returned the +questionnaire, striking a number of the entities owned by the Trusts. The Eagle employee +responsible for administering the survey questioned the deletions, and Paul responded that “the +owners are an entity whose members consist of an Irrevocable Trust for the benefit of my children +and/or other family members. I have NO control, decision making for these entities.” This + 5 +statement was false because Paul did have control of and make decisions for the Trusts during all +relevant times. + +17. In each subsequent Regulation O survey, Paul failed to disclose to Eagle personnel +the Trusts as entities that he controlled. + +18. As a result, Eagle did not classify the Trust Loans as Regulation O loans, and also +omitted the Trust Loans from the related party loan balances in its annual reports and proxy +statements. + +19. Eagle’s accounting department was not involved in the Regulation O survey +process, and prior to December 2017, was unaware of the Trust Loans. Eagle’s independent +auditor was also unaware of these loans prior to December 2017. Each year, the independent +auditor requested a list of Eagle’s related party loans. In response to this request, Eagle provided a +list of Regulation O loans, which omitted the Trust Loans. + +20. During its audit of Eagle’s 2015 financial statements, Eagle’s independent auditor +became aware that Eagle leased office space in a commercial property managed by Paul’s separate +property management business from an entity in which a Trust also had a 51% interest. The +auditor advised that Eagle should disclose the lease as a related party transaction in its financial +statements, and Eagle did so. When preparing Eagle’s annual reports to be filed with the +Commission each year thereafter, Eagle’s accounting department contacted Paul to confirm the +substance of the related party lease disclosure. Despite knowledge of this recurring disclosure of +the lease as a related party transaction, Paul did not disclose the Trust Loans to Eagle’s accounting +department or its independent auditor. Given that neither the accounting department nor the +independent auditor knew of the existence of the Trust Loans, neither party was in a position to ask +Paul about those loans. + +Eagle’s Disclosure Failures in Annual Reports and Proxy Statements Filed in 2015-2017 + +21. Eagle’s failure to include the Trust Loans in the total balances of related party loans +was in contravention of GAAP and Rule 9-03, and rendered its disclosures misleading by +understating the total balances of Eagle’s loans to related parties. + +22. In its 2014 annual report, filed on March 2, 2015, Eagle reported total related party +loan balances at December 31, 2014 of $17.1 million. In doing so, Eagle failed to include +approximately $24.8 million of Trust Loans. + +23. In its 2015 annual report, filed on February 29, 2016, and its 2016 proxy statement +filed on April 1, 2016, Eagle reported total related party loans balances at December 31, 2015 of +$29.9 million. In doing so, Eagle failed to include approximately $37.3 million of Trust Loans. + +24. In its 2016 annual report, filed on March 1, 2017, and its 2017 proxy statement filed +on April 3, 2017, Eagle reported total related party loan balances at December 31, 2016 of $52.6 +million. In doing so, Eagle failed to include approximately $72.7 million of Trust Loans. + 6 + +Eagle’s Misleading Responses to the December 2017 Short Report + +25. On December 1, 2017, a short-selling research firm published a report, alleging, +among other things, that Eagle had made large, undisclosed loans financing Paul’s real estate +ventures. The report identified several Trust Loans, explaining that they were “structured so that +Eagle makes loans to LLCs owned by [a] Trust, an entity created by [Paul] for the benefit of his +family … and the properties held by the trust appear to be controlled by Paul as an extension of +[his wholly-owned real estate development company].” + +26. Following the release of the report, Eagle’s stock price dropped by more than 24%, +to close at $49.95 on December 1, 2017, from a $66.15 closing price the prior trading day. + +27. On December 1, 2017, the same day that the short seller’s report was published, +Eagle issued a press release, subsequently filed with the Commission on Form 8-K, titled, “Eagle +Bancorp, Inc. Denies Allegations In Deceptive and Misleading Report.” In the press release, +“Eagle categorically reject[ed] the assertions and implications” in the short report. Specifically +addressing the allegations regarding undisclosed loans to entities related to Paul, the release stated: + +All Loans Referenced in the Piece Fully Meet Legal +Requirements. The only credit issued by Eagle to the identified +executive was a line of credit in case of an overdraft; the line never +was used and has not been funded. Eagle takes seriously its +obligation to comply with all applicable laws and regulations, +including Regulation O. Its compliance is regularly examined +internally, and is also examined by agency regulators. Contrary to +the misrepresentations by [the short seller], the loans identified in +the piece were not made to the identified executive, and, in any +event, were approved and disclosed (where required) in +compliance with Regulation O. + +28. Two days later, on Sunday, December 3, 2017, Eagle issued another press release, +subsequently filed with the Commission on Form 8-K: “Eagle Bancorp Rebuts Claims of Internal +Control Weaknesses and Alerts Shareholders and Customers to be Wary of Unscrupulous Short +Seller Tactics,” which stated: + +There are required disclosures of loans to insiders (as defined in +Regulation O), both in annual filings with the Securities and +Exchange Commission and in quarterly Bank regulatory reports. +The filings by the Company have always been complete, receiving +the attention of monthly Board meetings, the Bank’s Compliance +team, the internal Disclosure Controls Committee and the Audit +Committee of the Board. In addition, there are external +independent auditor reviews. In all such cases, the loans are made +on market-rate, not preferential, rates and terms. The Bank treats + 7 +insider and related party loans exactly the same as borrowers who +have no director or officer relationship with the Bank. . . . + +Our internal controls are strong and all required disclosures, +including loans to insiders, have been met. . . . + +The allegations intimated last Friday by the short seller . . . that +Eagle’s pricing, underwriting, internal controls and/or its +disclosures are somehow lacking are totally unfounded. + +29. In a letter written by Paul and others to EagleBank customers dated December 4, +2017, and subsequently filed with the Commission on Form 8-K, Eagle stated that: “The short +seller alleged that EagleBank and its directors and officers acted improperly in making loans to +insiders. EagleBank categorically rejects this deceptive and misleading allegation. . . . Any loans +subject to Regulation O (the regulation that addresses the rules and processes for making loans to +insiders) have been made, approved and disclosed in compliance with that regulation.” + +30. These statements were either materially false or misleading. As discussed, Eagle’s +failure to include the Trust Loans in the total balances of related party loans was in contravention +of GAAP and Rule 9-03, and rendered its disclosures from 2015-2017 misleading by understating +the total balances of Eagle’s loans to related parties. Furthermore, the majority of the loans +referenced in the short seller report itself were loans that should have been included in Eagle’s +prior related party loan disclosures, but were not. Instead of undertaking a thorough and +independent investigation of the short report’s allegations, Eagle relied on Paul’s false assertions +about the facts necessary for an accurate analysis of whether the Trust Loans were related party +transactions that should have been disclosed. + +31. On December 4, 2017, the first trading day after the short report was published and +after Eagle’s press releases were issued, Eagle’s stock price rebounded 13%. + +32. Following the release of the short report, in December 2017, numerous investors +and analysts contacted Eagle to inquire as to the accuracy of the allegations in the report. Among +other things, investors and analysts asked about the amount of Eagle’s Regulation O or related +party loans and whether the Trust Loans should be classified as such. In calls and meetings with +investors and analysts, Paul falsely asserted that the Trust Loans were not related party loans, +because he did not control or make any decisions for the Trusts, which he knew was untrue. In +these calls and meetings, Paul also falsely asserted that Eagle’s related party loan disclosures were +complete. Paul also gave interviews to several media outlets, asserting that the short report was +“100 percent false.” + +Eagle Made Material Misstatements and Omissions in Its 2017 Annual Report + +33. In a January 31, 2018 meeting, examiners from the Federal Reserve Bank of +Richmond (“FRB”) advised Paul and Eagle that the Trusts were related interests of Paul because +he had the ability to replace the trustee and swap assets of the Trusts at will, and therefore the Trust + 8 +Loans were in violation of Regulation O. Eagle understood that if the Trust Loans were subject to +Regulation O, then they also would need to be disclosed as related party loans in Eagle’s financial +statements. + +34. Paul and Eagle were aware that Eagle’s independent auditor contacted FRB +examiners to discuss the Regulation O status of the Trust Loans with the FRB examiners, and that +the examiners would not discuss the issue since it related to a pending examination. However, no +one from Eagle told the independent auditor that the FRB had determined that the Trust Loans +were Regulation O loans. A March 1, 2018 management representation letter to the independent +auditor, signed by Paul, stated: “We have not received information from [the FRB] that could have +a material impact on the financial statements, particularly as it relates to the determination of +related parties. . . There have been no . . . Violations or possible violations of laws or regulations.” + +35. In February 2018, Eagle’s independent auditor determined that the Trust Loans +should be disclosed as related party transactions in Eagle’s financial statements because Paul had +the ability to exercise significant influence over the Trusts due to his employment of the trustee. +The independent auditor also concluded that Eagle’s failure to disclose these loans previously was +a significant deficiency in its internal controls over financial reporting. + +36. The independent auditor discussed its conclusions at a February 27, 2018 Audit +Committee meeting involving Paul, other Eagle officers and employees, and Eagle’s outside +counsel. Eagle and its outside counsel disagreed with the auditor’s conclusions, and stated their +belief that “because there is a separate trustee responsible for management of the trust, and +distributions, if any, to the named beneficiaries are completely discretionary with the trustee, the +relationship was not a related party.” + +37. As a compromise, Eagle agreed to disclose in the annual report the existence of +loans to an unspecified trust created by an unspecified officer and director, while not classifying +them as related party loans. + +38. In its 2017 annual report, filed on March 1, 2018, Eagle reported total related party +loan balances at December 31, 2017 of $60.9 million. In doing so, Eagle failed to include +approximately $89.6 million of Trust Loans. + +39. In a paragraph below the related party loan balances, Eagle stated: + +The Bank has made an aggregate of $4.0 million of loans to a trust +with an independent third party trustee, established by an +executive officer and director, of which the children of such +executive officer and director are discretionary beneficiaries, and +over which such individuals have no investment or operational +authority, and an aggregate of $65.6 million of loans to entities in +which the trust has an ownership interest in excess of 10%, which +the Company does not consider to be related party transactions. +(emphasis added) + 9 + +40. This description was misleading for several reasons. First, the disclosure +characterized the trustee as an “independent third party,” without specifying that the trustee was +Paul’s employee and close friend, and that Paul had the unilateral right to remove the trustee +without cause. Second, in many instances, Paul in fact exercised investment and operational +authority over the Trust. Third, because Paul exercised investment and operational authority over +the Trusts, the Trust Loans were related party transactions. + +41. While Eagle’s 2017 annual report stated that the loans to an unspecified trust were +not related party transactions, the same document disclosed a lease for office space in a +commercial property managed by Paul’s separate property management business from an entity in +which a Trust also had a 51% interest as a related party transaction. Specifically, the annual report +identified lease payments to “a limited liability company in which a trust for the benefit of an +executive officer’s children has a 51% interest” as related party transactions. The independent +auditor informed Eagle about this discrepancy before the annual report was filed, but it was not +resolved. + +Eagle Repeats Misstatements and Omissions in its 2018 Proxy Statement + +42. On March 2, 2018, the day after Eagle filed its 2017 annual report, Eagle started +treating at least one of the Trust Loans as a Regulation O loan in its internal systems. This change +was made in response to FRB examiners, who expressed concerns to Eagle that the Trust Loans +were subject to Regulation O. + +43. Despite this internal reclassification of a Trust Loan as a Regulation O loan, Eagle’s +2018 proxy statement, filed on April 3, 2018, did not disclose the Trust Loans as related party +loans: + +The maximum aggregate amount of loans (including lines of credit) +to officers, directors and affiliates of the Company and their related +interests during the year ended December 31, 2017 amounted to $85 +million, representing approximately 8.9% of the Company’s total +shareholders’ equity at December 31, 2017. . . . The Bank has made +an aggregate of $4.0 million of loans to a trust with an independent +third party trustee, established by an executive officer and director, +of which the children of such executive officer and director are +discretionary beneficiaries, and over which such individuals have no +investment or operational authority, and an aggregate of $65.6 +million of loans to entities in which the trust has an ownership +interest in excess of 10%, which the Company does not consider to +be related party transactions. + + 10 +Eagle Discloses Revised Related Party Loan Balances in its 2018 Annual Report + +44. In May 2018, Eagle received the final joint examination report from the FRB and a +state regulator, which found that Paul had “a controlling influence over the management of the +trusts” and “[a]s a result of his control, both trusts are deemed related interests of CEO [] and are +subject to Regulation O.” + +45. During the second quarter of 2018, Eagle began developing a new, enhanced +process to identify and disclose all related party transactions in its financial statements and filings +with the Commission. This process no longer relied exclusively on Regulation O, but was +designed to identify related party transactions under all applicable rules, including ASC 850 and +Rule 9-03. + +46. As a result of this improved process, Eagle identified additional related party loans, +including loans to an entity in which a director was a trustee, loans to an entity in which a director +had an ownership interest exceeding 10%, and loans to an entity in which a director’s son had an +ownership interest exceeding 10%. + +47. In its 2018 annual report, filed on March 1, 2019, Eagle included the Trust Loans, +as well as loans identified as a result of its process improvements, in its related party loan balances. +Eagle disclosed an increase in the outstanding related party loan balances to $238 million as of +December 31, 2017, from a previously-reported balance of $61 million, and to $138 million as of +December 31, 2016, from a previously-reported balance of $53 million. + +Eagle’s False Books and Records and Inadequate Internal Controls + +48. During the relevant period, Eagle’s books and records understated its related party +loan balances for the reasons discussed above. Furthermore, during the relevant period, Eagle’s +internal controls were insufficient to prevent these misstatements. Specifically, Eagle’s process for +identifying related party loans relied on the wrong definition of “related party” – Regulation O +instead of ASC 850 and Rule 9-03 – and heavily and unreasonably relied on Eagle’s officers and +directors understanding and correctly reporting all related parties that met that technical definition. + +49. In March 2019, shortly after the filing of its 2018 annual report, Paul retired from +Eagle, citing health reasons. As part of the December 31, 2019 audit, Eagle’s independent auditor +identified a material weakness in Eagle’s internal control over financial reporting “resulting from +tone at the top issues that contributed to a control environment that was insufficiently tailored to +the culture of deference afforded to” Paul. Subsequently, as part of the December 31, 2020 audit, +Eagle’s independent auditor found that “[a]s of December 31, 2020, the enhanced controls are +operating effectively and the deficiencies that contributed to the Material Weakness [identified in +the 2019 audit] have been fully and effectively remediated.” + + 11 +Violations + +50. As a result of the conduct described above, Eagle violated Sections 17(a)(2) and +17(a)(3) of the Securities Act, which prohibit any person from directly or indirectly obtaining +money or property by means of any untrue statement of 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 are made, not misleading, or engaging in any transaction, practice, or course of +business which operates or would operate as a fraud or deceit upon the purchaser, in the offer or +sale of securities. A violation of these provisions does not require scienter and may rest on a +finding of negligence. + +51. As a result of the conduct described above, Eagle violated Section 13(a) of the +Exchange Act and Rule 13a-1 thereunder, which require issuers with securities registered under +Section 12 of the Exchange Act to file annual, current, and quarterly reports with the Commission +containing such information as the Commission’s rules may require. Eagle also violated Rule 12b- +20 of the Exchange Act, which requires an issuer to include in a statement or report filed with the +Commission any information necessary to make the required statements in the filing not materially +misleading. A violation of these reporting provisions does not require scienter. + +52. As a result of the conduct described above, Eagle 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. Scienter is not +an element of the books and records provision. + +53. As a result of the conduct described above, Eagle 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 and maintain a system of internal accounting controls sufficient to provide +reasonable assurance that, among other things, transactions are recorded as necessary to permit +preparation of financial statements in conformity with GAAP. Scienter is not an element of the +internal accounting control provisions. + +54. As a result of the conduct described above, Eagle violated Section 14(a) of the +Exchange Act and Rule 14a-9 thereunder. Section 14(a) of the Exchange Act makes it unlawful to +solicit any proxy in respect of securities registered under Section 12 of the Exchange Act in +contravention of such rules and regulations as the Commission may prescribe. Rule 14a-9 +prohibits the use of proxy statements containing materially false or misleading statements or +materially misleading omissions. No showing of scienter is required to establish a violation of +Section 14(a) of the Exchange Act or Rule 14a-9 thereunder. + +Disgorgement and Civil Penalties + +The disgorgement and prejudgment interest ordered in paragraph IV.B, infra, is +consistent with equitable principles and does not exceed Respondent’s net profits from its +violations and will be distributed to harmed investors to the extent feasible. The Commission + 12 +will hold funds paid pursuant to paragraph IV.B in an account at the United States Treasury +pending distribution. Upon approval of the distribution final accounting by the Commission, any +amounts remaining that are infeasible to return to investors, and any amounts returned to the +Commission in the future that are infeasible to return to investors, may be transferred to the +general fund of the U.S. Treasury, subject to Section 21F(g)(3) of the Exchange Act. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Eagle’s Offer. + + Accordingly, pursuant to Sections 8A of the Securities Act and Section 21C of the +Exchange Act, it is hereby ORDERED that: + + A. Respondent Eagle cease and desist from committing or causing any violations and +any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, Sections 13(a), +13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act, and Rules 12b-20, 13a-1, and 14a-9 +thereunder. + +B. Respondent Eagle shall, within 10 days of the entry of this Order, pay disgorgement +of $2,600,000, prejudgment interest of $750,493, and a civil money penalty in the amount of +$10,000,000 to the Securities and Exchange Commission. 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 a 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 + +(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 + + 13 +Payments by check or money order must be accompanied by a cover letter identifying Eagle 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 Kevin Guerrero, Assistant Director, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549. + + C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is +created for the disgorgement, prejudgment interest, and penalties referenced in paragraph IV.B +above. This Fair Fund may be combined with any fund established for the benefit of harmed +investors in SEC v. Ronald D. Paul, 22-cv-06985 (S.D.N.Y.). 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/2022/AAER-4324.txt b/raw/aaer/2022/AAER-4324.txt new file mode 100644 index 0000000000000000000000000000000000000000..493f7a4c4e9c4b036845ee6b71345a9f3523e771 --- /dev/null +++ b/raw/aaer/2022/AAER-4324.txt @@ -0,0 +1,534 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95593 / August 24, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4324 / August 24, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-20998 + +In the Matter of + +Farber Hass Hurley LLP; Michel +Abedian, CPA; and Michael +Hurley, 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 +proceedings be, and hereby are, instituted against Farber Hass Hurley LLP (“FHH”), Michel +Abedian, CPA (“Abedian”), and Michael Hurley, CPA (“Hurley”) (each a “Respondent” and +collectively “Respondents”) pursuant to Section 4C of the Securities Exchange Act of 19341 (the +“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 ch aracter or +integrity, or to have engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the securities laws or the +rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or improper +professional conduct. + + + + + + + +2 +II. + + In anticipation of the institution of these proceedings, Respondents have submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Public +Administrative 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’ Offer, the Commission finds3 that: + +SUMMARY + +1. This matter involves repeated failures by FHH, an accounting firm, and its +partners Abedian and Hurley, in conducting custody examinations of two SEC-registered +investment advisers pursuant to Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder +(the “Custody Rule”). During the relevant period, the advisers had custody of client funds or +securities and were required by the Custody Rule to have an independent public accountant +conduct annual surprise examinations to verify those funds and securities. Respondents conducted +the examinations for the two advisers for the years 2017 through 2020 (“Custody Examinations”), +and filed reports on Form ADV-E with the SEC (“Custody Examination reports”), but failed to +perform sufficient and appropriate examination procedures as a basis for those reports. +Specifically, Abedian, as engagement partner, failed to confirm account balances and transactions +directly with the custodial clients, and failed to reconcile confirmations received from the qualified +custodians that held client assets to the adviser’s books and records or to perform alternative +procedures, while Hurley, who conducted engagement quality control reviews of all the Custody +Examinations and knew or should have known about the deficiencies, failed to ensure that +sufficient and appropriate examination procedures were performed and that the examination +reports were appropriate in the circumstances. As a result, Respondents 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. + + + +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 +Respondents + +2. Farber Hass Hurley LLP is a California limited liability partnership and +accounting firm registered with the PCAOB. FHH has five offices, including one in Chatsworth, +California, and provides accounting, tax, auditing and consulting services to a variety of clients +including several registered investment advisers and public companies. FHH was engaged to +perform the Custody Examinations for two investment advisers for 2017 through 2020. FHH +resigned from both engagements in September 2021. + +3. Michel Abedian, age 48, resides in La Crescenta, California. Abedian is +an equity partner of FHH and a certified public accountant licensed in California since 2004. He +was the engagement partner for all of the Custody Examinations FHH performed for the two +adviser clients from 2017 through 2020. + +4. Michael Hurley, age 69, resides in Porter Ranch, California. Hurley is a +non-equity partner of FHH and a certified public accountant licensed in California since 1981, in +Arizona since 2002, and in Hawaii since 2016. Hurley was involved in establishing FHH’s +quality control policies and was responsible for monitoring compliance with these policies. Hurley +performed engagement quality control reviews for all of the Custody Examinations FHH +performed for the two adviser clients from 2017 through 2020. + +Relevant Entities + +5. Adviser A is a California limited liability company and an SEC-registered +investment adviser that provides investment management services to high-net-worth clients. + +6. Adviser B is a Georgia corporation located in El Segundo, California and +an SEC-registered investment adviser that provides non-discretionary real estate investment +advisory services to two clients. + +Facts + +Background + +7. The Custody Rule, Rule 206(4)-2, requires registered investment advisers +with custody of client funds or securities to implement certain controls designed to protect those +client assets from loss, misappropriation, misuse, or the adviser’s insolvency, including +maintaining these funds and securities with a qualified custodian and obtaining an annual surprise +custody examination by an independent public accountant to verify client assets. An adviser has +custody if it holds, directly or indirectly, client funds or securities, or has any authority to obtain +possession of them, including when acting as a trustee of a trust that gives the adviser access to + + + + +4 +client funds or securities. Rule 206(4)-2(d)(2) + +8. During the relevant period, Adviser A had custody of between $9 million +and $20 million of funds and securities for between four and twelve clients by virtue of serving as +a trustee for these clients. FHH was first engaged by Adviser A in November 2018 to perform a +surprise examination for 2018 and, because Adviser A had failed to obtain an examination for +2017, to conduct one retroactively for 2017. FHH continued to conduct Custody Examinations for +the adviser for 2019 and 2020. + +9. During the relevant period, Adviser B had custody of at least $10 million +of funds of one client because it had access to client cash and bank accounts, and retained FHH to +conduct Custody Examinations for years 2017 through 2020. + +10. In September 2021, FHH resigned its engagement from both advisers. + +Respondents Engaged in Improper Professional Conduct in Performing the Custody +Examinations of the Advisers + +11. An accountant should conduct the Custody Examination, in accordance +with American Institute of Certified Public Accountants’ (“AICPA”) standards for attestation +engagements and compliance examinations, which are promulgated in AT-C §105A “Concepts +Common to all Attestation Engagements,” AT-C §205A “Examination Engagements,” and AT-C +§315 “Compliance Attestation.” In conducting such examinations, the objectives of the +accountant are to obtain reasonable assurance about whether the entity complied with the +specified requirements in all material respects, and to express an opinion thereon. (AT-C §315, ¶ +06) + +12. AT-C § 315, ¶13 provides that when conducting examinations, the +accountant should obtain an understanding of the specified requirements. AT-C § 315, ¶13a +provides further that the accountant’s procedures to obtain that understanding should include +consideration of laws, regulations, rules, contracts, and grants that pertain to the specified +requirements, including published requirements. To comply with the requirements of AT-C § 315, +¶13 and AT-C § 315, ¶13a, the accountant should conduct the examinations pursuant to SEC +guidance set forth in Release No. IA-2969, Commission Guidance Regarding Independent Public +Accountant Engagements Performed Pursuant to Rule 206(4)-2 Under the Investment Advisers +Act of 1940 (Dec. 30, 2009) (“IA-2969”), which identifies procedures which should be included +in the performance of custody examinations. To obtain reasonable assurance to support an +opinion, accountants should obtain sufficient appropriate evidence to reduce attestation risk to an +acceptably low level and thereby enable the accountant to draw reasonable conclusions on which +to base the accountant’s opinion. (AT-C §205A, ¶19 and AT-C§315, ¶ 06). IA-2969 specifically +provides that the independent accountant’s procedures should normally include (i) confirmation of + + + + +5 +client funds and securities with qualified custodians and reconciliation of confirmations received +from the custodians to the adviser’s records, and (ii) confirmation of client funds, securities and +account transactions directly with custodial clients and reconciliation of confirmations received +from the clients to the adviser’s records. + +13. During the relevant period, Abedian, as the engagement partner, +conducted the Custody Examinations of the two advisers, Hurley performed the engagement +quality control reviews on all of them, and FHH issued examination reports that were filed with +the SEC on Forms ADV-E. In all of the Custody Examination reports, FHH claimed that it had +examined each adviser’s compliance, or assertion of such compliance, with paragraph (a)(1) of +Rule 206(4)-2 and Rule 204-2(b) in accordance with the Custody Rule and that the examinations +were conducted in accordance with the AICPA Attestation Standards. However, as discussed +below, in conducting the Custody Examinations, Abedian failed to confirm balances and +transactions with the custodial clients, and failed to reconcile confirmations received from the +custodians to the adviser’s books and records or to perform alternative procedures, while Hurley +failed to ensure that sufficient procedures were performed and the examination reports were +appropriate in the circumstances, and that the Custody Examinations were conducted in accordance +with AICPA attestation standards and applicable regulatory requirements. + +Abedian + +14. In conducting the Custody Examinations, Abedian failed to design and +perform the procedures set forth in IA- 2969 and otherwise failed to obtain sufficient appropriate +evidence to support FHH’s opinion. + +15. Abedian failed to reconcile confirmations received from qualified +custodians to the adviser’s books and records. For Adviser A’s Custody Examinations, Abedian +obtained confirmations from the qualified custodians but failed to reconcile these confirmations to +the adviser’s books and records. He also failed to document any procedures performed or +conclusions reached with regard to these confirmations. With respect to Adviser B’s Custody +Examinations, Abedian obtained reconciliations prepared by the adviser but failed to perform +sufficient procedures to verify the legitimacy of significant reconciling items or to document +conclusions reached regarding these items. As a result, Abedian neither verified that the funds +held by the custodians reconciled to the adviser’s books and records nor performed alternative +procedures. + +16. When performing the Custody Examinations of Adviser A for 2017 and +2018, Abedian failed to send confirmation letters to custodial clients requesting that they confirm +account balances and transactions, even though he knew at the time that the qualified custodians +did not send account statements to the custodial clients during most of the period. For all other +examinations, Abedian requested that custodial clients confirm that they received periodic + + + + +6 +statements directly from the qualified custodians and that such statements show account balances +and transactions, but failed to request that clients confirm their agreement with account balances +and account transactions. His confirmation requests did not comply with the procedures set forth +in IA-2969, which provide that an accountant should obtain records to verify balances and +transactions directly with custodial clients. Abedian also failed to perform any alternative +procedures to verify the client’s balances and transactions as understood by the clients. + +17. Abedian did not act with due professional care. He failed to exercise +professional skepticism (AT-C §105A, ¶43) and professional judgment (AT-C §105A, ¶45) in +planning and performing the Custody Examinations, when he failed to perform procedures set +forth in IA-2969, and when he did not consider contradictory evidence in planning and conducting +the 2019 and 2020 Adviser A Custody Examinations. Specifically, Abedian knew that in 2017 and +2018 Advisor A had various internal control and books and records deficiencies, but did not +consider these deficiencies in designing attestation procedures and conducting the 2019 and 2020 +Custody Examinations of Adviser A. At the time, he knew the adviser’s books and records were +not accurately reconciled to the confirmations obtained from qualified custodians in either year, +and that at least one client did not receive statements directly from the qualified custodian in 2019, +but without considering these deficiencies and contradictory evidence, Abedian accepted the +adviser’s representation that the books and records were accurate and that all previously identified +internal control deficiencies were resolved. This contributed to his failure to obtain sufficient +appropriate evidence. + +Hurley + +18. Hurley failed to meet professional standards for engagement quality +control reviews. As the quality control reviewer, he should have performed an objective +evaluation of the significant judgments made by the engagement team and the conclusions +reached in formulating the report and considered whether the report was appropriate. (AT-C +§105A, ¶42, A65) He reviewed the Custody Examination work papers, including the +confirmations, and he knew or should have known about the deficiencies in Abedian’s work. +Specifically, he knew or should have known that Abedian did not perform the confirmation and +reconciliation procedures set forth in IA-2969 or alternative procedures. Nevertheless, he failed +to ensure that sufficient procedures were performed, that the examination was conducted in +accordance with AICPA attestation standards and regulatory requirements, and that the +examination reports were appropriate in the circumstances. This was in spite of the fact that +Hurley was involved in establishing FHH’s quality control policies and was responsible for +monitoring compliance with these policies. + + + + + + +7 +FHH + +19. Although FHH established a system of quality control policies which was +intended to provide it with assurance that the firm and its personnel comply with professional +standards and regulatory requirements and to determine that reports issued by the firm are +appropriate in the circumstances, it did not effectively monitor compliance with those policies. + +20. Given Abedian’s failure to perform appropriate procedures and failure to +obtain sufficient evidence, FHH’s opinions expressed in all of the Custody Examination reports +lacked reasonable basis in violation of AT-C §205A, ¶19 and AT-C §315, ¶06. + +21. FHH also violated AT-C §105A, ¶13, which provides that accountants +should not represent compliance with attestation standards unless all AT-C sections relevant to +the engagement were complied with. FHH falsely claimed in all of the Custody Examination +reports that it had examined each adviser’s compliance, or assertion of such compliance, with +paragraph (a)(1) of Rule 206(4)-2 and Rule 204-2(b) in accordance with the Custody Rule and +that the Custody Examinations were conducted in accordance with AICPA attestation standards, +when they were not. + +Findings + +22. Based on the foregoing, the Commission finds that FHH, Abedian, and +Hurley 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. + +Remedial Action + +In determining to accept Respondents’ Offer, the Commission considered the +Respondents’ remedial actions, including their voluntarily ceasing to conduct surprise custody +examinations of registered investment advisers. + + + + + + +8 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offer. + + Accordingly, pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice, it is hereby ORDERED, effective immediately, that: + + A. Respondent FHH is hereby censured. + + B. Respondents Abedian and Hurley are denied the privilege of appearing or +practicing before the Commission as an accountant. + +C. After two years from the date of the Order, Respondent Abedian may request that +the Commission consider Abedian’s reinstatement by submitting an application to the attention of +the Office of the Chief Accountant. + +D. After one year from the date of the Order, Respondent Hurley may request that the +Commission consider Hurley’s reinstatement by submitting an application to the attention of the +Office of the Chief Accountant. + +E. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Respondent +shall submit a written statement attesting to an undertaking to have Respondent’s work reviewed +by the independent audit committee of any public company for which Respondent works or in +some other manner acceptable to the Commission, as long as Respondent practices before the +Commission in this capacity and will comply with any Commission or other requirements related +to the appearance and practice before the Commission as an accountant. + +F. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Exchange Act, as a preparer or reviewer, or as a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission, Respondent shall +submit a statement prepared by the audit committee(s) with which Respondent will be associated, +including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Respondent will be associated; + + + + + +9 +2. A description of Respondent’s role on the specific audit committee(s) with +which Respondent will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Respondent’s service on the specific +audit committee; and + +5. A statement noting whether Respondent will be able to act unilaterally on behalf +of the Audit Committee as a whole. + +G. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Respondent must be +associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (the “PCAOB”) and Respondent shall submit the following additional +information: + +1. A statement from the public accounting firm (the “Firm”) with which +Respondent is associated, stating that the firm is registered with the PCAOB in +accordance with the Sarbanes-Oxley Act of 2002; + +2. A statement from the Firm with which the Respondent is associated that the +Firm has been inspected by the PCAOB and that the PCAOB did not identify +any criticisms of or potential defects in the Firm’s quality control system that +would indicate that Respondent will not receive appropriate supervision; and + +3. A statement from Respondent indicating that the PCAOB has taken no +disciplinary actions against Respondent since seven (7) years prior to the date of +the Order other than for the conduct that was the basis for the Order. + +H. In support of any application for reinstatement, Respondent shall provide +documentation showing that Respondent is currently licensed as a certified public accountant +(“CPA”) and that Respondent has resolved all other disciplinary issues with any applicable state +boards of accountancy. If Respondent is not currently licensed as a CPA, Respondent shall provide +documentation showing that Respondent’s licensure is dependent upon reinstatement by the +Commission. + +I. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + + + + + +10 +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings, or any related Commission +proceedings, including any orders requiring payment of disgorgement or +penalties; + +2. That Respondent undertakes to notify the Commission immediately in writing if +any information submitted in support of the application for reinstatement +becomes materially false or misleading or otherwise changes in any material +way while the application is pending; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a basis +for a forthwith suspension from appearing or practicing before the Commission +pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +(a) has not been charged with a felony or a misdemeanor involving +moral turpitude as set forth in Rule 102(e)(2) of the +Commission’s Rules of Practice, except for any charge +concerning the conduct that was the basis for the Order; + +(b) has not been found by the Commission or a court of the United +States to have committed a violation of the federal securities +laws, and has not been enjoined from violating the federal +securities laws, except for any finding or injunction concerning +the conduct that was the basis for the Order; + +(c) has not been charged by the Commission or the United States +with a violation of the federal securities laws, except for any +charge concerning the conduct that was the basis for the Order; + +(d) has not been found by a court of the United States (or any +agency of the United States) or any state, territory, district, +commonwealth, or possession, or any bar thereof to have +committed an offense (civil or criminal) involving moral +turpitude, except for any finding concerning the conduct that +was the basis for the Order; and + +(e) has not been charged by the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or + + + + +11 +possession, civilly or criminally, with having committed an act +of moral turpitude, except for any charge concerning the conduct +that was the basis for the Order. + +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis for +the Order. + +6. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by any State Board of Accountancy, or other regulatory body. + +J. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for +entities regulated by the Commission, and the persons to whom +Respondent reported for such work; and + +2. Respondent’s plans for any future appearance or practice before the +Commission. + +K. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +L. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under Paragraph K, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + + + + + +12 +M. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph K, the burden shall be on the Respondent to provide an explanation as +to the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + + +N. If the Commission declines to reinstate Respondent pursuant to Paragraphs L and +M, it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an accountant. + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4326.txt b/raw/aaer/2022/AAER-4326.txt new file mode 100644 index 0000000000000000000000000000000000000000..07ab856b5595071e5d85629d8717cd3461e3b2c9 --- /dev/null +++ b/raw/aaer/2022/AAER-4326.txt @@ -0,0 +1,153 @@ + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95610 / August 25, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4326 / August 25, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21004 + + +In the Matter of + +Laurel Krzeminski + +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 Laurel Krzeminski (“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over her and the subject matter of these proceedings, which are +admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings +Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a +Cease-and-Desist Order (“Order”), as set forth below. + + + + + + 2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary +1. Granite Construction Inc. (“Granite”) is a publicly traded company that specializes +in the construction of infrastructure projects. From at least 2017 through the third quarter of 2019 +(“the Relevant Period”), Granite recognized revenue in incorrect periods with respect to multiple +projects managed by its significant subdivision, the Heavy Civil operating group (“Heavy Civil +Group”). As a result, Granite materially overstated revenue for certain reporting periods and +understated revenue in other periods. +2. In February 2021, Granite announced material misstatements in its financial +statements for its Forms 10-K for fiscal years 2017 and 2018 and its Forms 10-Q for each of the +quarters of 2018 and 2019. +3. Laurel Krzeminski, who was Granite’s Chief Financial Officer when Granite filed +its Form 10-K for fiscal year 2017 and Form 10-Q for the first quarter of 2018, received bonuses, +incentive-based compensation, and equity-based compensation during the 12-month periods +following these filings containing financial results that Granite misstated as a result of misconduct. +Krzeminski, who is not being charged with misconduct, reimbursed Granite for this compensation +as required under Section 304(a) of the Sarbanes-Oxley Act of 2002, in connection with this Order. +Respondent +4. Laurel Krzeminski is 67 years old and resides in Westport, Connecticut. +Krzeminski was Granite’s Chief Financial Officer from June 2010 until she retired on July 6, 2018. +Related Entity +5. Granite Construction Inc. is a Delaware corporation headquartered in Watsonville, +California that was founded in 1922. Granite’s common stock is registered with the Commission +pursuant to Section 12(b) of the Securities Exchange Act of 1934. Granite’s stock has been publicly +traded since 1990. Granite’s common stock trades on the New York Stock Exchange. Granite 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. + +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 +6. On March 2, 2020, Granite announced that its Audit Committee was conducting an +internal investigation into the accuracy of the Heavy Civil Group’s prior-period reporting, and that it +would need to delay the filing of its Form 10-K for fiscal year 2019. +7. On February 19, 2021, Granite announced material misstatements in its financial +statements and related disclosures for fiscal years 2017 and 2018 and the quarterly reports for 2018 +and 2019 because of errors in the Heavy Civil Group’s project forecasts. +8. On February 22, 2021, Granite restated its previously issued consolidated financial +statements for its Forms 10-K for fiscal years 2017 and 2018 and its Forms 10-Q for each of the +quarters of 2018 and 2019. The restatement corrected misstatements that overstated its revenue for +certain periods and understated its revenue in other periods. +9. The restatement of Granite’s revenues resulted from its improper deferral of +expected costs in quarterly project forecasts for several of the Heavy Civil Group’s largest projects. +According to Granite’s critical accounting policies disclosed in its Forms 10-K for fiscal years 2017 +and 2018, the company recognized quarterly and annual revenues under long-term construction +contracts using a percentage of completion ratio, which analyzed actual incurred costs and total +expected costs for each construction project, to determine how much revenue was earned by Granite +during that period. Thus, an increase in the total expected costs from period to period would result +in lower earned revenues. +10. The Senior Vice President of the Heavy Civil Group, while acting on behalf of +Granite, approved and certified project forecasts despite, among other things, being presented with +warning signs that the project forecasts understated costs, and thus overstated revenue, during +multiple quarters. These inaccurate project forecasts caused Granite to recognize revenue earlier in +incorrect periods for fiscal years 2017 and 2018. +Compensation of CFO Krzeminski +11. During the 12-month periods that followed the filing of Granite’s Form 10-K for +fiscal year 2017 and Form 10-Q for the first quarter of 2018, which contained financial statements +requiring restatement, Krzeminski received bonuses, incentive-based compensation, and equity- +based compensation. +12. In connection with this Order, Krzeminski reimbursed Granite $261,115 on June 28, +2022, and returned 2,364 shares she received as incentive compensation on July 5, 2022. +Violation +13. As a result of the conduct described above, Krzeminski violated Section 304 of the +Sarbanes-Oxley Act of 2002, which requires the chief executive officer and chief financial officer of +any issuer required to prepare an accounting restatement due to material noncompliance with the +securities laws as a result of misconduct to reimburse the issuer for (1) any bonus or other incentive- + + 4 +based or equity-based compensation received by that person from the issuer during the 12-month +period following the first public issuance or filing with the Commission of the financial document +embodying such financial reporting requirement and (2) any profits realized from the sale of +securities of the issuer during that 12-month period. Section 304 does not require that a chief +executive officer or chief financial officer engage in, or be aware of, misconduct to trigger the +reimbursement requirement. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Krzeminski’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 of Section 304(a) of the Sarbanes-Oxley Act of 2002. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4327.txt b/raw/aaer/2022/AAER-4327.txt new file mode 100644 index 0000000000000000000000000000000000000000..62b084f3d621dac2a939738b42d21a1fd4dec9bc --- /dev/null +++ b/raw/aaer/2022/AAER-4327.txt @@ -0,0 +1,152 @@ + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95611 / August 25, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4327 / August 25, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21005 + + +In the Matter of + +Jigisha Desai + +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 Jigisha Desai (“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over her and the subject matter of these proceedings, which are +admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings +Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a +Cease-and-Desist Order (“Order”), as set forth below. + + + + + + 2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary +1. Granite Construction Inc. (“Granite”) is a publicly traded company that specializes +in the construction of infrastructure projects. From at least 2017 through the third quarter of 2019 +(“the Relevant Period”), Granite recognized revenue in incorrect periods with respect to multiple +projects managed by its significant subdivision, the Heavy Civil operating group (“Heavy Civil +Group”). As a result, Granite materially overstated revenue for certain reporting periods and +understated revenue in other periods. +2. In February 2021, Granite announced material misstatements in its financial +statements for its Forms 10-K for fiscal years 2017 and 2018 and its Forms 10-Q for each of the +quarters of 2018 and 2019. +3. Jigisha Desai, who was Granite’s Chief Financial Officer during a portion of the +Relevant Period, received bonuses, incentive-based compensation, and equity-based compensation +during the 12-month periods following the filings containing financial results that Granite misstated +as a result of misconduct. Desai, who is not being charged with misconduct, reimbursed Granite for +this compensation as required under Section 304(a) of the Sarbanes-Oxley Act of 2002, in +connection with this Order. +Respondent +4. Jigisha Desai is 55 years old and resides in Santa Cruz, California. Desai was +Granite’s Chief Financial Officer from July 2018 until January 2021. +Related Entity +5. Granite Construction Inc. is a Delaware corporation headquartered in Watsonville, +California that was founded in 1922. Granite’s common stock is registered with the Commission +pursuant to Section 12(b) of the Securities Exchange Act of 1934. Granite’s stock has been publicly +traded since 1990. Granite’s common stock trades on the New York Stock Exchange. Granite 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. + +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 +6. On March 2, 2020, Granite announced that its Audit Committee was conducting an +internal investigation into the accuracy of the Heavy Civil Group’s prior-period reporting, and that it +would need to delay the filing of its Form 10-K for fiscal year 2019. +7. On February 19, 2021, Granite announced material misstatements in its financial +statements and related disclosures for fiscal years 2017 and 2018 and the quarterly reports for 2018 +and 2019 because of errors in the Heavy Civil Group’s project forecasts. +8. On February 22, 2021, Granite restated its previously issued consolidated financial +statements for its Forms 10-K for fiscal years 2017 and 2018 and its Forms 10-Q for each of the +quarters of 2018 and 2019. The restatement corrected misstatements that overstated its revenue for +certain periods and understated its revenue in other periods. +9. The restatement of Granite’s revenues resulted from its improper deferral of +expected costs in quarterly project forecasts for several of the Heavy Civil Group’s largest projects. +According to Granite’s critical accounting policies disclosed in its Forms 10-K for fiscal years 2017 +and 2018, the company recognized quarterly and annual revenues under long-term construction +contracts using a percentage of completion ratio, which analyzed actual incurred costs and total +expected costs for each construction project, to determine how much revenue was earned by Granite +during that period. Thus, an increase in the total expected costs from period to period would result +in lower earned revenues. +10. The Senior Vice President of the Heavy Civil Group, while acting on behalf of +Granite, approved and certified project forecasts despite, among other things, being presented with +warning signs that the project forecasts understated costs, and thus overstated revenue, during +multiple quarters. These inaccurate project forecasts caused Granite to recognize revenue earlier in +incorrect periods for fiscal years 2017 and 2018. +Compensation of CFO Desai +11. During the 12-month periods that followed the filing of financial statements in +Granite’s quarterly and annual reports requiring restatement, Desai received bonuses, incentive- +based compensation, and equity-based compensation. +12. On July 7, 2022, in connection with this Order, Desai reimbursed Granite a total of +$176,100.51, which includes bonuses and the cash equivalent of 2,603 shares she received as +incentive compensation based on the last closing price as of June 17, 2022. +Violation +13. As a result of the conduct described above, Desai violated Section 304 of the +Sarbanes-Oxley Act of 2002, which requires the chief executive officer and chief financial officer of +any issuer required to prepare an accounting restatement due to material noncompliance with the +securities laws as a result of misconduct to reimburse the issuer for (1) any bonus or other incentive- + + 4 +based or equity-based compensation received by that person from the issuer during the 12-month +period following the first public issuance or filing with the Commission of the financial document +embodying such financial reporting requirement and (2) any profits realized from the sale of +securities of the issuer during that 12-month period. Section 304 does not require that a chief +executive officer or chief financial officer engage in, or be aware of, misconduct to trigger the +reimbursement requirement. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Desai’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 of Section 304(a) of the Sarbanes-Oxley Act of 2002. + + By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4331.txt b/raw/aaer/2022/AAER-4331.txt new file mode 100644 index 0000000000000000000000000000000000000000..83e62ab9393f0cfc2ccdf4c1fdd7d7632ea8a8ad --- /dev/null +++ b/raw/aaer/2022/AAER-4331.txt @@ -0,0 +1,1403 @@ + + + + + + + + + + + + + + + + SEC.gov | David Pope + + + + + + + + !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\/527501","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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David Pope , No. 0:22-CV-02155 (D. Minn. filed September 2, 2022) + + + + + + + + + The Securities and Exchange Commission today charged David Pope, a rail freight trader formerly employed by agricultural cooperative CHS Inc., for manipulating the values and quantities of certain of the company's rail freight contracts. In December 2018, CHS restated its publicly filed financial statements from 2014 through 2018 to correct errors caused by Pope. + + As alleged by the SEC, Pope reported false values for shuttle loader train contracts to CHS's accountants in an effort to smooth out the rail freight trading desk's financial results. According to the SEC's complaint, he also reported fictitious shuttle contracts to the company's accountants for the same purpose. The SEC further alleged that Pope provided altered emails concerning CHS's shuttle contracts to the company's external auditor to conceal his misconduct. + + The SEC's complaint against Pope, filed in U.S. District Court for the District of Minnesota, charges him with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The complaint also charges him with violating Exchange Act Section 13(b)(5) and Rule 13b2-1 thereunder, and with aiding and abetting violations of Exchange Act Sections 13(a) and 13(b)(2)(A) and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. The SEC seeks permanent injunctions, disgorgement with prejudgment interest, and a civil penalty. + + In a separate proceeding, without admitting or denying the SEC's findings, CHS agreed to cease and desist from committing or causing any violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + + The SEC's investigation was conducted by Jason Rose and Laura Bennett and was supervised by David Reece and Eric Werner. The litigation against Pope will be led by Mr. Reece under the supervision of B. 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Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2022/AAER-4332.txt b/raw/aaer/2022/AAER-4332.txt new file mode 100644 index 0000000000000000000000000000000000000000..7f81cfd36908a25835e9e09a6c5a2e80d5c4f0c8 --- /dev/null +++ b/raw/aaer/2022/AAER-4332.txt @@ -0,0 +1,239 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 6107 / September 8, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4332 / September 8, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21042 + + +In the Matter of + +CHARLES PRATT & COMPANY, +LLC, + +Respondent. +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 Charles Pratt & Company, LLC (“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 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 Respondent’s Offer, the Commission finds that: + +Summary + +1. Respondent, a registered investment adviser, failed to obtain an independent +verification of assets of a private fund client, or, alternatively, distribute annual audited financial +statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) to +the investors in one private fund that it advised for each fiscal year from 2010 through 2018. For +fiscal years 2019 and 2020, the annual audited financial statements for the fund were distributed +to investors 481 days late and 222 days late, respectively. Respondent also failed to obtain the +requisite independent verification of client assets from an independent public accountant for 465 +discretionary client accounts that it advised for each year from 2010 through 2020. As a result of +the foregoing, Respondent violated Section 206(4) of the Advisers Act and Rule 206(4)-2 +thereunder, commonly referred to as the “custody rule.” + + 2. Respondent also failed to adopt and implement written policies and procedures +reasonably designed to prevent violations of the Advisers Act and the rules thereunder, a violation +of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. + +Respondent + +3. Respondent is a New York limited liability company with its principal office and +place of business in New York, New York. Respondent has been registered with the Commission +as an investment adviser since February 1984. During the relevant period, Respondent was the +general partner of and served as investment adviser to the private fund at issue here, CP +International Partners, LP (“CPIP”), and provided investment advisory services to 465 +discretionary client accounts. +Facts + +4. CPIP accounted for approximately $29.1 million of the approximately $895 million +in regulatory assets under management that Respondent reported in its Form ADV filed on March +28, 2022. The stated investment strategy for CPIP is capital appreciation through investments in +securities outside the United States. Together with CPIP, the 465 discretionary client accounts +managed by Respondent accounted for $778 million of the regulatory assets under management +reported in its Form ADV filed on March 28, 2022. The stated investment strategy for these +discretionary accounts is long-term growth and income preservation. +5. 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. + +3 + 6. 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). + + 7. Respondent had custody of the assets of CPIP and the 465 discretionary accounts +as defined in Rule 206(4)-2. An investment adviser who has custody of client assets must, among +other things: (i) maintain clients’ assets with a qualified custodian; (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 member; and (iv) obtain +verification of client funds and securities 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). + + 8. 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 CPIP. 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 “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)(2-4) in order to avoid +violating the custody rule. + +9. Respondent did not meet the requirements of the Audited Financials Alternative +or otherwise comply with the custody rule for CPIP during the relevant period. For fiscal years +2010 through 2018, CPIP’s annual financial statements did not undergo an audit at all, as +Respondent did not engage an independent public accountant to conduct the requisite audit. +Although Respondent engaged a PCAOB-registered firm to audit CPIP’s annual financial +statements for fiscal years 2019 and 2020, the firm was not engaged, and did not complete the +audits and issue audit reports, until well after 120 days following the end of those fiscal years. +The audited financial statements were distributed to CPIC investors 481 days late for 2019 and +222 days late for 2020. Accordingly, Respondent did not satisfy the requirements of the Audited +Financials Alternative in Rule 206(4)-2(b)(4) for CPIC for fiscal years 2010 through 2020. +Respondent was therefore obligated to comply with Rule 206(4)-2(a)(2), (3) and (4) with respect +to CPIC, which it also failed to do. + +4 +10. With respect to the 465 discretionary accounts it managed, Respondent similarly +failed to obtain verification of client funds by an actual examination by an independent public +accountant for each year from 2010 through 2020, as required by Rule 206(4)-2(a) for those +accounts (commonly referred to as the “surprise” examination requirement). For the years 2010 +through 2017, Respondent failed to engage an independent public accountant to perform a +surprise examination for the discretionary accounts. Although Respondent engaged an +independent public accountant to perform a surprise examination in 2018, that examination did not +include a review of client funds or securities and therefore failed to satisfy the surprise examination +requirement. No surprise examination at all was conducted in 2019, and while an independent +accountant was again engaged to perform a surprise examination in 2020, the 2020 examination +also failed to include the requisite review of client funds or securities. + + 11. Respondent 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 violations of the Advisers Act and the rules thereunder. See Rule +206(4)-7(a). While Respondent’s written policies and procedures referenced the custody rule, they +were not reasonably designed and implemented to prevent violations of the rule. + +Violations + + 12. 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 funds or securities to have +independent public 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. + + 13. As a result of the conduct described above, Respondent willfully violated Section +206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-7 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent’s Offer. + + Accordingly, pursuant Sections 203(e) and 203(k) of the Advisers Act, it is hereby +ORDERED that: + +5 + A. Respondent cease and desist from committing or causing any violations and any +future violations of Section 206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-7 +promulgated thereunder. + +B. Respondent is censured. + + C. Respondent shall, within 21 days of the entry of this Order, pay a civil monetary +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. + +D. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Charles Pratt & Company, LLC 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 Sheldon +Pollock, Associate Director, Securities and Exchange Commission, New York Regional Office, +100 Pearl Street, Suite 20-100, New York, NY 10004. + + 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, Respondent 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 +6 +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/2022/AAER-4334.txt b/raw/aaer/2022/AAER-4334.txt new file mode 100644 index 0000000000000000000000000000000000000000..af14c10bdbb6ba14df18438e6d5a8927722819c5 --- /dev/null +++ b/raw/aaer/2022/AAER-4334.txt @@ -0,0 +1,110 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95767 / September 14, 2022 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4334 / September 14, 2022 +ADMINISTRATIVE PROCEEDING +File No. 3-17746 + +In the Matter of +Badree Komandur, ACA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN +ACCOUNTANT RESPONSIBLE FOR THE +PREPARATION OR REVIEW OF FINANCIAL +STATEMENTS REQUIRED TO BE FILED WITH +THE COMMISSION + +On December 22, 2016, the Commission issued a consented Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e) of the Commission’s Rules +of Practice, Making Findings, and Imposing Remedial Sanctions, a Cease-and-Desist Order, and +a Civil Penalty (the “Suspension Order”) as to Respondent Badree Komandur, ACA +(“Komandur”).1 The Suspension Order denied Komandur the privilege of appearing or +practicing before the Commission as an accountant but permitted him, after four years from the +date of the Suspension Order and if certain conditions were met, to request that the Commission +consider his reinstatement 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; or (2) an independent +accountant. +This order is issued in response to Komandur’s application for reinstatement to appear +and practice before the Commission as an accountant responsible for the preparation or review of +financial statements required to be filed with the Commission. +In the Suspension Order, the Commission found that from 2006 through 2009, an +accountant in the Controllership Division of Wipro Limited (“Wipro”) embezzled money from +Wipro. Komandur, who served as Wipro’s controller, accepted cash from this accountant in + +1 See Accounting and Auditing Enforcement Release No. 3837, dated December 22, 2016. + + 2 +violation of Wipro’s conflict of interest policy. At the same time, Komandur failed to correct +certain known erroneous accounting entries in Wipro’s Exchange Rate Fluctuation and certain +intercompany accounts. As a result of this conduct, Komandur willfully violated Section +13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder while also causing Wipro’s violations +of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a- +16 promulgated thereunder. +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. + +Komandur has shown good cause for reinstatement and has met all of the conditions set +forth in the Suspension Order to be reinstated to appear and practice before the Commission as a +person responsible for the preparation or review of financial statements required to be filed with +the Commission. In this capacity he has attested that he will have his work reviewed by the +independent audit committee of any company for which he works, or in some other manner +acceptable to the Commission. Komandur is not, at this time, seeking to appear or practice +before the Commission as an independent accountant. If, in the future, Komandur 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, among other things, that he has +complied and will comply with the terms of the Suspension Order. + +On the basis of the information supplied, representations made, and undertakings agreed +to by Komandur, and for the reasons stated immediately above, it appears that he has complied +with the terms of the Suspension Order denying him the privilege of appearing or practicing +before the Commission as an accountant. No information has come to the attention of the +Commission relating to his character, integrity, professional conduct, or qualifications to practice +before the Commission that would be a basis for adverse action against him pursuant to Rule +102(e) of the Commission’s Rules of Practice. As a result, Komandur 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 he aring; +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 +Badree Komandur, ACA is hereby reinstated to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4336.txt b/raw/aaer/2022/AAER-4336.txt new file mode 100644 index 0000000000000000000000000000000000000000..a048330082bf5f2b308d60e92accf6c276f76b51 --- /dev/null +++ b/raw/aaer/2022/AAER-4336.txt @@ -0,0 +1,272 @@ + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95852 / September 21, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4336 / September 21, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21119 + +In the Matter of + +TERRENCE J. WALTON, 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 +Terrence J. Walton (“Respondent” or “Walton”) 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(B)(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. Walton is and has been a certified public accountant licensed to practice in the State of +California since 1980. He held himself out as the Chief Financial Officer of the Eye +Machine, LLC (now known as Nova Oculus Partners, LLC) (the “Eye Machine”). + +2. The Eye Machine was, at all relevant times, a Delaware limited liability company with +its principal place of business in Los Angeles, California. Eye Machine was founded to +develop, manufacture, and lease a biomedical device designed to deliver electrical +current to the eye, for potential use in treating patients with macular degeneration. Eye +Machine and its securities have never been registered with the SEC. + +3. On October 17, 2018, the Commission filed a Second Amended Complaint against +Walton in SEC v. Peter Pocklington, et al. (Civil Action No. 17-701-JGB-SP), in the +United States District Court for the Central District of California. On May 9, 2022, the +court entered an order permanently enjoining Walton by consent, from future violations +of Section 17(a)(3) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. +§77q(a)(3)]. Walton was also ordered to pay a civil penalty in the amount of $27,162. + +4. The Commission’s Second Amended Complaint alleged, among other things, that from +2014 to at least 2017, the Eye Machine raised over $14 million from more than 260 +investors. The complaint alleged the Eye Machine raised this money, in part, by +concealing the fact that co-defendant Peter H. Pocklington, a convicted felon and +someone previously sanctioned by Arizona for securities fraud, would be the person +running the company. The complaint also alleged that co-defendants misappropriated +investor funds for personal use. The complaint further alleged that Walton was a +signatory on the Eye Machine’s bank account and knew or should have known about +these improper expenditures. Finally, the complaint also alleges that Walton took no +steps to determine whether the expenditures of funds by the Eye Machine were +permitted under the Private Placement Memoranda provided to investors. + 3 +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Doe’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Walton is suspended from appearing or practicing before the Commission as an +accountant. + +B. After 3 years from the date of the Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the attention of +the Office of the Chief Accountant. + +C. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Respondent +shall submit a written statement attesting to an undertaking to have Respondent’s work reviewed +by the independent audit committee of any public company for which Respondent works or in +some other manner acceptable to the Commission, as long as Respondent practices before the +Commission in this capacity and will comply with any Commission or other requirements related +to the appearance and practice before the Commission as an accountant. + +D. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934 (“Exchange Act”), as a preparer or reviewer, or as a person +responsible for the preparation or review, of any public company’s financial statements that are +filed with the Commission, Respondent shall submit a statement prepared by the audit +committee(s) with which Respondent will be associated, including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Respondent will be associated; + +2. A description of Respondent’s role on the specific audit committee(s) with +which Respondent will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Respondent’s service on the specific +audit committee; and + +5. A statement noting whether Respondent will be able to act unilaterally on behalf +of the Audit Committee as a whole. + 4 + +E. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Respondent must be +associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (the “PCAOB”) and Respondent shall submit the following additional +information: + +1. A statement from the public accounting firm (the “Firm”) with which +Respondent is associated, stating that the firm is registered with the PCAOB in +accordance with the Sarbanes-Oxley Act of 2002; + +2. A statement from the Firm with which the Respondent is associated that the +Firm has been inspected by the PCAOB and that the PCAOB did not identify +any criticisms of or potential defects in the Firm’s quality control system that +would indicate that Respondent will not receive appropriate supervision; and + +3. A statement from Respondent indicating that the PCAOB has taken no +disciplinary actions against Respondent since seven (7) years prior to the date of +the Order other than for the conduct that was the basis for the Order. + +F. In support of any application for reinstatement, Respondent shall provide +documentation showing that Respondent is currently licensed as a certified public accountant +(“CPA”) and that Respondent has resolved all other disciplinary issues with any applicable state +boards of accountancy. If Respondent is not currently licensed as a CPA, Respondent shall provide +documentation showing that Respondent’s licensure is dependent upon reinstatement by the +Commission. + +G. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders in SEC v. +Peter Pocklington, et al. (Civil Action No. 17-701-JGB-SP), in the United +States District Court for the Central District of California, or any related +Commission proceedings, including any orders requiring payment of +disgorgement or penalties; + +2. That Respondent undertakes to notify the Commission immediately in +writing if any information submitted in support of the application for +reinstatement becomes materially false or misleading or otherwise changes +in any material way while the application is pending; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a + 5 +basis for a forthwith suspension from appearing or practicing before the +Commission pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +a. has not been charged with a felony or a misdemeanor involving moral +turpitude as set forth in Rule 102(e)(2) of the Commission’s Rules of +Practice, except for any charge concerning the conduct that was the +basis for the Order; + +b. has not been found by the Commission or a court of the United States to +have committed a violation of the federal securities laws, and has not +been enjoined from violating the federal securities laws, except for any +finding or injunction concerning the conduct that was the basis for the +Order; + +c. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge concerning +the conduct that was the basis for the Order; + +d. has not been found by a court of the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, or any bar thereof to have committed an offense (civil or +criminal) involving moral turpitude, except for any finding concerning +the conduct that was the basis for the Order; and + +e. has not been charged by the United States (or any agency of the United +States) or any state, territory, district, commonwealth, or possession, +civilly or criminally, with having committed an act of moral turpitude, +except for any charge concerning the conduct that was the basis for the +Order. + +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis +for the Order. + +6. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by any State Board of Accountancy, or other regulatory body. +H. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + 6 + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Respondent reported for +such work; and + +2. Respondent’s plans for any future appearance or practice before the +Commission. + + I. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +J. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under Paragraph I, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +K. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph I, the burden shall be on the Respondent to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + +L. If the Commission declines to reinstate Respondent pursuant to Paragraphs J and K, +it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an accountant. + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4337.txt b/raw/aaer/2022/AAER-4337.txt new file mode 100644 index 0000000000000000000000000000000000000000..d2cf9618934670f7c2383529ed4cf1faa084bb04 --- /dev/null +++ b/raw/aaer/2022/AAER-4337.txt @@ -0,0 +1,112 @@ + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95856 / September 21, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4337 / September 21, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21123 + +In the Matter of + +MANUEL A. +ROMERO, +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 Manuel +A. Romero (“Respondent” or “Romero”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules +of Practice.1 + +II. + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.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. Romero, age 55, served as the Chief Financial Officer of Professional +Financial Investors, Inc. (“PFI”) from 2018 until his termination in June 2020. He previously +served as the controller of PFI, from 2015 to 2018. + + 2. PFI was, at all relevant times, a California corporation based in Novato, +California. PFI is a real estate investment and management firm specializing in multi-unit +residential and commercial real estate in Northern California. On July 26, 2020, PFI filed a +voluntary Chapter 11 bankruptcy petition in the Bankruptcy Court for the Northern District of +California. + + 3. On April 25, 2022, a final judgment was entered against Romero, +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 the civil action +entitled Securities and Exchange Commission v. Manuel A. Romero, Civil Action Number 3:22- +cv-02067-WHA, in the United States District Court for the Northern District of California. +Romero was also ordered to pay $91,819 in disgorgement of ill-gotten gains from his receipt of a +loan from investor funds that was not disclosed to PFI’s investors, and $6,655 in prejudgment +interest, and a $50,000 civil money penalty. + + 4. The Commission’s complaint alleged that, from at least October 2016 +through May 2020, Romero falsified financial statements provided to investors and made +inappropriate cash transfers as part of a larger Ponzi-like scheme designed and operated by PFI’s +now-deceased founder and its former president. The complaint further alleged, that in order to +improve the appearance of the financial condition of certain of PFI’s entities for investors, +Romero and employees he oversaw made material adjustments to properties’ balance sheets, +including inflating cash reserves and manipulating various expense line items in order to +increase income or decrease net losses. The Commission alleged that Romero played a key role +in carrying out the Ponzi scheme, including by commingling funds across the various PFI +entities and making distributions to existing investors from new investor funds. + + + 3 + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Romero’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Romero 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/2022/AAER-4339.txt b/raw/aaer/2022/AAER-4339.txt new file mode 100644 index 0000000000000000000000000000000000000000..a533f4c99637fcb70197ca7472faee7734bfb67b --- /dev/null +++ b/raw/aaer/2022/AAER-4339.txt @@ -0,0 +1,847 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95887 / September 23, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4339 / September 23, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21142 + + + +In the Matter of + +Friedman 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 +Friedman LLP (“Friedman” 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: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before +it . . . to any person who is found . . . to have engaged in unethical or improper professional conduct. + +2 + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over them and the subject matter of these proceedings, which +are admitted, 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 serial violations of the federal securities laws and improper +professional conduct by Respondent in conducting multi-year audits of two public issuers, +iFresh, Inc. and Issuer A (together, the “Reporting Companies”). iFresh, Inc. retained Friedman +to audit its financial statements for the fiscal years ended March 31, 2017 through 2020. Issuer +A retained Friedman to audit its financial statements for the years ended December 31, 2016 +through 2020. + +2. Respondent failed to comply with the standards of the Public Company +Accounting Oversight Board (“PCAOB”) in conducting audits of the Reporting Companies +when it did not: (1) design and perform procedures specifically designed to be responsive to +assessed risks; (2) perform procedures to identify related party transactions; (3) obtain sufficient +appropriate audit evidence; (4) respond to fraud risks; (5) document procedures performed and +significant findings; (6) maintain control over the confirmation requests and responses in +connection with the iFresh audit for fiscal year 2017; and (7) exercise due professional care and +professional skepticism. Finally, Respondent failed to maintain an adequate system of quality +control. + +3. Respondent conducted the iFresh and Issuer A audits without including +procedures that were adequately designed to identify related party transactions, and stated the +audits had been conducted in accordance with PCAOB standards, when they had not. As a +result, Respondent violated Section 10A(a)(2) of the Exchange Act and Rule 2-02(b)(1) of +Regulation S-X, and engaged in improper professional conduct within the meaning of Section 4C +of the Exchange Act and under Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + + + + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any other +person or entity in this or any other proceeding. + +3 + +Respondent + +4. Friedman LLP (“Friedman”), a limited liability partnership headquartered in +New York, New York, is a public accounting firm registered with the PCAOB. + +Relevant Entities and Individuals + +5. iFresh, Inc. (“iFresh”) is a Delaware corporation headquartered in Long Island +City, New York. In February 2017, iFresh and its wholly owned subsidiary, E-Compass +Acquisition Corp. (“E-Compass”), a SPAC, merged with NYM Holding, Inc. (“NYM”) through +a reverse merger, and became a public company. iFresh is an Asian/Chinese grocer that operates +wholesale businesses and retail supermarkets across New York, Massachusetts, and Florida. +iFresh’s common stock is registered with the Commission pursuant to Section 12(b) of the +Exchange Act and is quoted on an unsolicited basis under the ticker symbol “IFMK” on OTC +Link whose parent company is OTC Markets Group Inc. iFresh’s fiscal year ends on March 31, +and it files periodic reports, including Form 10-K, with the Commission pursuant to Section +13(a) of the Exchange Act and related rules thereunder. + +6. Issuer A is a Delaware corporation whose common stock is registered with the +Commission pursuant to Section 12(b) of the Exchange Act. + +7. Long Deng (“Deng”), age 54, is a resident of Roslyn, New York. Deng was the +Chairman of the Board of iFresh from February 2017 until April 2022, when the Delaware +Chancery Court affirmed a shareholder vote to remove him from iFresh’s board of directors. +Deng was also iFresh’s Chief Executive Officer (“CEO”) and Chief Operating Officer (“COO”) +from February 2017 through April 2022. Deng founded NYM in 1995 and was NYM’s CEO, +COO and sole Director during the relevant time period. + +Facts + +2017–2020 iFRESH AUDITS + +Background + +8. Friedman was first engaged to perform an audit for NYM for the fiscal years +ending March 31, 2015 and 2016 in March 2016 (collectively the “2016 audit”). Friedman also +performed audits for iFresh for the fiscal years ending March 31, 2017, 2018, 2019, and 2020, +and issued unqualified audit reports in all fiscal years. The audit reports each stated that +Friedman had conducted its audits in accordance with PCAOB standards. After the review for +the quarter ended June 30, 2020, iFresh dismissed Friedman as its auditor.4 + +9. iFresh and Deng engaged in a substantial number and a variety of types of related +party transactions. iFresh filed year-end financial statements for the fiscal years ending March + +4 iFresh filed a Form 8-K on October 6, 2020 announcing a change in auditor and that there were no +disagreements with Friedman. + + +4 + +31, 2017, 2018, 2019 and 2020 that were materially misstated because they failed to properly +disclose certain material related party transactions. + +Friedman Failed to Conduct the 2017 through 2020 iFresh Audits in Accordance with +PCAOB Standards + +10. Friedman performed inadequate audit procedures with regard to iFresh’s related +party transactions. Friedman did not obtain a sufficient understanding of iFresh’s relationships +and transactions with its related parties as required by PCAOB Auditing Standard 2410, Related +Parties (“AS 2410”). In connection with each of the 2017 through 2020 audits, Friedman +obtained a related party list from iFresh that contained the names of at least 30, and as many as +42 entities, all of which were owned or controlled by Deng. Friedman did not sufficiently +understand how the related party list was created, or whether the list was complete. + +11. iFresh disclosed in its Form 10-Ks for the 2017 through 2020 fiscal years that its +disclosure controls and procedures were not effective and that it lacked employees with adequate +knowledge of the SEC’s rules and requirements. In the Form 10-K for fiscal year 2018, iFresh +reported that its internal control over financial reporting was not effective, and in the Forms 10-K +for fiscal years 2019 and 2020, it reported material weaknesses related to lacking accounting +personnel with sufficient knowledge of GAAP and SEC reporting experience. Despite these +disclosures, Friedman did not sufficiently understand iFresh’s process for identifying a related +party or accounting for and disclosing relationships and transactions with related parties.5 + +Friedman Failed to Design and Perform Procedures Responsive to Assessed Risks for the +2017 through 2020 Audits. + +12. PCAOB Auditing Standard 2301, The Auditor's Responses to the Risks of +Material Misstatement (“AS 2301”) requires that “the auditor should design and perform audit +procedures in a manner that addresses the assessed risks of material misstatement for each +relevant assertion of each significant account and disclosure” (.08). AS 2301 states that “[f]or +significant risks, the auditor should perform substantive procedures, including tests of details, +that are specifically responsive to the assessed risks” (.11). PCAOB Auditing Standard No. +2110, Identifying and Assessing Risks of Material Misstatement, states that a fraud risk is a +significant risk (.71). + +13. Friedman failed to perform sufficient substantive audit procedures specifically +designed to be responsive to fraud risks. Related party transactions were identified as a fraud +risk for the 2017 through 2020 audits. In addition, accounts receivable and revenue were +identified as significant audit areas and fraud risks for all audits. Due professional care in these +audit areas required Friedman to exercise professional skepticism. PCAOB Auditing Standard +No. 2401, Consideration of Fraud in a Financial Statement Audit (.13). + +14. Friedman failed to exercise professional skepticism when reviewing work papers. +First, the work papers that documented the details and testing of accounts receivable and prepaid +expenses and other current assets contained names included on iFresh’s related party lists. + +5 See Accounting Standards Codification ("ASC'') Topic 850, Related Party Disclosures + +5 + +Friedman did not identify the names on the work papers as related parties, so certain related +party transactions were not disclosed in the financial statements. + +15. Second, Friedman failed to recognize red flags that indicated undisclosed related +parties. For example, schedules provided to Friedman by iFresh in connection with the 2018 +through 2020 audits included names of entities that had similar names as iFresh subsidiaries, and +transaction descriptions that were inconsistent with iFresh’s business. + +16. Friedman also encountered numerous red flags of undisclosed related party +transactions with Li Ba HVAC & Construction (“Li Ba”). Li Ba was a related party because it +was owned by Deng’s brother.6 In connection with the 2018 audit, Friedman was aware that Li +Ba was owned by Deng’s brother. AS 2410 states the auditor should look to the requirements of +the SEC and to GAAP for the definition of a related party (.01). Accounting Standards +Codification Topic 850, Related Party Disclosures provides that related party transactions +include, among other things, transactions between an entity and its principal owners or members +of their immediate families. ASC 850-10-05-3. Immediate family is defined as “Family +members who might control or influence a principal owner or a member of management, or who +might be controlled or influenced by a principal owner or a member of management, because of +the family relationship.” ASC 850-10-20. + +a. Other red flags that indicated undisclosed related party transactions with Li Ba +include7: iFresh’s largest receivable was from Li Ba, with long aging and little to +no collection for the 2017 through 2020 audits (the aging exceeded iFresh’s bad- +debt policy, which required accounts receivable to be written off after 90 days); + +b. iFresh engaged in significant unusual transactions with Li Ba. Friedman’s 2017 +through 2020 audit files documented that iFresh sold commercial refrigeration +equipment to Li Ba, which was outside the normal course of business for iFresh; + +c. Li Ba had the same address as iFresh, a fact of which Friedman was aware; + +d. Li Ba paid a legal settlement in the amount of $652,000 on behalf of iFresh. +Friedman obtained the settlement agreement as part of the 2018 audit. The +disclosure in the financial statements inaccurately stated a third party paid the +settlement on iFresh’s behalf. Friedman never questioned why Li Ba paid the +legal settlement or if this payment was evidence that Deng could exercise control +over Li Ba; and + +e. Friedman knew as part of the 2019 and 2020 audits that iFresh and Li Ba had +engaged in lending transactions with each other. + + +6 Li Ba was also a related party because Deng could exercise control by having signature authority over Li Ba’s +bank accounts. Friedman was not aware of Deng’s signature authority. + +7 Appendix A of AS 2410 provides examples of information that could indicate undisclosed related party +transactions. The examples include, extended payment terms, borrowing or lending without fixed repayment terms, +and contracts or agreements representing unusual transactions (.A2). + +6 + +17. In addition, iFresh made material undisclosed payments to Li Ba for property and +equipment. + +18. During the fiscal year 2020 second and third quarter reviews, Friedman failed to +identify red flags that indicated transactions with other undisclosed related parties. Friedman +obtained agreements that showed Deng made payments totaling $500,000 to iFresh on behalf of +New York Mart White Plains, Inc. (“White Plains”) to satisfy accounts receivable owed to +iFresh, and another undisclosed related party, Jiutian Music Club (“Jiutian”), made capital +contributions of approximately $558,000 to iFresh on behalf of Deng. White Plains and Jiutian +were related parties because Deng could exercise control by having signature authority over bank +accounts and they are owned by Deng’s brother. Friedman did not sufficiently question why +Deng would personally pay a liability on behalf of a purportedly unrelated party and why a +purportedly unrelated party would make capital contributions on behalf of Deng. In addition, +copies of the checks from Jiutian showed the same address as iFresh, and Deng signed the +checks. + +Friedman Failed to Perform Procedures to Identify Related Party Transactions for the 2017 +through 2020 Audits. + +19. 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. + +20. The guidance in AS 2410 requires the auditor to perform procedures to test the +accuracy and completeness of related parties and related party transactions identified by the +company, including taking into account information gathered during the audit, which could +include significant unusual transactions (.14). As detailed above, the 2017 through 2020 Li Ba +transactions were material, and Friedman overlooked numerous red flags indicating that there +were undisclosed related party transactions. + +21. AS 2410.15 states, “If the auditor identifies information that indicates that related +parties or relationships or transactions with related parties previously undisclosed to the auditor +might exist, the auditor should perform the procedures necessary to determine whether +previously undisclosed relationships or transactions with related parties, in fact, exist. These +procedures should extend beyond inquiry of management.” As detailed above, Friedman did not +perform sufficient procedures designed to identify related party transactions and failed to +perform procedures when confronted with information that indicated undisclosed related party +transactions. + +Friedman Failed to Obtain Sufficient Appropriate Audit Evidence for the 2017 through 2020 +Audits. + +22. PCAOB Auditing Standard 1105, Audit Evidence (“AS 1105”), 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” (.04). Friedman issued audit reports in +connection with the 2017 through 2020 audits that contained unqualified opinions. However, + +7 + +Friedman failed to obtain sufficient appropriate audit evidence to provide a reasonable basis for +the opinions. + +23. For fiscal years 2017 through 2020, iFresh disclosed in the notes to the financial +statements that it had advanced funds to related entities that it intended to acquire (“Target +Entities”). The disclosed amounts due from the Target Entities included balances that were +assigned to the Target Entities from other entities that were owned or controlled by Deng +(“Assignors”). Friedman did not obtain agreements that authorized the transfer from the +Assignors to the Target Entities of all of the liabilities that were reflected in the balances due +from the Target Entities in fiscal years 2017 through 2020. + +24. In fiscal year 2020, iFresh disclosed in the notes to the financial statements a debt +conversion agreement in which iFresh converted $3.5 million in debt owed to Deng to 1,000 +preferred shares of iFresh. Friedman failed to obtain sufficient appropriate audit evidence to +support portions of the debt conversion agreement in connection with the 2020 audit. Friedman +failed to obtain sufficient evidence regarding the transactions underlying iFresh’s debts that were +assigned by Deng before the debt conversion. + +Friedman Failed to Respond to Fraud Risks for the 2017 through 2020 Audits. + +25. PCAOB Auditing Standard 2401, Consideration of Fraud in a Financial +Statement Audit (“AS 2401”) states that the auditor should design and perform procedures to +obtain an understanding of the business purpose of significant unusual transactions (.66A) and +“must evaluate whether significant unusual transactions that the auditor has identified have been +properly accounted for and disclosed in the financial statements” (.67A). Significant unusual +transactions are defined as, “outside the normal course of business for the company or that +appear to be unusual due to their timing, size, or nature” (.66). + +26. Friedman failed to design and to perform procedures to obtain a sufficient +understanding of the following significant unusual transactions involving undisclosed related +parties: 1) the sale of commercial refrigeration equipment to Li Ba and the resulting large +receivable with long aging and little to no collection for the 2017 through 2020 audits; 2) a legal +settlement paid by Li Ba on behalf of iFresh for the 2018 audit; 3) iFresh and Li Ba extending +loans to each other for the 2019 and 2020 audits; 4) Deng’s payments to iFresh on behalf of +White Plains for the 2020 audit; and 5) Jiutian’s capital contributions to iFresh on behalf of Deng +for the 2020 audit. + +27. Friedman failed to evaluate the business purpose of the above transactions and +whether there were indications of undisclosed related party transactions that would cause +fraudulent financial reporting. Even when Friedman obtained supporting documentation, as +discussed above, it failed to recognize red flags of undisclosed related party transactions. + + + + + +8 + +Friedman Failed to Document Procedures Performed and Significant Findings for the 2017 +through 2020 Audits. + +28. AS 1215, Audit Documentation (“AS 1215”), 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” (.08). Audit documentation is +“the written record of the basis for the auditor's conclusions that provides the support for the +auditor's representations, whether those representations are contained in the auditor’s report or +otherwise. Audit documentation also facilitates the planning, performance, and supervision of +the engagement, and is the basis for the review of the quality of the work because it provides the +reviewer with written documentation of the evidence supporting the auditor’s significant +conclusions” (.02). + +29. In connection with the 2017 through 2020 audits, Friedman failed to document +the Assignors’ assignment of a portion of the advances and receivables due from related parties +to the Target Entities (“Debt Assignments”). More specifically, Friedman’s audit work papers +did not adequately document the existence of the Debt Assignments, nor did Friedman obtain the +underlying agreements. + +30. In connection with the 2018 through 2020 audits, Friedman failed to document +that Li Ba was owned by Deng’s brother. + +Friedman Failed to Maintain Control over the Confirmation Requests and Responses for the +2017 Audit. + +31. PCAOB Auditing Standard AS 2310, The Confirmation Process (“AS 2310”) +provides guidance about the audit confirmation process. Confirmation is the process of +obtaining and evaluating a direct communication from a third party in response to a request for +information about a particular item affecting financial statement assertions, including +presentation and disclosure; and evaluating the information provided by the third party (AS 2310 +at .04 and .11). Additionally, “The auditor should exercise an appropriate level of professional +skepticism throughout the confirmation process” (.15). An auditor should maintain control over +confirmation requests and responses, which means establishing direct communication between +intended recipient and the auditor to minimize the possibility that the results will be biased +because of interception and alteration (AS 2310 at .28). + +32. In connection with the 2017 audit, Friedman failed to adhere to AS 2310. First, it +did not obtain a confirmation response directly from Li Ba. Instead, Friedman accepted an email +forwarded from the iFresh Accounting Manager containing the confirmation response from Li +Ba. Second, it failed to evaluate the information provided on the confirmation with professional +skepticism. Li Ba’s 2017 confirmation listed the same address as iFresh, an indication that it +may be (and in fact was) an undisclosed related party. + + + + + +9 + +Friedman Failed to Exercise Due Professional Care for the 2017 through 2020 Audits. + +33. PCAOB Auditing Standard 1015, Due Professional Care in the Performance of +Work (“AS 1015”), states that auditors are required to exercise due professional care throughout +the audit. AS 1015 states that the “engagement partner should know, at a minimum, the relevant +professional accounting and auditing standards…” (.06). Due professional care requires that the +auditor exercise professional skepticism. Under this standard, “[p]rofessional skepticism is an +attitude that includes a questioning mind and a critical assessment of audit evidence” (.07), and +auditors should “consider the competency and sufficiency of the evidence” (.08) and “neither +assume[] that management is dishonest nor assume[] unquestioned honesty” (.09). + +34. As a result of Friedman’s conduct described in paragraphs 10 through 32 above, +Friedman failed to exercise due professional care and an attitude of professional skepticism as +required by AS 1015. + +2017–2019 ISSUER A AUDITS + +Background + +35. Friedman was first engaged in September 2017 to perform an audit of Issuer A’s +financial statements for the years ending December 31, 2016 and 2017 (collectively the “2017 +audit”). Friedman also performed audits of Issuer A’s financial statements for the years ending +December 31, 2018, 2019, and 2020, and issued unqualified audit reports for each of those years. +Each audit report stated that Friedman had conducted its audits in accordance with PCAOB +standards. Issuer A dismissed Friedman as its auditor in September 2021.8 + +Friedman Failed to Conduct the 2017 through 2019 Issuer A Audits in Accordance with +PCAOB Standards + +Friedman Failed to Obtain Sufficient Appropriate Audit Evidence Relating to the Staff Loan +Program for the 2017 through 2019 Audits (AS 1105). + +36. Prior to going public, Issuer A had a multimillion dollar liability recorded on its +books and records, described by Issuer A’s management as a liability for a “staff loan” program. +In 2017, in preparation for going public, Issuer A removed this liability from its books in a series +of accounting entries which included assigning this liability to an executive of Issuer A, via the +executive’s stockholder loan account on Issuer A’s books. + +37. Issuer A reclassified amounts from the executive’s loan account into a note +receivable from a purportedly unrelated party on Issuer A’s books, based on a claim that the note +receivable related to a line of credit provided to that entity. Issuer A amended the note +receivable several times. Issuer A also continued to increase the balance on the note receivable +via a series of transactions in Issuer A’s cash on hand account, including after Issuer A went +public in 2018. At December 31, 2018, the then-outstanding note receivable totaled +approximately $3.8 million. In 2019, the executive issued a personal guarantee for the + +8 Issuer A filed a Form 8-K announcing a change in auditor and that there were no disagreements with Friedman. + +10 + +outstanding note receivable, and subsequently purchased the note receivable from Issuer A using +shares of Issuer A. + +38. Friedman was aware of the liability for the staff loan program, the transfer of the +balance to the executive’s loan account, and the removal of the staff loan liability from Issuer +A’s books and records. Friedman was also aware of the line of credit with the purportedly +unrelated party, the notes receivable, and the executive’s personal guarantee and purchase of the +outstanding note. + +39. Notwithstanding this knowledge, there is insufficient audit evidence that +Friedman took adequate steps to: understand the operation of the staff loan program by Issuer A; +evaluate whether it was proper not to disclose it in Issuer A’s financial statements audited by +Friedman; or gather adequate audit evidence to ensure that all transactions were properly +recorded in Issuer A’s books and records. Friedman failed to obtain any formal documentation +evidencing that the executive had agreed to assume the liability for the amounts relating to the +staff loan program. Friedman also failed to perform any procedures to verify that the liability +was legally assumed by the executive and appropriately removed from the books and records of +Issuer A. + +40. In addition, Friedman failed to obtain adequate information to understand the +underlying business purpose for the notes receivable with the purportedly unrelated party. +Friedman also failed to gather appropriate audit evidence to validate the notes receivable, +including failing to vouch the transfer of cash or assets from Issuer A to the purportedly +unrelated party. + +Friedman Failed to Obtain Sufficient Appropriate Audit Evidence, and Failed to Document +Procedures Performed Relating to VIEs for the 2018 and 2019 Audits (AS 1105 and AS 1215). + +41. In 2018 and 2019, Issuer A had transactions with multiple related parties that had +characteristics of variable interest entities (VIEs) but which were not classified as VIEs by Issuer +A and not consolidated into Issuer A’s financial statements and related disclosures. Generally +accepted accounting principles (GAAP) state that “[a] variable interest entity [VIE] is defined as +a legal entity subject to consolidation according to the variable interest entities model. The +identification of variable interest entities and the determination of whether such entities should +be consolidated should be based on substantive terms, transactions, and arrangements.”9 + +42. During its 2018 and 2019 audits, Friedman was aware of transactions with related +parties that had characteristics indicating their potential status as VIEs, including the lack of +adequate equity capital and issues of whether the holders of the equity interests of the companies +had the power to direct the activities of the entity. Notwithstanding this, Friedman failed to +perform and document sufficient procedures to evaluate the VIE status of these related parties +and whether the entities should be consolidated. + + + +9 ASC Topic 810, Consolidation + +11 + +Friedman Failed to Properly Audit Related Party Transactions for the 2017 through 2019 +Audits (AS 2410). + +43. From 2018 to 2019, Issuer A made at least $1,400,000 in payments to a related +party partially owned by one of its executives, pursuant to a service agreement between Issuer A +and the related party. The invoices from the related party to Issuer A lacked detail of the +services provided and instead only contained generic descriptions such as “service fee” or +“professional fee.” + +44. Friedman failed to design and perform sufficient audit procedures to identify and +evaluate these related party transactions during its 2018 and 2019 audits. Specifically, Friedman +failed to understand the underlying business purpose and services rendered in connection with +these related party payments. Friedman thus failed to design procedures to identify and obtain an +adequate understanding of Issuer A’s relationships and transactions with its related parties as +required by Section 10A(a)(2) of the Exchange Act and AS 2410. + +45. Issuer A also had numerous transactions with another related party partially +owned by an executive. By December 31, 2017, Issuer A had extended approximately $6 +million to this related party in the form of trade receivables. However, Issuer A did not have a +regular trading relationship with this related party. Eventually, the outstanding receivable +balance was converted into a promissory note between Issuer A and the related party. In 2019, +an executive of Issuer A issued a personal guarantee for the note, then later purchased the note +using shares of Issuer A. + +46. Friedman failed to design and to perform sufficient audit procedures to identify +and evaluate these related party transactions during its 2017, 2018, and 2019 audits. +Specifically, Friedman failed to confirm the existence of a trading relationship between Issuer A +and the related party that supported the large outstanding trade receivable balance. Friedman +thus failed to design procedures to identify and obtain an adequate understanding of Issuer A’s +relationships and transactions with its related parties as required by Section 10A(a)(2) of the +Exchange Act and AS 2410. + +Friedman Failed to Obtain Sufficient Appropriate Audit Evidence in Connection with a Sale +of Assets to a Related Party for the 2018 Audit (AS 1105 and AS 2410). + +47. In 2018, Issuer A removed multiple assets and liabilities from its books, in +connection with a sales transaction with a related party connected to one of its executives. + +48. Friedman was aware of this transaction during its 2018 audit, but failed to obtain +and evaluate sufficient audit evidence to confirm whether the transaction was properly accounted +for as a sale under GAAP. Friedman also failed to obtain and evaluate sufficient audit evidence +to confirm whether the corresponding liabilities were properly removed from Issuer A’s books +and records. + + + +12 + +Friedman Failed to Exercise Due Professional Care for the 2017 through 2019 Audits (AS +1015). + +49. As a result of Friedman’s conduct described in paragraphs 36 through 48 above, +Friedman failed to exercise due professional care and an attitude of professional skepticism as +required by AS 1015. + +Friedman Failed to Comply with PCAOB Quality Control Standards + +50. Friedman did not design and implement an adequate system of quality control and +thus failed to adhere to PCAOB Standard QC Section 20, System of Quality Control for a CPA +Firm’s Accounting and Auditing Practice (“QC § 20”). Pursuant to QC §20, “[a] firm has a +responsibility to ensure that its personnel comply with the professional standards applicable to its +accounting and auditing practice, and “a system of quality control is broadly defined as a process +to provide the firm with reasonable assurance that its personnel comply with applicable +professional standards and the firm's standards of quality.” QC § 20.03. Designing a system of +quality control includes adopting policies and establishing procedures to provide the firm with +reasonable assurance of complying with professional standards. QC § 20.04. This includes +policies and procedures for deciding whether to accept or continue a client relationship and +whether to perform a specific engagement for that client, by providing the firm with reasonable +assurance that the likelihood of association with a client whose management lacks integrity is +minimized. QC § 20.14. It also includes policies and procedures that provide the firm with +reasonable assurance that “the work performed by engagement personnel meets applicable +professional standards, regulatory requirements, and the firm’s standards of quality.” QC § +20.17. Firm policies and procedures should also provide reasonable assurance that the policies +and procedures established for the elements of quality control described in the standard are +“suitably designed and are being effectively applied.” QC § 20.20. The policies and procedures +should encompass elements relevant to personnel management, acceptance and continuance of +clients and engagements, engagement performance, and monitoring, QC § 20.07, as well as +planning, performing, supervising, reviewing, documenting, and communicating the results of +each engagement. QC § 20.18. + +51. Friedman failed to adopt and implement adequate policies and procedures +regarding audit documentation. First, Friedman did not have policies and procedures regarding +audit documentation with respect to auditing related party transactions in accordance with AS +2410. As a result, the Engagement Quality Reviewer (“EQR”) for the 2017 through 2020 iFresh +audits was not informed of the existence of the Debt Assignments, the Li Ba relationship, or +other red flags indicating undisclosed related party transactions, and did not have the opportunity +to determine that there were corresponding auditing deficiencies and reporting and disclosure +deficiencies. + +52. Second, Friedman did not have adequate policies and procedures regarding which +work papers should be saved in a permanent file or carried forward to the audit file. As a result, +the engagement partner and the EQR for iFresh were unaware of additional red flags indicating +that there were undisclosed related party transactions. For example, in connection with the +quarterly iFresh interim reviews during the 2020 fiscal year, the agreements with White Plains + +13 + +and Jiutian were not saved in an area of the quarterly review file that the engagement partner and +the EQR were expected to review nor were they carried forward to the 2020 audit file. + +53. Third, Friedman failed to staff its engagements with properly-trained personnel. +Evidence indicates training was provided to the Friedman staff who worked on the iFresh and +Issuer A engagements that was separate and apart from the overall Friedman training process. +This training was inadequate to address the specific issues and risks for which it was designed. +For example, while this training included guidance on understanding management’s process for +identifying related party transactions, it did not include, until 2020, guidance on the definition of +related parties or procedures to identify undisclosed related party transactions. + +54. Fourth, during the 2017, 2018, and 2019 audits of Issuer A, Friedman was aware +of, or had access to, information from Issuer A that reflected its potentially concerning +transactions and relationships, yet Friedman took no additional steps to verify the integrity of +Issuer A’s management. Accordingly, Friedman failed to establish sufficient client +acceptance/continuance and engagement acceptance policies and procedures. + +55. Friedman also failed to adequately monitor the design and application of its +system of quality control in accordance with PCAOB Standard QC Section 30, Monitoring a +CPA Firm’s Accounting and Auditing Practice (“QC § 30”). QC § 30 states that a firm’s internal +inspection process may be considered part of the monitoring process, provided “[t]he review is +sufficiently comprehensive to enable the firm to assess compliance with all applicable +professional standards and the firm’s quality control policies and procedures.” QC § 30.08a. +“Inspection procedures contribute to the monitoring functions because findings are evaluated and +changes in or clarifications of quality control policies and procedures are considered.” QC § +30.04. As part of its monitoring process, Friedman had an annual internal inspection process +whereby engagements were selected and inspected by an internal inspection team. However, +Friedman’s Quality Control Document for 2016 through 2020 failed to provide guidance on the +work papers that the inspector was required to review. The iFresh audit for 2017 was selected +for internal inspection but none of the audit deficiencies identified above were uncovered. + +56. Violations + +a. 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. As a result of the conduct described above, Friedman +violated Section 10A(a)(2) of the Exchange Act. + +b. 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 + +14 + +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. As a result of the conduct described above, Friedman +violated Rule 2-02(b)(1) of Regulation S-X, when it stated the audits had +been conducted in accordance with PCAOB standards, when the audits +had not been. + +57. Findings + +a. Based on the foregoing, the Commission finds that Friedman 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. 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 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, Friedman 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. + +c. Based on the foregoing, the Commission finds that Friedman violated +Section 10A(a)(2) of the Exchange Act and Rule 2-02(b)(1) of Regulation +S-X. + +Remedial Efforts + +58. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded the Commission staff. + +Disgorgement and Civil Penalty + +59. The disgorgement and prejudgment interest ordered in paragraphs IV.D are +consistent with equitable principles and does not exceed Respondent’s net profits from its +violations and will be distributed to harmed investors, if feasible. The Commission will hold +funds paid pursuant to paragraphs IV.D in an account at the United States Treasury pending a + +15 + +decision whether the Commission in its discretion will seek to distribute funds. If a distribution +is determined feasible and the Commission makes a distribution, upon approval of the +distribution final accounting by the Commission, any amounts remaining that are infeasible to +return to investors, and any amounts returned to the Commission in the future that are infeasible +to return to investors, may be transferred to the general fund of the U.S. Treasury, subject to +Section 21F(g)(3) of the Exchange Act. + +Undertakings + +Friedman has undertaken to: + +A. Training. Prior to October 1, 2023, Friedman shall certify (as required by +paragraph E, below) that each of its audit professionals serving public company audits who was +part of the China Practice Group and, during any year beginning in 2017, received annual +training through that practice group to complete successfully a minimum of 24 hours of audit- +related training. The audit-related training requirement may be fulfilled by completing course(s) +conducted in accordance with the applicable state boards of accountancy, including any course +qualifying for CPE credit with an applicable state board. The training shall cover (1) risk +assessment, including the auditor’s responses to the risks of material misstatement; (2) the +identification of related parties and related party transactions and the examination and evaluation +of such transactions and the appropriate disclosures thereof; (3) obtaining sufficient appropriate +audit evidence; (4) the consideration of fraud in a financial statement audit, including obtaining +an understanding of significant unusual transactions and review and testing of journal entries; (5) +adequate audit documentation, including documentation of significant findings; (6) the +confirmation process, including obtaining and evaluating evidence from third parties; and (7) the +exercise of due professional care and professional skepticism. The following topics should be +accorded the training hours noted below: + +a. At least 8 hours shall be devoted to the auditor’s assessment of and response to +risk; +b. At least 4 hours shall be devoted to related party identification and testing; and +c. At least 2 hours shall be devoted to audit documentation. + +B. Friedman shall inform its audit professionals of the terms of the Order within ten +business days after entry of the Order. + +C. Friedman shall appoint an internal team leader on US GAAP, SEC regulations +and PCAOB standards to oversee the above undertakings. + +D. 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. + +E. Friedman shall certify, in writing, compliance with the undertaking(s) set forth +above. The certification shall identify the undertaking(s), provide written evidence of + +16 + +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. All reports and certifications +mentioned in these undertakings shall be submitted to Paul Montoya, Associate Regional +Director, Chicago Regional Office, Securities and Exchange Commission, 175 W. Jackson +Boulevard, 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. + +F. In determining whether to accept Friedman’s Offer, the Commission has +considered the above undertakings. Friedman agrees that if the Division of Enforcement believes +that Friedman has not satisfied these undertakings, it may petition the Commission to reopen the +matter to determine whether additional sanctions are appropriate. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Pursuant to Sections 4C and 21C of the Exchange Act, Respondent 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 is censured. + +C. Respondent shall comply with its undertakings as enumerated in Paragraphs A +through F of Section III above. + +D. Respondent shall, within 30 days of the entry of this Order, pay disgorgement of +$524,138 and pre-judgment interest of $40,574, and a civil money penalty in the amount of +$1,000,000 to the Securities and Exchange Commission. The Commission may distribute civil +money penalties collected in this proceeding if, in its discretion, the Commission orders the +establishment of a Fair Fund pursuant to 15 U.S.C. § 7246, Section 308(a) of the Sarbanes-Oxley +Act of 2002. The Commission will hold the 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 the civil penalty is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + + + +17 + +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 +Friedman as a Respondent in these proceedings, and the file number of these proceedings; a copy +of the cover letter and check or money order must be sent to Paul Montoya, Associate Regional +Director, Chicago Regional Office, Securities and Exchange Commission, 175 W. Jackson +Boulevard, Suite 1450, Chicago, IL 60604. + +E. Regardless of whether the Commission in its discretion orders the creation of a +Fair Fund for the penalties ordered in this proceeding, amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondent agrees that in any Related Investor Action, it shall not argue that it is entitled to, nor +shall it benefit by, offset or reduction of any award of compensatory damages by the amount of +any part of Respondent’s payment of a civil penalty in this action (“Penalty Offset”). If the court +in any Related Investor Action grants such a Penalty Offset, Respondent agrees that it shall, +within 30 days after entry of a final order granting the Penalty Offset, notify the Commission's +counsel in this action and pay the amount of the Penalty Offset to the Securities and Exchange +Commission. Such a payment shall not be deemed an additional civil penalty and shall not be + + +18 + +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/2022/AAER-4346.txt b/raw/aaer/2022/AAER-4346.txt new file mode 100644 index 0000000000000000000000000000000000000000..6d8552e58548fff19678b5b04c9a738e9c87a579 --- /dev/null +++ b/raw/aaer/2022/AAER-4346.txt @@ -0,0 +1,1728 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95948 / September 30, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4346 / September 30, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21183 + + + +In the Matter of + +RSM US 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 RSM US LLP (“Respondent”) pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules +of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or +permanently, to any person the privilege of appearing or practicing before +the Commission in any way, if that person is found . . . (1) not to possess +the requisite qualifications to represent others; (2) to be lacking in +character or integrity, or to have engaged in unethical or improper +professional conduct; or (3) to have willfully violated, or willfully aided +and abetted the violation of, any provision of the securities laws or the +rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an +Offer of Settlement (the “Offer”), which the Commission has determined to accept. Solely +for the purpose of these proceedings and any other proceedings brought by or on behalf of +the Commission, or to which the Commission is a party, and without admitting or denying +the findings herein, except as to the Commission’s jurisdiction over it and the subject +matter of these proceedings, which are admitted, Respondent consents to the entry of this +Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to +Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and +a Cease-and-Desist Order (“Order”), as set forth below. +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + +1. During the period 2015 to 2018, RSM engaged in improper professional +conduct during multiple audits of Revolution Lighting Technologies, Inc. (“Revolution”). +RSM failed to properly conduct audits of Revolution’s financial statements and internal +control over financial reporting. RSM failed to adhere to Public Company Accounting +Oversight Board (“PCAOB”) auditing and quality control standards, from planning and +supervision of the audit through the evaluation of the audit results and review of +Revolution’s disclosures. PCAOB is an entity established by Congress to, among other +things, oversee the audits of public companies in order to protect investors. Among +PCAOB’s primary duties are establishing the standards that registered public accounting +firms must meet when they audit public companies. + +2. Revolution’s financial statements were materially misstated because they +included improperly recognized revenue from “bill and hold” sales, which are generally a +type of transaction that involves a company selling a product to a customer but not +delivering the product to the customer until some later date. Bill and hold sales need to +satisfy several criteria in order for a company to be able to recognize them as revenue +(meaning the sales get recorded as revenue in a company’s books and records and reported +as revenue in a company’s financial statements). Audit evidence provided to RSM’s audit +team during the audits demonstrated that Revolution was violating U.S. Generally +Accepted Accounting Principles (“GAAP”) with respect to recognition of revenue in its + + The Commission may . . . deny, temporarily or permanently, the privilege +of appearing or practicing before it . . . to any person who is found . . . to +have engaged in unethical or improper professional conduct. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and +are not binding on any other person or entity in this or any other proceeding. + + 3 +financial statements from these bill and hold sales. RSM’s audit team unreasonably failed +to comply with professional standards by concluding that Revolution’s accounting and +financial statements conformed with GAAP. + +3. For each audit, RSM issued two types of audit reports: (i) a report opining +that Revolution’s financial statements presented fairly, in all material respects, +Revolution’s financial position and that they conformed with GAAP; and (ii) a report +opining that Revolution maintained, in all material respects, effective internal control over +financial reporting. Both reports also stated that RSM conducted its audits in accordance +with the standards of the PCAOB. As a result of RSM’s improper professional conduct, +RSM’s audit reports were inaccurate in their representations that the audits were conducted +in accordance with PCAOB standards. RSM violated Rule 2-02(b) of Regulation S-X. In +addition, by inaccurately stating in its audit reports accompanying Revolution’s 2014 to +2017 Forms 10-K filed with the Commission that RSM had conducted each audit in +accordance with PCAOB standards, RSM caused Revolution to violate Section 13(a) of the +Exchange Act and Rule l3a-l thereunder. + +4. During the course of RSM’s audit of Revolution’s fiscal year 2017 financial +statements (the “2017 Audit”; prior years’ audits will be named the “201X Audit”), RSM’s +engagement team and national office concluded that Revolution had improperly recognized +revenue in fiscal year 2017 due to Revolution’s failure to adhere to fixed delivery dates for +its bill and hold sales, and presumed that this issue also impacted revenue recognition in +each of the preceding three years. RSM then concluded that Revolution’s revenue +misstatements were immaterial and therefore Revolution did not need to restate its financial +statements. RSM’s conclusion was unreasonable because it was based on faulty estimates, +and it rested upon its determination that qualitative factors outweighed the fact that, even +under its faulty estimates, Revolution’s misstatements of revenue significantly exceeded +the quantitative audit materiality level that RSM had identified for several of the periods in +question. In reaching the decision that qualitative factors rendered immaterial the fact that +revenue figures for multiple years were misstated, RSM effectively abandoned the audit +team’s own prior determination, in each of the years in question, that reported revenue was +a key metric of interest to shareholders of Revolution. During this analysis, RSM violated +the applicable PCAOB standards. + +5. Overall, rather than exercise an appropriate level of skepticism in this area – +an area requiring heightened scrutiny – RSM made unreasonable determinations in +concluding that Revolution’s misstatements were immaterial. The lack of due professional +care by RSM’s personnel had the effect of hiding the RSM engagement team’s failure to +properly conduct an audit for fiscal years 2014 – 2017. + +B. RESPONDENT + +6. RSM US LLP, a limited liability partnership with its headquarters in +Chicago, Illinois, is a public accounting firm registered with the PCAOB. RSM served as +the auditor of Revolution, a company with publicly traded stock that was required to file + + 4 +periodic reports with the Commission, including reports that included audited financial +statements, from at least 2010 until it resigned from that role in June 2019. + +C. OTHER RELEVANT ENTITY + +7. Revolution Lighting Technologies, Inc. is a Delaware corporation +headquartered in Stamford, Connecticut. Revolution manufactures and markets LED +lighting solutions. Its common stock was registered with the Commission under Exchange +Act Section 12(g) until August 24, 2020. Before October 14, 2019, Revolution traded on +the NASDAQ under the ticker symbol RVLT. On June 29, 2020, the Commission +temporarily suspended trading in Revolution’s securities because its periodic Commission +filings were delinquent. On August 21, 2020, the Commission revoked the registration of +Revolution’s securities pursuant to Section 12(j) of the Exchange Act. On September 24, +2020, the Commission brought a settled action against Revolution and four of its +executives for violations of the federal securities laws in connection with the bill and hold +transactions at issue. + +D. FACTS + +I. RSM IMPROPERLY TESTED BILL AND HOLD REVENUE + +a. Revolution Began Relying on Bill and Hold Sales at the End of 2014 + +8. During 2014, Revolution acquired Value Lighting, Inc. (“Value Lighting”) +and made Value Lighting a business division. Revenue from Value Lighting immediately +became the large majority of Revolution’s reported revenue. + +9. Historically, Revolution recognized revenue on a sale upon shipment or +delivery to its customers. At the end of 2014, however, Revolution deviated from prior +practice and implemented a program at Value Lighting of recognizing revenue on so-called +bill and hold sales. Broadly speaking, a bill and hold sale is a sale of a product to a +customer in which the seller maintains possession of the product until some later date when +the customer needs the product delivered. If certain criteria are met, a seller may properly +recognize revenue from bill and hold sales before delivering the product to the customer. +However, bill and hold sales are subject to abuse by companies, such as Revolution, that +seek to inflate their revenues by improperly recording sales of products that have not been +shipped and that do not satisfy the criteria for recognizing revenue. + +10. RSM began audit work for Revolution in 2010. During its 2014 Audit, +RSM learned Revolution had used bill and hold sales on December 31, 2014, the last day +of Revolution’s 2014 fiscal year. RSM’s audit team sampled and tested Revolution’s bill +and hold revenue for GAAP compliance. + +11. Under GAAP applicable at the time of the audits, revenue could not be +recognized until it was: (1) earned and (2) realized or realizable. Bill and hold sales were +required to meet specific criteria under GAAP for a company to recognize revenue from + + 5 +those transactions. RSM’s work papers reflected that the team applied the following seven +criteria to test Revolution’s recognition of revenue from purported bill and hold sales: + + Risks of ownership must have passed to buyer. + Buyer has a fixed commitment to purchase, preferably in writing. + Buyer, not seller, requested the bill and hold transaction and there is a substantial +business purpose for ordering the goods on a bill and hold basis. + A fixed delivery schedule with reasonable delivery dates exists. + Seller has not retained any specific performance obligations. + Product is complete and ready for shipment. + The ordered goods must have been segregated from the seller’s inventory and not +be subject to being used to fill other orders. + +12. RSM nominally applied these criteria during its 2014 Audit through the +2017 Audit. These seven well-established criteria closely tracked the language set forth in +the Commission’s Accounting and Auditing Enforcement Release (“AAER”) 108 and Staff +Accounting Bulletin (“SAB”) No. 104. RSM understood that failure to satisfy any of the +criteria disqualified the revenue from being recognized on a bill and hold basis. + +b. RSM Failed to Adequately Plan the Audit, Design and Implement +Bill and Hold Testing Procedures, and Supervise the Audit Team +Members Performing Bill and Hold Revenue Testing + +13. Preceding each audit, the RSM audit team completed an annual risk +assessment form to evaluate the risks of material misstatement and to design audit +procedures responsive to the assessed risks. Based on the audit team’s inputs, RSM’s risk +assessment tool rated the Revolution audit at RSM’s highest audit risk level. RSM’s audit +team identified bill and hold sales as a “significant risk” of material misstatement due to +fraud (the highest risk designation under the auditing standards). + +14. Despite the fact that Revolution was at the top of RSM’s audit risk scale, +and RSM’s determination that the bill and hold transactions presented a significant risk of +material misstatement due to fraud, RSM’s engagement partner and senior manager +assigned the testing of Revolution’s bill and hold sales to junior members of the audit team +(who lacked experience with bill and hold testing), and failed to adequately supervise the +testing. + +15. When RSM’s audit team first began testing Revolution’s bill and hold sales +during the 2014 Audit, no one on the team other than the engagement partner had any +experience with bill and hold sales. Despite this, RSM did not provide any formal training +to the audit team members on how to apply the bill and hold criteria. Additionally, RSM +did not require bill and hold training. + +16. Under the audit’s design and planning, the reviewers of the bill and hold +testing were not required to review the underlying audit evidence for such testing. RSM’s +audit team continued this approach through the 2017 Audit. Despite issues coming to the +attention of the engagement partner and senior members of RSM’s audit team during the + + 6 +2014 and 2015 Audits and despite finding in 2016 that there was a deficiency in +Revolution’s internal control over financial reporting relating to bill and hold sales, RSM +did not assign more experienced auditors to this significant risk area or review more closely +the bill and hold testing performed by junior associates. Instead, RSM’s audit team kept +placing the highest risks of the audit on the shoulders of the least experienced team +members. + +17. The leadership of RSM’s audit team also failed to design and implement +adequate bill and hold testing. They directed the RSM audit team to use “bill and hold +agreements” as the principal documentary evidence to test bill and hold revenue +recognition. Those agreements were the only documents that purportedly transferred risk +of loss and title to Revolution’s customers by quarter end. However, the bill and hold +agreements between Revolution and its customers were often executed after the quarter +close, which was clear from the dates on those agreements. Yet RSM failed to find any +error with recognizing revenue on sales for which the bill and hold arrangements were +agreed to after the quarter close, in part, because the RSM audit team did not design or +apply adequate cut-off testing to verify that revenue was recognized in the appropriate +period. In addition, the RSM audit team did not design and implement adequate +procedures to test whether a customer had initiated the bill and hold arrangement and +whether it had a “substantial business purpose” for requesting it. RSM’s audit team also +did not require adequate documentation demonstrating that a customer initiated the bill and +hold arrangement. + +18. In general, RSM’s audit team leadership did not perform regular reviews or +even spot checks on the audit evidence underlying the bill and hold testing. Leadership +failed to review the audit evidence to ensure that the junior associates were testing correctly +in the highest risk area of RSM’s audit. Audit team leadership even failed to meaningfully +question illogical and insufficient explanations written on bill and hold work papers. The +lack of supervision contributed to RSM’s overall audit failures. + +19. Based upon the information presented to RSM’s audit team, almost all of +the revenue from Revolution’s bill and hold sales tested by RSM was not earned and +realizable in the periods in which Revolution recorded the revenue. But year after year, +RSM signed off on Revolution’s improper accounting because the audit team’s leadership +improperly supervised the junior members of the audit team, who had failed to adequately +assess Revolution’s application of the seven bill and hold criteria. RSM violated PCAOB +standards on audit planning and supervision by inadequately assigning and supervising the +testing of Revolution’s bill and hold sales by the junior members of the audit team, which +contributed to RSM’s audit failures. + +II. RSM FAILED TO REASONABLY APPLY THE SEVEN BILL AND +HOLD CRITERIA + +a. During the 2014 Audit, RSM Failed to Identify Revolution’s +Accounting Errors + + + 7 +20. During the 2014 Audit, junior members of the RSM audit team identified +problems with Revolution’s bill and hold sales. In February 2015, RSM wrote to +Revolution’s CFO about the poor quality of the audit evidence that RSM had received from +Revolution for the bill and hold sales. RSM wrote that Revolution’s bill and hold +agreements were insufficient to show that the sales satisfied the bill and hold criteria. RSM +also wrote to Revolution finance personnel in February 2015, upon receipt of a customer +confirmation (“Customer A”); there, RSM expressed concern about the bill and hold audit +evidence, including that the customer expressly represented it did not accept ownership of +the product as of the end of Revolution’s fiscal year, December 31, 2014, among other +deficiencies with the bill and hold revenue recognition criteria. While RSM’s audit team +initially raised these problems to Revolution, RSM did not obtain sufficient audit evidence +to resolve these issues, even after receiving inadequate and/or contradictory responses. + +21. Despite the audit team’s criticism of Revolution’s bill and hold agreements, +RSM reversed its position and did so without documenting the basis for this change. +RSM’s 2014 Audit work papers state that RSM relied on Revolution’s bill and hold +agreements to establish certain bill and hold criteria, even though RSM’s audit team +manager on the audit had said the agreements were insufficient for that very purpose. +RSM’s engagement partner and the senior manager signed off on the bill and hold testing +work paper, which failed to document the existence and reconciliation of disconfirming +audit evidence about which they knew. + +22. RSM’s audit team procured a second customer confirmation for the sale to +Customer A that directly contradicted the first one. However, the RSM audit team never +documented in the 2014 Audit work papers: (i) the existence of the first disconfirming +customer confirmation; (ii) whether Revolution provided additional relevant audit +evidence; (iii) how RSM reconciled any contradictory audit evidence; and (iv) why RSM +changed its position and decided that Revolution could recognize revenue from the +purported sale. + +b. RSM Ignored Audit Evidence that Some Bill and Hold Customers +Had Not Agreed to Accept Ownership (and Risk of Loss) Prior to +Shipment + +23. The first bill and hold criterion required the risk of ownership of the product +to pass to Revolution’s customers before revenue could be recognized for that sale. For +Revolution to recognize revenue in a particular quarter, the risk of ownership must pass +before the end of the fiscal quarter. In other words, the buyer and Revolution must agree to +the terms of the bill and hold arrangement (including the passage of the risk of loss to the +customer) during—not after—the quarter when the revenue is recognized. + +24. Revolution’s bill and hold agreements were the only documents that +evidenced the customer’s agreement to the bill and hold terms and the date when the +customer and Revolution agreed to the bill and hold terms. RSM’s audit team relied upon +the bill and hold agreements to establish if and when risk of loss passed to the customer. + + + 8 +25. Throughout the audits, when problems came to the RSM audit team’s +attention, they failed to evaluate adequately the significance of those issues, and failed to +evaluate adequately evidence that raised questions about whether Revolution could +appropriately recognize revenue on a bill and hold basis. Even though the bill and hold +agreements were usually entered into after quarter end, RSM did not question whether +revenue could be recognized during such quarter or require evidence that the bill and hold +arrangements in fact had been entered into during the quarter in which Revolution was +recognizing revenue. + +26. For instance, in February 2016, Revolution emailed to RSM the bill and +hold agreements for all of the bill and hold sales that RSM selected for testing during its +2015 Audit. More than two-thirds of the bill and hold agreements that Revolution then sent +to RSM were dated after the period in which the revenue was recognized, inconsistent with +recognizing revenue during those respective periods. The senior manager on RSM’s audit +team personally received these agreements during the audit. Yet RSM did not reasonably +apply the first bill and hold criterion and failed to find that Revolution improperly +recognized the revenue. + +27. Based upon the information presented to RSM’s audit team, almost all of +the revenue from Revolution’s bill and hold sales tested by RSM was not earned and +realizable in the periods in which Revolution recognized the revenue. In fact, more than +two-thirds of the bill and hold agreements RSM tested during its 2015 to 2017 Audits were +dated after the period when Revolution recognized revenue. + +c. RSM Did Not Require Audit Evidence To Show That Bill and Hold +Customers Made a Fixed Commitment to Purchase Products + +28. The second bill and hold criterion required Revolution’s customers to +commit to purchase product. RSM accepted Revolution’s revenue recognition even +without contemporaneous evidence of the customer’s commitment to purchase the product, +and RSM did not reasonably apply the second bill and hold criterion. The engagement +partner and senior manager did not design procedures that adequately tested this criterion. +RSM’s work papers claim it tested this criterion by analyzing the purchase orders from +Revolution’s customers and the corresponding invoices sent by Revolution. But when +Revolution either provided a purchase order dated after the close of the reporting period or +gave no purchase order at all, RSM’s audit team did not find that Revolution improperly +recognized the revenue in that reporting period. + +29. During RSM’s later reevaluation of the bill and hold transactions in +connection with Revolution’s anticipated restatement in late 2018 and early 2019, for the +majority of reported bill and hold sales from 2015 to 2018, management was either unable +to provide purchase orders, or the purchase orders that management did provide at that +point were dated after the period for which Revolution recognized revenue. + + + + + 9 +d. RSM Did Not Require Audit Evidence to Establish that Customers +Had Requested Bill and Hold Arrangements + +30. The third bill and hold criterion required that Revolution’s customer – and +not Revolution – request the bill and hold arrangement, and that the customer have a +“substantial business purpose” for doing so. RSM’s audit testing did not reasonably apply +the third bill and hold criterion. During its audit testing, RSM’s audit team did not require +adequate documentation demonstrating that a customer initiated the bill and hold +arrangement. + +31. The engagement partner and senior manager also did not design and +implement adequate procedures to test whether a customer had initiated the bill and hold +arrangement and whether it had a “substantial business purpose” for requesting later +delivery. RSM’s audit team did not require adequate audit evidence that documented the +specific customer’s reason for requesting a bill and hold arrangement. + +32. During the 2014 Audit, RSM’s audit team accepted Revolution’s +representations that its customers requested bill and hold arrangements because of supply +constraints due to the Chinese New Year (most of Revolution’s products were +manufactured in China). RSM’s audit team did not adequately test Revolution’s blanket +assertion. + +33. Only later did RSM’s audit team attempt to test Revolution’s customers’ +substantial business purpose, when it revised the format of the audit confirmation it used to +test the transactions. However, the RSM audit team’s design of the confirmation failed to +provide sufficient, appropriate audit evidence to confirm the customer’s substantial +business purpose for requesting a bill and hold arrangement. + +34. The language of the customer confirmation was neither transaction- nor +customer-specific, and did not meet the audit objective. RSM’s audit team carried forward +this generalized language without sufficient testing or any factual basis. + +e. RSM Did Not Require Audit Evidence of Fixed Delivery Schedules + +35. The fourth bill and hold criterion required a fixed delivery schedule with +reasonable delivery dates for bill and hold sales. RSM unreasonably applied this criterion; +its testing did not require Revolution to establish that there was a fixed delivery schedule +for its bill and hold sales. Most of Revolution’s bill and hold agreements with its +customers expressly stated that Revolution was to “not ship the goods and services covered +by such job, until further notice from” the customer. RSM’s audit team received a bill and +hold agreement with this or similar language for most bill and hold sales that it tested. In +those instances, the very terms of the bill and hold agreements indicated that the delivery +schedule was not fixed but subject to change or dependent upon when the goods were +needed at the customer job site. The engagement partner and senior manager both +reviewed and were familiar with the language of Revolution’s bill and hold agreements. + + + 10 +36. In addition, the RSM audit team did not appropriately evaluate evidence +about whether Revolution agreed to fixed delivery schedules with its bill and hold +customers to satisfy the fourth bill and hold criterion. For example: + + Revolution told RSM on at least two occasions that it did not agree to fixed +delivery schedules with its customers. An RSM audit team member questioned +Revolution’s CFO in November 2015 about a delivery schedule for a bill and +hold sale, to which the CFO replied in an email that the customer never +provided Revolution a delivery schedule, but rather the customer called +whenever it wanted product delivered. + + In February 2018, Value Lighting’s CFO wrote to the senior manager +admitting, “[w]e do not have fixed delivery schedules as we’ve discussed…” +Value Lighting’s CFO also wrote that the team was imposing “a new +requirement that was not in place in 2016.” Instead of providing fixed delivery +schedules, Value Lighting’s CFO offered RSM the same generic job release +schedules Revolution had always provided. + +37. During RSM’s later reevaluation of the bill and hold transactions in +connection with Revolution’s anticipated restatement in late 2018 and early 2019, +Revolution was only able to provide at that time an actual “fixed delivery schedule” for +four of the 198 bill and hold sales from 2015 through 2017. + +III. RSM UNREASONABLY CONCLUDED REVOLUTION’S +ACCOUNTING ERRORS WERE IMMATERIAL + +38. During the 2017 Audit, after the RSM audit team recognized that +Revolution had improperly recognized revenue for the preceding four years, RSM’s audit +team, in consultation with its national office, concluded – based on its analysis that +Revolution’s potential accounting errors from bill and hold sales were immaterial – that +Revolution did not have to restate its 2014 through 2017 financial statements. RSM’s +analysis was flawed as to both quantitative and qualitative factors. The failure to restate +effectively hid from investors Revolution’s four years of improperly recognized revenue. + +a. RSM Finally Begins to Question Revolution’s Bill and Hold Sales +and Initiates a Record of Consultation + +39. By the fall of 2017, RSM’s audit team became concerned that Revolution’s +accounts receivable balance for bill and hold sales kept growing. RSM’s audit team noted +that some of Revolution’s bill and hold customers were not paying for lighting product +when billed, but instead were paying after the product was shipped. The trend suggested +that transactions that Revolution had recognized as bill and hold sales were not in fact +appropriate to recognize as sales. It also meant that payment was contingent upon +Revolution’s shipment of the product, thereby violating the fifth bill and hold criterion +(seller has completed all of its obligations). + + + 11 +40. During the fall of 2017, the senior manager reached out to the “SEC +Reviewer” assigned to RSM’s audit of Revolution to discuss Revolution’s bill and hold +accounting and whether Revolution was satisfying the criterion requiring a fixed delivery +schedule. The SEC Reviewer was an RSM partner and revenue recognition specialist in +RSM’s regional Professional Practice Office (“PPO”). The PPO is a part of RSM’s +national office providing help to RSM professionals on a consulting basis when needed. +The senior manager and the SEC Reviewer for the Revolution audits discussed whether +Revolution was satisfying the criterion requiring a fixed delivery schedule. The SEC +Reviewer recommended that RSM’s audit team pursue a formal consultation with the +national office concerning Revolution’s bill and hold sales. + +41. In early November 2017, RSM’s audit team met to plan for the 2017 Audit. +The team identified bill and hold sales as presenting a significant risk, especially +Revolution’s collections for bill and hold sales. In its audit planning work paper, the RSM +audit team identified fraudulent revenue recognition as a significant risk, and, in particular, +bill and hold accounting at Value Lighting. RSM noted that Value Lighting allowed +accounts receivables to “age well past 90 days prior to collection.” + +42. Later that month, the engagement partner, the senior manager, and other +RSM personnel met with Revolution personnel to discuss Revolution’s upcoming audit. +Before the meeting, the RSM audit team sent Revolution an agenda, originally drafted by +the senior manager, identifying bill and hold sales as RSM’s “#1 priority.” The agenda +stated that bill and hold sales would be “much less of an issue” if Revolution could +significantly shrink its accounts receivables for bill and hold sales by year end. RSM also +noted that two bill and hold sales from 2016 and 2017, respectively, that had yet to ship, +would “be an issue” if Revolution had not shipped any product to the customers within two +or three months of entering into the arrangement. In addition to the meeting, the senior +manager spoke separately with Value Lighting’s CFO in November 2017 to discuss bill +and hold sales. + +43. At that time, RSM’s audit team was planning on drafting a formal “Record +of Consultation” (“ROC”) to send to RSM’s national office. The ROC sought guidance +regarding applying the GAAP criteria in light of Revolution’s long delays in shipping +product on bill and hold sales and in light of the pattern of aged accounts receivable for bill +and hold sales. + +44. In planning for the 2017 Audit, RSM’s audit team had determined that +“revenues are the most appropriate benchmark” and are most important to the primary +users of Revolution’s financial statements. RSM’s audit team used revenue as its primary +benchmark to set the audit materiality limit for its 2014 to 2017 Audits. For the 2017 +Audit, RSM set the limit at $1.79 million (roughly 1% of Revolution’s projected revenue). + +45. In late January 2018, the RSM senior manager sent a draft ROC to the SEC +Reviewer, copying the engagement partner. Following a call with the SEC Reviewer, the +senior manager repeated to the engagement partner that bill and hold testing needed to be + + 12 +the audit team’s “#1 priority.” Yet the engagement partner and senior manager continued +with the same bill and hold testing procedures. + +46. During the testing for the 2017 Audit, the audit team determined that all +2017 sampled revenue from bill and hold sales satisfied the seven criteria and GAAP. + +b. RSM Tries to Solve the Problem of Bill and Hold Sales +(February 2018) + +47. On February 23, 2018 (less than two weeks before Revolution was +scheduled to file its Form 10-K), the RSM senior manager and engagement partner emailed +the SEC Reviewer informing him that the bill and hold testing was completed and directed +him to the team’s bill and hold work paper and an updated draft of the ROC. The +engagement partner, SEC Reviewer, and senior manager discussed the bill and hold +accounting the next day, Saturday, February 24, 2018. + +48. After the discussion with the SEC Reviewer on Saturday, RSM’s senior +manager asked Value Lighting’s CFO for the unshipped inventory for open bill and hold +projects as of December 31, 2016. RSM already had the data as of December 31, 2017, +from the 2017 Audit. The senior manager said that he needed the data to establish the bill +and hold trend year-over-year so that the SEC Reviewer could sign off on Revolution’s +recognition of revenue from bill and hold sales. + +49. Value Lighting’s CFO replied after 10 pm on Saturday night, February 24, +2018, that Revolution did not have on hand the data RSM wanted and that it would take +time to construct the information from the purchase orders, invoices, and shipping +documents. + +50. On Sunday, February 25, 2018, the senior manager provided to the +engagement partner a self-described “rough estimate” of the amount of unshipped bill and +hold inventory as of December 31, 2016. The RSM audit team used the “rough estimate” +to calculate the magnitude of a potential adjustment to the financial statements. The senior +manager emailed the information to the engagement partner telling him that without the +requested data from Revolution, the “best we can do” was to apply the same rate of +unshipped inventory to 2016 as was present in the third and fourth quarters of fiscal year +2017. + +51. Later on Sunday night, February 25, 2018, in an email to the senior +manager, Value Lighting’s CFO distinguished Revolution’s 2016 bill and hold sales +practices from those in 2017. He explained that Revolution had completed (i.e. fully +shipped) many more bill and hold sales within 2017 than it had completed within 2016. He +wrote that Revolution had changed its business strategy with respect to bill and hold sales +within the last six months. Despite being made aware of the noted differences in practice +between 2016 and 2017, the RSM audit team continued to estimate the amount of +unshipped inventory in 2016 based on Revolution’s representations about shipping +practices in late 2017. + + + 13 +52. By Monday, February 26, 2018, the SEC Reviewer had reached out to the +Regional Director of the Northeast and Southeast PPO (“the regional audit director”), to +discuss the audit team’s concern about Revolution’s bill and hold sales. The regional audit +director reported to RSM’s National Director of Accounting. To RSM, the amount of +unshipped inventory represented the size of Revolution’s potential error for 2016. The +senior manager’s communication to the regional audit director included an earlier e-mail +chain between the SEC Reviewer and the senior manager indicating that the unshipped +percentage as of December 31, 2016 was an estimate based upon the unshipped percentage +from late 2017. That information was also contained in notes embedded in certain cells in +the spreadsheet. + +53. The regional audit director directed the audit team to consult with another +partner from RSM’s national office who was a specialist in revenue recognition for the +national accounting group. + +c. RSM Concludes Errors Exist Within the Bill and Hold Sales + +54. On Tuesday, February 27, 2018, the RSM specialist, the engagement +partner, the senior manager, and the SEC Reviewer discussed Revolution’s bill and hold +sales. + +55. As a result of the discussion with the RSM specialist, the audit team +recognized that at least some of Revolution’s bill and hold sales did not support revenue +recognition because they, at a minimum, failed the fixed delivery schedule criterion. + +56. Following the discussion, the regional audit director spoke with the RSM +specialist. The regional audit director agreed with the specialist’s input and the audit +team’s conclusion that there were revenue recognition errors for some bill and hold sales. + +57. The audit team, however, did not adequately document this conclusion in its +work papers. For example, RSM failed to identify any specific bill and hold sale that was +erroneously recognized. Instead, RSM’s bill and hold testing work papers for the 2017 +Audit continued to reflect that all tested bill and hold sales satisfied GAAP. + +58. RSM did not perform any additional audit procedures to determine which of +the 2016 bill and hold sales failed to satisfy the GAAP criteria, based on the information +from the national office consultation. Instead, the engagement partner, senior manager, and +the RSM audit team assumed Revolution’s bill and hold practices in 2017 were comparable +to those in 2016, even though they had evidence to the contrary. As a result, the +engagement partner, senior manager, and the RSM audit team undercounted the potential +misstatement of Revolution’s 2016 annual revenue by at least 44%. In addition, they failed +to account for more than one million dollars of bill and hold revenue from another +Revolution division, compounding the error. + +59. Given the heightened risk associated with bill and hold sales and the +imprecision of the estimate, RSM and the engagement partner failed to exercise due +professional care and skepticism by relying on an erroneous estimate and by not requiring + + 14 +Revolution to produce the actual historical information necessary to calculate the actual +impact of the bill and hold revenue recognition errors. + +d. Materiality Memo Drafted by Revolution + +60. Following the discussion with the RSM national office specialist, the +engagement partner and senior manager informed Revolution’s CFO that there was an +issue with the accounting for bill and hold sales. They told Revolution’s CFO that +Revolution needed to evaluate the impact on Revolution’s financial statements if +Revolution only recognized revenue when the product was shipped. They asked +Revolution’s CFO to draft a materiality assessment in accordance with the SEC’s Staff +Accounting Bulletin No. 99 and guided Revolution’s CFO on what to do. + +61. On February 28, 2018, Revolution sent the RSM audit team a draft +materiality memo. It was drafted in less than one day, and presented Revolution’s view +that any errors from bill and hold sales were immaterial. The draft materiality memo was +riddled with errors, but the engagement partner and the senior manager did not question +Revolution’s numbers, in part, because Revolution adopted RSM’s ROC figures, including +the senior manager’s “rough estimate” ($12.6 million) of the unshipped inventory as of +December 31, 2016. According to the draft materiality memo, the net effect for 2016 was a +decrease in revenue of only $1.3 million, or 0.7%. See Figure 1. + + +Figure 1. Excerpt from Revolution’s Draft Materiality Memo, February 28, 2018. + +62. After it rushed to file its 2017 Form 10-K on March 8, 2018, Revolution +later concluded in October 2018 that its estimate of unshipped inventory was inaccurate +because it failed to include the unshipped bill and hold sales from its All Around Lighting +division and that it had materially misstated its financial statements. Revolution ultimately +determined that it misstated revenue in 2016 not by 0.7%, but by 7.0%. + + + + 15 +63. RSM’s estimation error also affected the rollover impact analysis for fiscal +year 2017 revenue. Revolution’s draft materiality memo stated that the net effect on +Revolution’s 2017 revenue was $7.2 million or 4.5%. Revolution later calculated that, in +reality, it was $17.5 million or 10.3%. See Figure 2. + +In 000s Except Percentages FY 2014 FY 2015 FY 2016 FY 2017 +Revenue As Reported + +76,840 + +129,656 + +172,121 + +152,312 +Bill & Hold Adjustments + +(4,769) + +(5,912) + +(11,314) + +17,546 +Revenue As Adjusted for Bill and +Holds + +72,071 + +123,744 + +160,807 + +169,858 +Misstatement as % of As Adjusted +Revenue (Absolute Value) 6.6% 4.8% 7.0% 10.3% + +Figure 2. Excerpted Data from Revolution’s Later 2019 Restatement Analysis + +64. RSM, including the engagement partner, did not object to Revolution’s use +of the “rough estimate.” RSM also did not object when the rollover analysis contradicted +the audit evidence it possessed. For example, Value Lighting’s CFO had given the RSM +audit team schedules that showed that some 2015 bill and hold sales did not ship until +2017. Nonetheless, Revolution placed all deferred 2015 revenue into 2016, instead of +apportioning it accurately. The spreadsheet that the engagement partner and the audit team +ultimately presented to the regional audit director used this “rough estimate” to evaluate the +materiality of Revolution’s bill and hold errors. + +e. The March 1st and 2nd Revised Draft ROCs Presented to the Regional +Audit Director Concluded that the Potential Misstatements to +Revolution’s 2017 Financial Statements were Immaterial + +65. Following the February 27, 2018 discussion with the RSM specialist, the +RSM audit team and the engagement partner revised the ROC. Even before receiving +Revolution’s analysis on February 28 about whether the errors were material, RSM treated +the errors as immaterial and suggested that the potential misstatements did not need to be +corrected. On March 1, 2018, the engagement partner, senior manager, and the RSM audit +team sent the revised ROC (“March 1 ROC”) to the regional audit director along with a +draft of Revolution’s materiality memo. The audit team consulted the regional audit +director on a possible restatement of 2017 because situations where the uncorrected +misstatements exceed RSM’s audit planning materiality thresholds required sign off by a +regional PPO member per RSM’s protocols. Before speaking with the audit team, the +regional audit director forwarded the March 1 ROC to RSM’s National Director of +Accounting. + +66. On March 2, 2018, the RSM audit team consulted with the regional audit +director and incorporated his suggestions into a new ROC (“March 2 ROC”). The March 2 +ROC analyzed the necessity of adjusting Revolution’s 2017 financial statements and + + 16 +restating prior year financial statements for the effect of bill and hold revenue that had not +been shipped. + +67. Similar to situations where uncorrected misstatements exceeded RSM +thresholds, RSM’s protocols required sign off by either the regional audit director or +RSM’s National Director of Accounting in order to approve a ROC relating to a possible +restatement of a client’s financial statements. + +68. The March 2 ROC stated that RSM was concerned that shipping dates for +bill and hold sales were not adhering to the “original fixed delivery schedules entered into +with its customers.” In general, the concern misstated the nature of the problem: in reality, +Revolution had never actually entered into fixed delivery schedules with its purported bill +and hold customers. The March 2 ROC concluded that Revolution’s bill and hold +misstatements were not material and that prior years’ financial statements did not need to +be restated. + +f. March 8 Final ROC + +69. On March 5, 2018, the regional audit director forwarded the March 2 ROC +to the National Director of Accounting and asked to speak with him about it before starting +“some heavier editing.” As the RSM audit team prepared that day for its meeting with +Revolution’s audit committee, the ROC revision process was still ongoing. + +70. The regional audit director edited the ROC and directed the senior manager +to make changes where the regional audit director thought the analysis needed further +support or where he believed the evidence given did not support the proposition. + +71. The regional audit director approved the final version of the ROC (“final +ROC”) on March 8, 2018 – the very day that Revolution filed its Form 10-K. That final +version used the flawed estimate of unshipped inventory and incorrectly measured the +impact of the improper bill and hold revenue. Revolution’s and RSM’s faulty analysis +miscalculated the actual (larger) size of the potential misstatement in 2016 and 2017. The +incorrect smaller impact contributed to Revolution’s and RSM’s erroneous conclusion that +the misstatements in Revolution’s financial statements were immaterial. + +72. RSM determined that Revolution’s potential accounting errors from 2014 +through 2017 were quantitatively material based on several metrics (revenue; net income; +and earnings before interest, taxes, depreciation, and amortization (“EBITDA”)). The +misstated revenue was many times greater than the audit materiality levels for each year. +RSM, which based its audit materiality threshold on 1% of expected revenue, found the +potential revenue misstatement exceeded 5% for each of the prior three years on a +cumulative basis, using the “iron curtain” method. Under the “iron curtain” method, the +cumulative effect of correcting a prior period misstatement in the current period financial +statements, irrespective of the misstatement’s year of origin, is considered rather than just +the impact of the error originating in each period. RSM also used the rollover method to +quantify the potential misstatement. The rollover method quantifies a misstatement for a +particular period based on the amount of error originating in that period’s income + + 17 +statement. If errors affect the timing of revenue, the cumulative quantitative impact of +correcting a continuing fraud in the current period’s financial statements can be muted +under a rollover analysis. Even using the rollover method, RSM concluded that the +potential revenue misstatement exceeded 5% in two of the prior three years based on its +calculation of materiality, as follows: + + + +73. The regional audit director and the audit team deemed the misstatements +immaterial for qualitative reasons, despite the quantitative impacts. RSM found that any +erroneously recognized bill and hold revenues did not mask any trends at Revolution: after +adjusting revenue into the appropriate periods, Revolution’s revenue still grew, it still lost +money every year, and it still failed to achieve revenue and other metric forecasts. +According to RSM, because these macro trend lines would not change if Revolution’s +financial statements were restated, the impact of the bill and hold error was immaterial to +investors. + +74. Even though the audit’s materiality levels were exceeded by a substantial +margin, the engagement partner, senior manager, and regional audit director concluded +that: (i) no restatement was required; and (ii) no revision was required. The final ROC also +stated that no material weakness in internal control over financial reporting existed. The +engagement partner and the senior manager inaccurately concluded that there was only a +significant deficiency over adherence to shipping schedules. In conducting their analysis, +the engagement partner, senior manager, and regional audit director did not have any RSM +firm guidance on how to weigh qualitative factors against quantitative factors in +restatement analyses. + +75. In reaching its conclusion, RSM took a number of unreasonable missteps +and made unsupported conclusions, which contradicted or deviated from RSM’s audit work +for fiscal years 2014 – 2017, without adequate explanation or support, including: + + RSM deviated from its prior conclusion in its work papers that, for the +primary users of the financial statements (including shareholders), +“revenues are the most appropriate benchmark” and the one that was “most +important” to those users. + In assessing the materiality of the misstatements, RSM also erroneously +used the numbers from Revolution’s early forecasts of revenue instead of + + + 18 +Revolution’s most current revenue forecasts. It concluded without any +support that once a company misses its revenue forecasts, any lower +revenue results would not be significant to an investor. + The final ROC stated that “RSM determined that revenue, net income, and +EBITDA are all important metrics that [Revolution’s] investors and analysts +frequently review;” however, RSM’s earlier audit work had concluded that +net income was not an appropriate benchmark for materiality because +investors expected losses. +76. The final ROC concluded, without support, that because Revolution had +already missed its revenue forecasts, any further reduction in revenue creating an even +larger miss “would likely not have had a significant impact on investor’s views of the +performance.” The final ROC stated this conclusively, and it did not explain why a +quantitatively larger miss in revenue compared to the forecasted guidance would not +significantly alter the total mix of information important to an investor. + +77. The regional audit director, engagement partner, and senior manager did not +exercise due professional care when weighing the qualitative factors against quantitative +factors, and they inconsistently applied the qualitative factors to certain time periods. For +example: + + The underlying premise of much of RSM’s argument for immateriality was +that a miss to guidance is important to investors, but not the magnitude of +the miss. Yet in analyzing 2015, when Revolution would have missed +guidance but for the erroneous bill and hold revenue, RSM reversed course +and deemed a failure to meet the analysts’ expectations not material to +investors. + The assessment of qualitative factors in the final ROC was based on analyst +calls from a limited time period, 2014 and early 2015, which were used to +evaluate what investors cared about during different periods, instead of an +analysis of the qualitative factors for the reasonable investor in each +analyzed year to determine what was material at that time. For example, +one section of the final ROC attempted to explain why the missed forecast +was not significant. It stated that RSM reviewed an analyst report from +December 2014, an analyst report from March 2015, and a 2015 earnings +call, and found that the analysts’ questions were primarily centered on long- +term growth. + The final ROC also did not address whether the analyst reports and earnings +calls discussed whether Revolution met the revenue forecast. RSM also did +not look to analysts’ reports after Revolution reported it missed revenue +guidance to see if that guidance miss was discussed by analysts. +78. RSM also noted in its materiality analysis that its concern was mitigated by +Revolution’s representations that it planned to cease using bill and hold sales going + + 19 +forward. Revolution’s representations about its future bill and hold practices should not +have entered into RSM’s analysis of the materiality of Revolution’s past improper revenue +recognition. + +79. Further, RSM decided no additional audit procedures were necessary to +determine the scope or impact of the potential accounting errors and issued its unqualified +opinion for both Revolution’s financial statements and its internal control over financial +reporting. + +80. RSM failed to exercise due professional care when analyzing Revolution’s +failure to satisfy the bill and hold revenue recognition criteria. The final ROC improperly +evaluated Revolution’s failure to satisfy the fixed delivery schedule criterion. RSM said +that Revolution thought it was acceptable to delay shipment when requested by the +customer, in accordance with a cited accounting resource. In reality, Revolution did not +agree to fixed delivery schedules with its bill and hold customers in the first place, as Value +Lighting’s CFO told the senior manager in February 2018. + +IV. RSM IMPROPERLY AUDITED REVOLUTION’S INTERNAL +CONTROL OVER FINANCIAL REPORTING + +81. During its audit of Revolution’s internal control over financial reporting, +RSM did not correctly identify the causes of the problems it identified with bill and hold +revenues, instead taking an unreasonably narrow view of the deficiencies concerning the +recognition of bill and hold revenue. + +82. RSM also did not properly analyze the scope of the control deficiency +identified during the 2017 Audit, and came to contradictory conclusions about it. RSM’s +analysis should have led it to conclude that Revolution’s deficiencies associated with bill +and hold revenues were, in fact, a material weakness. + +a. RSM Misidentified the Control Deficiencies + +83. RSM misidentified the causes and extent of Revolution’s control +deficiencies because it focused exclusively on adherence to delivery schedules. In its 2017 +work papers, the RSM audit team concluded that a significant deficiency existed in +Revolution’s internal control over financial reporting. The audit team wrote that certain +revenue related to “bill and [hold] transactions did not meet the 1st criteria (fixed delivery +schedule) due to project delays which is common in the construction industry.” The audit +team explained that Revolution’s interpretation of the fixed delivery schedule criterion was +different than RSM’s interpretation. The audit team wrote that the “root cause did not +appear in other components of internal control, [and] no other deficiencies noted in testing +of bill and hold transactions.” + +84. But, as discussed above, Revolution had agreed with its bill and hold +customers that the date of delivery would be set in the future and was not fixed. The real +control failure arose at the point of sale and not later when Revolution failed to “adhere” to +a fixed delivery schedule. A fixed delivery schedule had never existed. So the “root + + 20 +cause” was actually separate or undocumented arrangements between Revolution and its +customers. + +85. This root cause of the deficiency for the fixed delivery schedules (separate +or undocumented arrangements with customers), however, did appear in other components +of internal control, and could apply to any Revolution sale. + +86. Revolution’s practice of separate or undocumented arrangements with +customers was also consistent with another control failure that drew both RSM’s and +Revolution’s attention: Revolution’s practice of allowing bill and hold customers to pay +after shipment. Yet RSM unreasonably did not find this practice to reflect a control +deficiency. + +87. In the fall of 2017, RSM’s audit team viewed Revolution’s large aged +accounts receivables for bill and hold revenue as an “issue.” But RSM did not design or +implement any new testing to determine if Revolution was making undocumented +arrangements with its customers. + +88. In addition, during the 2017 Audit, Revolution acknowledged that it was not +collecting payment from some bill and hold customers until shipment. In its draft and final +materiality memos, Revolution wrote that “it was noted that…the fixed delivery dates were +not always adhered to by the customer. As a result, shipping dates were extended on a +number of occasions and cash was not always collected within the stated period.” +(emphasis added). This statement should have alerted RSM that there was reason to +question whether the purported bill and hold sales were consummated sales or whether +payment was contingent upon delivery. The latter arrangement would disqualify the bill +and hold sales from revenue recognition. + +89. The regional audit director and engagement partner received and reviewed +(or should have reviewed) the draft materiality memo that stated Revolution did not always +collect payment in the stated period. After receipt, they neither took nor directed any +actions to identify the scope or cause of Revolution’s failure to collect payments. This +inaction, after being made aware of the longer delays in shipping bill and hold sales and +payment delays by their client, breached RSM’s duty of professional care. + +90. Unlike Revolution’s draft materiality memo, the final ROC ignored +Revolution’s practice of allowing customers to wait to pay until after the held product was +shipped. Instead, the final ROC limited its discussion of potential control deficiencies to +Revolution’s failure to adhere to fixed delivery schedules. The final ROC stated that +Revolution “hit on every other criteria in the B&H guidance, therefore, was a close call in +evaluating all of the guidance and comparing to the realities of Revolution’s customers.” +The regional audit director, engagement partner, and the senior manager should have +concluded from a review of Revolution’s draft materiality memo that this final ROC +statement was inaccurate. + + + 21 +91. While RSM’s work papers and final ROC failed to find a deficiency with +Revolution’s collection of bill and hold payments, RSM’s March 7, 2018 letter to +Revolution’s audit committee nevertheless lists it as a deficiency: “[c]ertain revenue +related to bill and hold transactions did not meet required fixed delivery schedule and/or +payment terms criteria. Revolution’s controls over bill and hold revenue recognition did +not properly identify when certain project delays or collection patterns results in a project +no longer meeting the proper recognition criteria.” Yet RSM’s work papers do not support +the conclusion in the letter to the audit committee or reference collection patterns at all. +These contradictory conclusions illustrate RSM’s failure properly to analyze Revolution’s +control deficiencies. + +b. RSM Improperly Classified the Control Deficiency as a Significant +Deficiency When It was a Material Weakness + +92. According to Auditing Standard No. 2201, a material weakness is a +deficiency, or a combination of deficiencies, in internal control over financial reporting, +such that there is a reasonable possibility that a material misstatement of the entity’s annual +or interim financial statements will not be prevented or detected on a timely basis. + +93. During 2017, RSM’s audit team unreasonably concluded that the lack of +adherence to fixed delivery schedules was only a significant deficiency and not a material +weakness. If RSM had found a material weakness, Revolution would have had to disclose +the material weakness in its internal control disclosures in its Form 10-K. RSM’s finding +of only a significant deficiency meant that Revolution did not disclose the problems with +revenue-related controls. + +94. RSM’s audit team made at least three mistakes. First, the audit team +inaccurately determined the size of the error caused by the control failure. Second, RSM +unreasonably concluded that the $2.2 million impact upon income was immaterial, and thus +the control deficiencies were not material weaknesses. Third, the audit team inaccurately +scoped the possible impact of the control failure. + +95. Moreover, RSM’s and the engagement partner’s determination of the +maximum amount caused by the control failure failed to recognize that: + + Revolution’s underlying problems with fixed delivery schedules and +payment collection were not reasonably limited to bill and hold revenue. +Revolution’s problems with collections and undocumented side +arrangements with customers relating to payment terms and Revolution’s +future performance obligations could reasonably impact any sale – not just +bill and hold sales. + + RSM’s work papers improperly assumed Revolution possessed a fixed +delivery schedule at the point of sale. But Revolution had explicitly alerted +RSM to contrary information: that it did not have fixed delivery schedules. +And audit team members had reviewed job schedules that did not contain +fixed delivery schedules. + + 22 + +96. RSM should have determined that the potential amount of the misstatement +of income was much higher than its estimate, and that the control deficiency was more +pervasive than RSM’s work papers reflected. + +97. RSM’s analysis was also flawed because the materiality of Revolution’s +misstatements should not have determined whether the deficiency was a material weakness. +Even as described by RSM, Revolution’s deficiency could have led to a material +misstatement, and the internal control deficiencies caused misstatements that far exceeded +the materiality level. + +98. RSM improperly bolstered its determination that there were not any +material weaknesses with the promise by Revolution’s management that it had stopped +recognizing revenue from bill and hold sales. + +99. Thus, RSM and the engagement partner failed to exercise due professional +care and skepticism in their evaluation of Revolution’s internal control over financial +reporting. + +V. RSM’S REPORTS CONTAINED FALSE STATEMENTS, WHICH +REVOLUTION INCORPORATED INTO ITS ANNUAL FILINGS + +100. For the audits for each of the years 2014 through 2017, RSM sent +Revolution its financial statement and internal control over financial reporting audit reports +and Revolution included those reports with Revolution’s annual SEC filings. In each of +those reports, RSM attested that it had conducted its audits “in accordance with the +standards of the PCAOB.” In reality, as detailed above, RSM did not conduct its audits +from 2014 to 2017 in accordance with PCAOB standards and its attestation to the contrary +was therefore false. RSM knew that Revolution would incorporate its reports into +Revolution’s annual filings with the Commission. In this manner, RSM caused Revolution +to include false statements in its annual filings with the Commission. + +VI. RSM UNREASONABLY CONCLUDED THAT REVOLUTION’S +REVENUE RECOGNITION POLICY DISCLOSURE WAS +ADEQUATE + +101. As part of its audit, RSM reviewed Revolution’s Form 10-K disclosures +about its revenue recognition policies. From 2014 to 2017, Revolution’s Forms 10-K +stated that Revolution “recognize[d] revenue upon shipment or delivery to [its] customers +in accordance with the respective contractual arrangements.” This was false as to bill and +hold transactions. As RSM was well aware, Revolution recognized a significant amount of +its reported revenue on a bill and hold basis, not upon shipment or delivery. Indeed, +revenue attributed to bill and hold sales exceeded 20% of Revolution’s largest division’s +total revenue. + + + 23 +102. RSM specifically considered whether Revolution’s bill and hold practices +should be disclosed. For the 2014, 2015, and 2016 Audits, RSM unreasonably concluded +that Revolution’s disclosure about recognizing revenue upon shipment or delivery +somehow encompassed bill and hold sales for which Revolution recognized revenue prior +to shipment or delivery. + +103. For the 2017 Audit, RSM took a different approach. It unreasonably +concluded that Revolution’s recognition of revenue on a bill and hold basis was “not +applicable” to Revolution’s revenue recognition disclosure. The RSM audit team offered +no explanation or analysis to support this unreasonable conclusion. + +104. For each of the 2014 to 2017 Audits, RSM had substantial evidence that the +disclosure in Revolution’s Form 10-K did not encompass Revolution’s bill and hold sales. + +VII. RSM VIOLATED NUMEROUS PCAOB AUDITING STANDARDS + +a. Failure to Adequately Plan the Audit (AS 2101) + +105. PCAOB Auditing Standard (AS) 2101 requires an auditor to properly plan +the work of an audit. An auditor must plan the nature, timing, and extent of tests of +controls and substantive procedures. + +106. By virtue of the conduct described above, RSM failed to plan for and design +effective testing of Revolution’s high-risk bill and hold sales. For instance, RSM did not +design a test to identify the date on which the parties agreed to conduct each transaction on +a bill and hold basis. RSM did not plan to have experienced and adequately trained audit +staff conduct the bill and hold testing and did not require more senior members of the audit +team to review critical underlying audit evidence in the highest risk area of the audit. + +b. Failure to Obtain Appropriate Audit Evidence (AS 1105) + +107. PCAOB Auditing Standard 1105 requires an auditor to plan and perform +audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable +basis for his or her opinion. + +108. By virtue of the conduct described above, RSM failed to plan and perform +adequate audit procedures to obtain sufficient appropriate audit evidence of fixed delivery +schedules; the customers’ requests for bill and hold arrangements; the timing of such +requests; and the substantial business purpose for such customer requests. In addition, +RSM failed to plan and perform adequate audit procedures to effectively identify special +terms Revolution offered (e.g., discounts) to incentivize customers to enter into bill and +hold agreements. + +c. Failure to Document the Audit Properly (AS 1215) + +109. PCAOB Auditing Standard 1215 requires an auditor to prepare audit +documentation in detail sufficient to provide a clear understanding of its purpose, source, + + 24 +and conclusions reached. Audit documentation must also include information the auditor +has identified that contradicts the auditor’s final conclusions on significant findings or +issues. + +110. By virtue of the conduct described above, RSM failed to document +disconfirming audit evidence and bill and hold agreements that controverted Revolution’s +recognition of revenue. Instead, the work papers stated, without adequate support, that +Revolution’s bill and hold sales satisfied the fixed delivery schedule criterion. + +d. Failure to Perform Confirmation Procedures Properly (AS 2310) + +111. PCAOB Auditing Standard 2310 addresses confirmations to obtain +evidence from third parties about financial statement assertions made by management. +Confirmations must be reliable and relevant, and an auditor should exercise an appropriate +level of professional skepticism throughout the confirmation process, including in +designing the confirmation itself. + +112. By virtue of the conduct described above, RSM failed to perform adequate +confirmation procedures by failing to adequately review confirmations that were +incomplete and, in some instances, that were inconsistent with bill and hold revenue +recognition. RSM also failed to perform adequate confirmation procedures because the +audit team designed confirmations that did not obtain sufficient evidence of a customer’s +substantial business purpose for requesting the bill and hold arrangement. + +e. Failure to Supervise the Engagement Team Properly (AS 1010 & +1201) + +113. PCAOB Auditing Standard 1010 requires an engagement partner to exercise +seasoned judgment in the varying degrees of his supervision and review of the work done +and judgments exercised by his subordinates. PCAOB Auditing Standard 1201 requires an +auditor to supervise the audit engagement (including the work of engagement team +members) so that the work is performed as directed and supports the conclusions reached. +The engagement partner is responsible for the engagement and its performance. The +partner must review the work of engagement team members to evaluate whether: (i) the +work was performed and documented; (ii) the objectives of the procedures were achieved; +and (iii) the results of the work support the conclusions reached. + +114. PCAOB Auditing Standard 1201 requires an auditor to supervise the audit +engagement (including the work of engagement team members) so that the work is +performed as directed and supports the conclusions reached. Audit managers are +responsible for the parts of the audit they manage and supervise. A manager should review +the work of engagement team members to evaluate whether: (i) the work was performed +and documented; (ii) the objectives of the procedures were achieved; and (iii) the results of +the work support the conclusions reached. + +115. By virtue of the conduct described above, RSM failed to properly supervise +the audit team’s testing of bill and hold sales. RSM did not directly review sufficient audit + + 25 +evidence to ensure that the evidence satisfied the testing requirements or GAAP criteria. +And, when contradictory evidence came to the audit team’s attention, RSM did not verify +that the audit evidence supported the conclusions reached. Rather, the audit team’s testing +of bill and hold sales was effectively left as the sole responsibility of the junior associates, +and the level of supervision exercised by the engagement partner and the senior manager +did not correspond to the risks associated with bill and hold sales. + +f. Failure to Properly Evaluate Audit Results (AS 2810) + +116. PCAOB Auditing Standard 2810 requires an auditor to evaluate whether +sufficient and appropriate audit evidence has been obtained and to evaluate the presentation +of the financial statements, including the disclosures. + +117. By virtue of the conduct described above, RSM failed to properly evaluate +the audit evidence, which did not support the conclusion that revenue recognition was +proper. RSM also did not properly evaluate the disclosures in Revolution’s financial +statements, which omitted Revolution’s policy of recognizing revenue from bill and hold +sales and thus misrepresented Revolution’s revenue recognition policy. Lastly, even using +its erroneous underestimate, RSM did not support with evidence its conclusion that the +potential impact of bill and hold sales was immaterial. + +g. Failure to Properly Perform an Audit of Internal Control Over +Financial Reporting (AS 2201) + +118. Under PCAOB Auditing Standard 2201, if one or more material weaknesses +exist, a company’s internal control over financial reporting cannot be considered effective. +A material weakness in internal control over financial reporting may exist even when +financial statements are not materially misstated. The auditor must evaluate the severity of +each control deficiency that comes to his or her attention to determine whether the +deficiencies are material weaknesses, meaning whether there is a reasonable possibility that +the company’s controls will fail to prevent or detect on a timely basis a material +misstatement. In conducting the audit of internal control over financial reporting, the +auditor should use the same materiality levels as those used in the audit of annual financial +statements. + +119. By virtue of the conduct described above, RSM failed to properly evaluate +the basis and severity of Revolution’s internal control deficiencies. RSM unreasonably +found that Revolution’s internal control over financial reporting suffered only from a +significant deficiency (instead of a material weakness), based on an unreasonably narrow +conclusion that Revolution’s controls did not properly identify “when certain project delays +or collection patterns result[ed] in a project no longer meeting the proper recognition +criteria.” + +VIII. RSM VIOLATED NUMEROUS PCAOB AUDIT AND QUALITY +CONTROL STANDARDS + +a. Failure to Exercise Due Professional Care (AS 1015) + + 26 + +120. Under PCAOB Auditing Standard 1015, “due professional care” requires +each professional within an independent auditor’s organization to exercise reasonable care +and diligence. It requires the auditor to exercise professional skepticism – “an attitude that +includes a questioning mind and a critical assessment of audit evidence.” + +121. As a result of the conduct described above, RSM failed to exercise an +appropriate level of professional skepticism or due professional care. For instance, +Revolution in several instances provided RSM auditors with copies of bill and hold +agreements that were dated nearly two months after the fiscal year ended, despite RSM’s +timely request for these documents. Revolution’s inability to provide the bill and hold +agreements punctually during the audits should have suggested to a reasonably skeptical +auditor that Revolution and the customer had not entered into the agreements before +December 31 on any given year. Yet RSM and the engagement partner accepted the bill +and hold agreements without question. + +122. RSM also failed to exercise due professional care in the restatement analysis +it prepared in 2018. That analysis was based on a “rough estimate” that did not align with +Revolution’s bill and hold practices. RSM therefore failed to exercise due professional +care because it did not require Revolution to provide the actual historical data before +calculating the impact of the errors and relying on that calculation. Revolution’s inability +to produce its own actual unshipped inventory records of sales at the end of the year +indicated a control deficiency. RSM failed to exercise a sufficient level of professional +skepticism by: (a) not recognizing Revolution’s failure to have these records available and +to produce them in a timely manner as a control deficiency, and (b) not waiting for +Revolution to determine the actual bill and hold unshipped inventory amounts. + +123. RSM also should not have permitted Revolution to simply copy RSM’s +“rough estimate” into Revolution’s materiality restatement analysis. RSM should not have +been supplying Revolution, the audit client, with estimated unshipped inventory amounts. + +124. RSM failed to exercise due professional care by not considering all of +Revolution’s bill and hold sales. RSM only included bill and hold revenue from Value +Lighting in its restatement analysis, failing to include bill and hold revenue from All +Around Lighting, even though the engagement partner knew Revolution had recognized +bill and hold revenue in that subsidiary. As a result, RSM’s restatement analysis +underestimated by over one million dollars the potential impact of Revolution’s erroneous +recognition of bill and hold sales as revenue. + +125. Lastly, RSM did not exercise due professional care in the restatement +analysis and materiality assessment. AS 2810 requires an auditor to assess the risk of a +material misstatement due to fraud and properly evaluate the materiality of any uncorrected +misstatements. As noted in AS 2810, “A fact is material if there is a substantial likelihood +that the…fact would have been viewed by the reasonable investor as having significantly +altered the ‘total mix’ of information made available.” AS 2810 lists qualitative factors to + + 27 +consider and specifically identifies that earnings and earnings per share matter to public +company investors. + +126. For the 2014 through 2017 Audits, the engagement partner determined that +revenue was the financial metric most important to investors. The engagement partner set +the revenue materiality level for the 2017 Audit at $1.79 million. In the final ROC, RSM +used the same revenue materiality level. In reviewing the ROC, the regional audit director +accepted the previously determined audit materiality level. Then, the engagement partner +and regional audit director agreed that Revolution’s cumulative uncorrected misstatements +exceeded the revenue materiality threshold by more than three times in 2017 and more than +seven times in 2016. They understood that the materiality level for other metrics, such as +net income, were also exceeded by multiples in the 2014 through 2016 financial statements. +Yet the engagement team and RSM’s national office concluded that Revolution’s persistent +practice of overstating revenue by more than 5% (iron curtain) would not be material to the +reasonable investor. This conclusion was unreasonable because of the earlier +determinations of materiality levels and qualitative factors, including that revenue was the +most important financial metric for investors and that net income and EBITDA were also +important metrics. + +127. The engagement partner and regional audit director’s conclusion was also +based on the unsupported assertion that (a) whether Revolution met or missed forecasts and +(b) the amount by which Revolution missed any forecasts for these important metrics +would not have had a significant impact on investors’ view of performance. For example, +the ROC reflected that restating bill and hold revenue would cause Revolution to miss 2015 +revenue guidance that it otherwise met. Even though that would yield a classic example of +qualitative materiality, they dismissed the idea that this was qualitatively material. They +supported this approach, in part, by noting—with hindsight reasoning—that revenue in +2016 still grew. But an investor reading Revolution’s financial statements and press +releases in 2015 could not have known what 2016’s annual revenue would be. + +128. The engagement partner, regional audit director, and RSM’s analysis was +driven by the outcome they wished to get. The RSM audit team believed the problem with +bill and hold revenue would be eliminated soon (as they wrote in the ROC) because +Revolution said it had stopped using bill and hold sales toward the end of 2017. In their +haste to meet Revolution’s filing deadline, RSM and the engagement partner negligently +failed to include bill and hold revenue from its All Around Lighting division, and RSM +unreasonably used bad estimates. As a result, RSM significantly undercounted the impact +of Revolution’s errors. Even with the underestimate, the misstatement was still multiples +of the audit planning quantitative materiality threshold. But RSM nevertheless determined +that qualitative factors outweighed quantitative factors and, ultimately, concluded that +Revolution’s investors would not find large changes in revenue, net income, and EBITDA +to be material. Rather than exercise an appropriate level of skepticism in this area – an area +they knew required heightened scrutiny – RSM made unreasonable determinations in +concluding that Revolution’s misstatements were immaterial. RSM’s lack of due +professional care served to hide the engagement team’s failure to properly conduct an audit +for fiscal years 2014 – 2017. + + 28 + +b. Failure to Ensure Adequate Supervision, Training, and Review (QC +20.03, QC 20.11, QC 20.12, QC 20.13) + +129. PCAOB’s Quality Control (“QC”) standards, and in particular PCAOB QC +20.03, require an audit firm to ensure that its personnel comply with professional auditing +standards, and to implement a system of quality controls to ensure that services are +competently delivered and adequately supervised. + +130. PCAOB QC 20.11 states: “A firm’s quality control system depends heavily +on the proficiency of its personnel. In making assignments, the nature and extent of +supervision to be provided should be considered.” + +131. PCAOB QC 20.12 states: “The quality of a firm’s work ultimately depends +on the integrity, objectivity, intelligence, competence, experience, and motivation of +personnel who perform, supervise, and review the work. Thus a firm’s personnel +management policies and procedures factor into maintaining such quality.” + +132. PCAOB QC Standard 20.13 requires an audit firm to establish policies and +procedures to provide reasonable assurance that work is assigned to personnel having the +degree of technical training and proficiency required in the circumstances. PCAOB QC +40.02 also imposes this requirement. + +133. By virtue of the conduct described above, RSM failed to provide reasonable +assurance that personnel conducting bill and hold testing were adequately trained and +supervised in that significant risk area, and RSM failed to provide reasonable assurance that +the level of supervision over the bill and hold testing was commensurate with the +experience of the personnel conducting the testing. + +c. Failure to Establish Policies and Procedures Concerning Professional +Standards (QC 20.17, QC 20.18 & QC 20.19) + +134. PCAOB QC Standard 20.17 requires an audit firm to establish policies and +procedures to provide the firm with reasonable assurance that the work performed by +engagement personnel meets applicable professional standards, regulatory requirements, +and the firm’s standards of quality. PCAOB Quality Control Standard 20.18 states that the +policies and procedures encompass all phases of the engagements. PCAOB Quality +Control Standard 20.19 requires policies and procedures to provide reasonable assurance +that direct engagement personnel “consult, on a timely basis, with individuals within or +outside the firm, when appropriate (for example, when dealing with complex, unusual, or +unfamiliar issues).” + +135. By virtue of the conduct described above, RSM failed sufficiently to +establish policies and procedures concerning professional standards. Here, RSM had +inadequate consultation policies and procedures. It did not require audit teams to consult +with revenue recognition specialists or its national office when confronted with the +complexities of high-risk revenue contracts with customers, such as those with bill and + + 29 +hold arrangements. When the Revolution audit team finally consulted with a revenue +recognition specialist in 2018, the national office determined that the engagement team had +inappropriately applied the bill and hold criteria since the 2014 Audit; yet the national +office did not sufficiently challenge any of the judgments made by the audit team. + +136. The national office also failed to conduct a robust consultation. RSM did +not have a policy adequately addressing how to apply qualitative factors in a materiality +analysis. The national office consultation failed to challenge the judgments of the audit +team. As a result, when confronted with a quantitatively large misstatement of revenue in +2018, the audit team and regional audit director concluded that the qualitative factors +outweighed quantitative factors, even though the team had in previous years concluded that +revenue was the most important metric to investors. + +IX. VIOLATIONS + +137. Through the conduct described above, RSM engaged in improper +professional conduct in violation of Section 4C(a)(2) of the Exchange Act and Rule 102(e) +of the Commission’s Rules of Practice. Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice provide, in part, that the Commission +may censure a person or deny, temporarily or permanently, the privilege of appearing or +practicing before the Commission to any person who is found by the Commission to have +engaged in improper professional conduct. With respect to persons licensed to practice as +accountants, “improper professional conduct” includes either of the following two types of +negligent conduct: (i) a single instance of highly unreasonable conduct that results in a +violation of applicable professional standards in circumstances in which an accountant +knows, or should know, that heightened scrutiny is warranted; or (ii) repeated instances of +unreasonable conduct, each resulting in violations of applicable professional standards, that +indicate a lack of competence to practice before the Commission. See Rule +102(e)(1)(iv)(B)(1) and (2). By failing to comply with PCAOB standards in connection +with the 2014 through 2017 Audits of Revolution, as described above, RSM engaged in +improper professional conduct as defined in Rule 102(e)(1)(iv). + +138. Through the conduct described above, RSM violated Rule 2-02(b)(1) of +Regulation S-X. Then Rule 2-02(b)(1) of Regulation S-X required an accountant’s report +to state whether the audit was performed in accordance with applicable auditing standards. +17 CFR 210.2-02(b)(1). RSM issued audit reports for Revolution’s fiscal years 2014 +through 2017 attesting that it had conducted those audits in accordance with PCAOB +standards when it had not. + +139. Through the conduct described above, RSM caused Revolution’s violations +of Section 13(a) of the Exchange Act and Rule l3a-l thereunder. Section 13(a) of the +Exchange Act and Rule 13a-1 require issuers of securities registered under Section 12 to +file annual reports with the Commission. Those annual reports must be audited by an +independent public accountant registered with the PCAOB. Revolution filed an annual +report on Form 10-K for fiscal years 2014 through 2017, and included RSM’s audit reports. + + 30 +Those audit reports falsely stated that RSM had conducted its audits in accordance with +PCAOB standards. + +X. FINDINGS + +140. Based on the foregoing, the Commission finds that RSM 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. + +141. Based on the foregoing, the Commission finds that RSM violated Rule 2- +02(b) of Regulation S-X. + +142. Based on the foregoing, the Commission finds that RSM caused +Revolution’s violations of Section 13(a) of the Exchange Act and Rule 13a-1 promulgated +thereunder. + +XI. UNDERTAKINGS + +a. Independent Consultant + +143. Respondent RSM has undertaken to retain, within 120 days after the entry +of this Order, an independent consultant (“Independent Consultant”), not unacceptable to +the Commission staff. RSM shall provide to the Commission staff a copy of the +engagement letter detailing the scope of the Independent Consultant’s responsibilities. +RSM shall, upon request by the staff, provide information about the Independent +Consultant’s work plan to the staff including the Independent Consultant’s experience, +ability to staff the engagement, and expertise in auditing and audit firm quality controls. +The Independent Consultant’s compensation and expenses shall be borne exclusively by +RSM. + +b. Independence + +144. To ensure the independence of the Independent Consultant, RSM: (1) shall +not have the authority to terminate the Independent Consultant or substitute another +independent consultant for the initial Independent Consultant, without the prior written +approval of the Commission staff; and (2) shall compensate the Independent Consultant +and persons engaged to assist the Independent Consultant for services rendered pursuant to +this Order at their reasonable and customary rates. + +145. RSM 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 +RSM, or any of its present or former affiliates, directors, officers, partners, employees, or +agents acting in their capacity as such. The agreement will also provide that the +Independent Consultant will require that any firm with which he/she is affiliated or of +which he/she is a member, and any person engaged to assist the Independent Consultant in + + 31 +the performance of his/her duties under this Order shall not, without prior written consent +of the Division of Enforcement, enter into any employment, consultant, attorney-client, +auditing or other professional relationship with RSM, or any of its present or former +affiliates, directors, officers, partners, employees, or agents acting in their capacity as such +for the period of the engagement and for a period of two years after the engagement. + +146. RSM will not assert any privilege over communications with or work +product prepared by the Independent Consultant. + +c. Scope of Independent Consultant’s Review + +147. Within the time periods specified below, the Independent Consultant will +review and evaluate RSM’s audit, review, and quality control policies and procedures as to, +among other aspects, their sufficiency, adequacy, design, implementation, and +effectiveness, applicable to Audit Clients4 regarding the subjects set forth below. The +Independent Consultant’s purpose for this review and evaluation will be to make +recommendations for improvements to these policies and procedures: + +i. The exercise of due professional care and professional skepticism involving +significant unusual revenue recognition (See, e.g., AS 1015); + +ii. Audit planning for significant unusual revenue recognition, including bill and +hold revenue recognition (See, e.g., AS 2101); + +iii. Obtaining appropriate audit evidence for significant unusual revenue recognition, +including bill and hold revenue recognition that is sufficient to support the +opinion expressed in the auditor’s report, including satisfaction of applicable bill +and hold revenue recognition criteria under GAAP (See, e.g., AS 1105); + +iv. Evaluation of audit results for significant unusual revenue recognition, including +bill and hold revenue recognition, including whether sufficient and appropriate +audit evidence has been obtained and whether disclosures of a company’s +financial statements are presented properly (See, e.g., AS 2810); + +v. Evaluation of audit results to determine whether there are material errors or +material misstatements to an Audit Client’s financial statements when potential +errors quantitatively equal or exceed audit planning materiality levels or +quantitative materiality thresholds (See, e.g., AS 2810); + +vi. The consideration of fraud in an audit involving significant unusual revenue +recognition (See, e.g., AS 2401); + +vii. The audit confirmation process over significant unusual revenue recognition, +including bill and hold revenue recognition (See, e.g., AS 2310); + +4 An “Audit Client,” for purposes of these undertakings, means any SEC registrant or any +client for which the audit or review was required by the federal securities laws. + + 32 + +viii. Supervision of engagements involving significant unusual revenue recognition, +including staffing of such audit engagements, exercising seasoned judgment by +partners and senior managers in the varying degrees of supervision and review of +the work done and judgments exercised by subordinates, and supervising the +audit work of other engagement team members so that the work is performed as +directed and supports the conclusions reached (See, e.g., AS 1010 and AS 1201); + +ix. The adequacy of audit documentation that clearly demonstrates the audit steps +and procedures performed over significant unusual revenue recognition, including +bill and hold revenue recognition, including the conclusions reached and the basis +for those conclusions (See, e.g., AS 1215); + +x. Evaluation of the severity of control deficiencies involving significant unusual +revenue recognition in audits of Internal Control Over Financial Reporting, +including whether the deficiencies are significant deficiencies, material +weaknesses, or there is a reasonable possibility that an Audit Client’s controls +will fail to prevent or detect a material misstatement (See, e.g., AS 2201); + +xi. Formal or informal communications or consultations with the Firm’s National +Professional Standards Group or Professional Practice Offices or personnel, or +any person or group performing a similar function, concerning auditing or +accounting for significant unusual revenue recognition, including bill and hold +sales and the documentation of such consultations, including but not limited to the +scope of consultation, the conclusions reached, and the basis for those +conclusions; + +xii. Formal or informal communications or consultations with the Firm’s National +Professional Standards Group or Professional Practice Offices or personnel, or +any person or group performing a similar function, concerning the review and +evaluation of: + +1. Financial statement errors and misstatements; and +2. Materiality and restatement assessments; + +including, but not limited to, consultations where the audit team has concluded +that quantitative factors would meet materiality thresholds, but the misstatements +were deemed immaterial to the reasonable user of the financial statements when +qualitative factors were considered; + +xiii. RSM’s review program(s) established in connection with the Firm’s compliance +with QC 20, System of Quality Control for a CPA Firm’s Accounting and +Auditing Practice, and QC 30, Monitoring a CPA Firm’s Accounting and +Auditing Practice, concerning auditing or accounting for significant unusual +revenue recognition, including bill and hold revenue recognition, and evaluating + + 33 +the materiality of errors or misstatements to an Audit Client’s financial statements +in connection with restatement assessments; + +xiv. The sufficiency of RSM’s professional development and training programs +concerning subject matters set forth in subsections (i) through (xiii) above. + +148. RSM shall cooperate fully with the Independent Consultant and shall +provide reasonable and timely access to firm personnel, information, and records (including +audit and consultation documents) as the Independent Consultant may reasonably request +for the Independent Consultant’s review and evaluation described in Paragraph 147 and the +reports specified in Paragraphs 149 through 155 below. + +d. Independent Consultant Reports and Certifications + +149. Within six (6) months of the Independent Consultant being retained, RSM +shall require the Independent Consultant to issue a detailed written report (“Report”) to +RSM: (a) summarizing the Independent Consultant’s review and evaluation of the areas +identified in Paragraph 147 and its subsections above; and (b) making recommendations, +where appropriate, reasonably designed to ensure that audits conducted by RSM comply +with Commission regulations and with PCAOB standards and rules. RSM shall require the +Independent Consultant to provide a copy of the Report to the Commission staff when the +Report is issued. RSM shall also make the Independent Consultant available to staff to +discuss its work both periodically and after issuance of the report. + +150. RSM will adopt all recommendations of the Independent Consultant in the +Report. Provided, however, that within thirty (30) days of issuance of the Report, RSM +may advise the Independent Consultant in writing of any recommendation that it considers +to be unnecessary, unduly burdensome, or impractical, and provide an explanation for its +conclusion. RSM need not adopt any such recommendation at that time, but instead may +propose in writing to the Independent Consultant and the Commission staff an alternative +policy or procedure designed to achieve the same objective or purpose. RSM shall provide +a copy of such written proposal and its explanation to the Commission staff within seven +(7) days of issuance of such proposal. RSM and the Independent Consultant will engage in +good-faith negotiations in an effort to reach agreement on any recommendations objected +to by RSM. + +151. In the event that the Independent Consultant and RSM are unable to agree +on an alternative proposal within sixty (60) days of RSM’s submission of its proposal, +RSM either will abide by the determinations of the Independent Consultant or seek +approval from the Commission staff pursuant to Paragraph 144 above to engage, at RSM’s +expense, a qualified third party acceptable to the Commission staff to promptly resolve the +issue(s). + +152. Within sixty (60) days of issuance of the Report, but not sooner than thirty +(30) days after a copy of the Report is provided to the Commission staff, RSM will certify +to the Commission staff in writing that it has adopted and has implemented or will +implement all recommendations of the Independent Consultant (“Certification of + + 34 +Compliance”), as modified pursuant to the process set forth in Paragraphs 150 and 151. +RSM will provide a copy of the Certification of Compliance to the Commission staff. To +the extent that RSM has not implemented all recommendations contained in the Report by +that time, RSM will certify to the Commission staff in writing, by thirty (30) days after +their implementation, that RSM has adopted and has implemented all recommendations +contained in the Report (“Implementation Certification”). + +153. Within six (6) months of the issuance of the Report or the Implementation +Certification, whichever is later, RSM shall require the Independent Consultant to complete +testing of whether RSM has implemented the written policies and procedures concerning +the areas specified in Paragraph 147 and its subsections above and assess the effectiveness +of the design and implementation of those policies and procedures. Within thirty (30) days +of the completion of this testing, RSM shall require the Independent Consultant to issue a +written final report summarizing the results of the Independent Consultant’s testing and +assessment (“Final Report”) and to provide a copy of the Final Report to the Commission +staff. At this time, if the Independent Consultant determines that RSM has adopted and +implemented all recommendations set forth in the Report, RSM shall require the +Independent Consultant to certify in writing that RSM has satisfied such undertakings +(“Independent Consultant Certification”) and provide a copy of this certification to the +Commission staff. In all events, RSM must complete all undertakings concerning the +implementation of the recommendations set forth in the Independent Consultant’s Report +and provide the Independent Consultant Certification to the Commission staff no later than +twenty-four (24) months after the entry of this Order. + +154. The Report, Final Report, Certification of Compliance, Independent +Consultant Certification, and any related correspondence or other documents shall be +submitted to John Dugan, Associate Director, Division of Enforcement, Securities and +Exchange Commission, Boston Regional Office, 33 Arch Street, 24th Floor, Boston, MA +02110, with a copy to the Office of Chief Counsel of the Enforcement Division. + +155. The Report and Final Report by the Independent Consultant will likely +include confidential financial, proprietary, competitive business or commercial +information. Public disclosure of these reports could discourage cooperation, impede +pending or potential government investigations or undermine the objectives of the reporting +requirement. For these reasons, among others, these reports and the contents thereof are +intended to remain and shall remain non-public, except (1) pursuant to court order, (2) as +agreed to by the parties in writing, (3) to the extent that the Commission determines in its +sole discretion that disclosure would be in furtherance of the Commission’s discharge of its +duties and responsibilities, or (4) is otherwise required by law. + +156. No later than sixty (60) days from the completion of the undertakings, +RSM’s CEO shall also 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 RSM agrees to provide such evidence. This certification and + + 35 +supporting material shall be submitted to John Dugan, Associate Director, Division of +Enforcement, Securities and Exchange Commission, Boston Regional Office, 33 Arch +Street, 24th Floor, Boston, MA 02110, 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. + +157. 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. + +158. RSM agrees that if the Division of Enforcement believes that RSM has not +satisfied these undertakings, it may petition the Commission to reopen the matter to +determine whether additional sanctions are appropriate. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the +sanctions agreed to in Respondent RSM’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. RSM shall cease and desist from committing or causing any violations and +any future violations of Rule 2-02(b) of Regulation S-X and Section 13(a) of the Exchange +Act and Rule 13a-1 promulgated thereunder. + +B. RSM is censured. + +C. RSM shall comply with its undertakings enumerated in Paragraphs 143-158 +of Section III above. + +D. RSM shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $3,750,000 to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 +U.S.C. § 3717. + +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 + + 36 + +(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 RSM US LLP as a Respondent in these proceedings, and the file number of +these proceedings; a copy of the cover letter and check or money order must be sent to John +Dugan, Associate Director, Division of Enforcement, Securities and Exchange +Commission, 33 Arch Street, 24th Floor, Boston, MA 01770. + +E. Amounts ordered to be paid as civil money penalties pursuant to this Order +shall be treated as penalties paid to the government for all purposes, including all tax +purposes. To preserve the deterrent effect of the civil penalty, Respondent agrees that in +any Related Investor Action, it shall not argue that it is entitled to, nor shall it benefit by, +offset or reduction of any award of compensatory damages by the amount of any part of +Respondent’s payment of a civil penalty in this action (“Penalty Offset”). If the court in +any Related Investor Action grants such a Penalty Offset, Respondent agrees that it shall, +within 30 days after entry of a final order granting the Penalty Offset, notify the +Commission’s counsel in this action and pay the amount of the Penalty Offset to the +Securities and Exchange Commission. Such a payment shall not be deemed an additional +civil penalty and shall not be deemed to change the amount of the civil penalty imposed in +this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4347.txt b/raw/aaer/2022/AAER-4347.txt new file mode 100644 index 0000000000000000000000000000000000000000..2b3835c39eb46891c70fb71af489dd54a920e428 --- /dev/null +++ b/raw/aaer/2022/AAER-4347.txt @@ -0,0 +1,1277 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95949 / September 30, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4347 / September 30, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21184 + + + +In the Matter of + +STEVEN KIRN, CPA, +MICHAEL PIQUEIRA, CPA, +and +RICHARD CONDON, 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 Steven Kirn, CPA (“Kirn”), Michael Piqueira, CPA (“Piqueira”), and Richard +Condon, CPA (“Condon”) (collectively “Respondents”) pursuant to Sections 4C1 and 21C +of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice.2 + +1 Section 4C provides, in 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, Respondents consent to the entry +of this Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant +to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and +a Cease-and-Desist Order (“Order”), as set forth below. +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +A. SUMMARY + +1. During the period 2015 to 2018, Kirn and Piqueira engaged in improper +professional conduct during multiple audits of Revolution Lighting Technologies, Inc. +(“Revolution”) performed by RSM US LLP (“RSM”). In addition, during 2018, Condon +engaged in improper professional conduct in connection with RSM’s audit of Revolution. +Kirn and Piqueira failed to properly conduct audits of Revolution’s financial statements +and internal control over financial reporting. They failed to adhere to Public Company +Accounting Oversight Board (“PCAOB”) auditing standards, from planning and +supervision of the audit through the evaluation of the audit results and review of +Revolution’s disclosures. PCAOB is an entity established by Congress to, among other +things, oversee the audits of public companies in order to protect investors. Among +PCAOB’s primary duties are establishing the standards that auditors and registered public +accounting firms must meet when they audit public companies. During 2018, RSM’s audit +team consulted Condon, who was a partner in RSM’s national office, about potential errors +in Revolution’s accounting for revenue from bill and hold sales and the potential impact of +any error on Revolution’s financial statements. During this work, Condon failed to adhere +to PCAOB standards. + +2. Revolution’s financial statements were materially misstated because they +included improperly recognized revenue from “bill and hold” sales, which are generally a + + The Commission may censure a person or deny, temporarily or +permanently, the privilege of appearing or practicing before it . . . to any +person who is found . . . to have engaged in unethical or improper +professional conduct. + +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and +are not binding on any other person or entity in this or any other proceeding. + 3 +type of transaction that involves a company selling a product to a customer but not +delivering the product to the customer until some later date. Bill and hold sales need to +satisfy several criteria in order for a company to be able to recognize them as revenue +(meaning the sales get recorded as revenue in a company’s books and records and reported +as revenue in a company’s financial statements). Audit evidence provided to RSM’s audit +team during the audits demonstrated that Revolution was violating U.S. Generally +Accepted Accounting Principles (“GAAP”) with respect to recognition of revenue in its +financial statements from these bill and hold sales. Kirn and Piqueira unreasonably failed +to comply with PCAOB standards by concluding that Revolution’s accounting and +financial statements conformed with GAAP. + +3. For each audit, RSM issued two types of audit reports: (i) a report opining +that Revolution’s financial statements presented fairly, in all material respects, +Revolution’s financial position in conformity with GAAP; and (ii) a report opining that +Revolution maintained, in all material respects, effective internal control over financial +reporting. Both reports also stated that RSM conducted its audits in accordance with the +standards of the PCAOB. As a result of Kirn and Piqueira’s improper professional +conduct, RSM’s audit reports were inaccurate in their representations that the audits were +conducted in accordance with PCAOB standards. RSM violated Rule 2-02(b) of +Regulation S-X, and Kirn and Piqueira caused RSM’s violation. In addition, Kirn and +Piqueira caused RSM to inaccurately state in its audit reports accompanying Revolution’s +2014 - 2017 Forms 10-K, filed with the Commission, that RSM had conducted each audit +in accordance with PCAOB standards, thereby causing Revolution to violate Section 13(a) +of the Exchange Act and Rule l3a-l thereunder. + +4. During the course of RSM’s audit of Revolution’s fiscal year 2017 financial +statements (the “2017 Audit”; prior years’ audits will be named the “201X Audit”), Kirn, +Piqueira, and Condon concluded that Revolution had improperly recognized revenue in +fiscal year 2017 due to Revolution’s failure to adhere to fixed delivery dates for its bill and +hold sales, and presumed that this issue also impacted revenue recognition in each of the +preceding three years. Kirn, Piqueira, and Condon then concluded that Revolution’s +revenue misstatements were immaterial and concurred with Revolution that Revolution did +not need to restate its financial statements. Their conclusion was unreasonable because it +was based on faulty estimates, and it rested upon Kirn, Piqueira, and Condon’s +determination that qualitative factors outweighed the fact that, even under the faulty +estimates, Revolution’s misstatements of revenue significantly exceeded the quantitative +audit materiality level that RSM had identified for several of the periods in question. In +reaching the decision that qualitative factors rendered immaterial the fact that revenue +figures for multiple years were misstated, Kirn, Piqueira, and Condon effectively +abandoned the audit team’s own prior determination, in each of the years in question, that +reported revenue was a key metric of interest to shareholders of Revolution. During this +analysis, Kirn, Piqueira, and Condon also violated the applicable PCAOB standards. + +5. Overall, rather than exercise an appropriate level of skepticism in this area – +an area requiring heightened scrutiny – Kirn, Piqueira, and Condon made unreasonable +determinations in concluding that Revolution’s misstatements were immaterial. Their lack + 4 +of due professional care had the practical effect of obscuring the RSM audit team’s failure +to properly conduct an audit for fiscal years 2014 – 2017. + +B. RESPONDENTS + +6. Steven Kirn is a resident of Shelton, CT and a partner at RSM. Kirn was +the engagement partner responsible for RSM’s audits and reviews of Revolution’s financial +statements for fiscal years 2013 through 2017. Kirn has been a licensed Certified Public +Accountant (“CPA”) since 1998. He is currently licensed as a CPA in Connecticut, +Massachusetts, New York, and Vermont. + +7. Michael Piqueira is a resident of Norwalk, CT and a senior manager at +RSM. Piqueira was “senior manager” on the Revolution audits and reviews for fiscal years +2014 through 2017. Piqueira has been a licensed CPA since 2006. He is currently licensed +as a CPA in Connecticut and New York. + +8. Richard Condon is a resident of Brookline, MA. Condon is a partner at +RSM. During the applicable period, Condon’s title was Regional Director of the Northeast +and Southeast Professional Practice Office, which is part of RSM’s national office. +Condon consulted on the audit of Revolution’s financial statements for fiscal year 2017. +Condon has been a licensed CPA since 1993. He is currently licensed as a CPA in +Massachusetts and New York. + +C. OTHER RELEVANT ENTITIES + +9. RSM US LLP, a limited liability partnership with its headquarters in +Chicago, Illinois, is a public accounting firm registered with the PCAOB. RSM served as +the auditor of Revolution, a company with publicly traded stock that was required to file +periodic reports with the Commission, including reports that included audited financial +statements, from at least 2010 until it resigned from that role in June 2019. + +10. Revolution Lighting Technologies, Inc. is a Delaware corporation +headquartered in Stamford, Connecticut. Revolution manufactures and markets LED +lighting solutions. Its common stock was registered with the Commission under Exchange +Act Section 12(g) until August 24, 2020. Before October 14, 2019, Revolution traded on +the NASDAQ under the ticker symbol RVLT. On June 29, 2020, the Commission +temporarily suspended trading in Revolution’s securities because its periodic Commission +filings were delinquent. On August 21, 2020, the Commission revoked the registration of +Revolution’s securities pursuant to Section 12(j) of the Exchange Act. On September 24, +2020, the Commission brought a settled action against Revolution and four of its +executives for violations of the federal securities laws in connection with the bill and hold +transactions at issue and efforts to conceal improper revenue recognition practices from +RSM. + + + + 5 +D. FACTS + +I. RSM IMPROPERLY TESTED BILL AND HOLD REVENUE + +a. Revolution Began Relying on Bill and Hold Sales at the End of 2014 + +11. During 2014, Revolution acquired Value Lighting, Inc. (“Value Lighting”) +and made Value Lighting a business division. Revenue from Value Lighting immediately +became the large majority of Revolution’s reported revenue. + +12. Historically, Revolution recognized revenue on a sale upon shipment or +delivery to its customers. At the end of 2014, however, Revolution deviated from prior +practice and implemented a program at Value Lighting of recognizing revenue on so-called +bill and hold sales. Broadly speaking, a bill and hold sale is a sale of a product to a +customer in which the seller maintains possession of the product until some later date when +the customer needs the product delivered. If certain criteria are met, a seller may properly +recognize revenue from bill and hold sales before delivering the product to the customer. +However, bill and hold sales are subject to abuse by companies, such as Revolution, that +seek to inflate their revenues by improperly recording sales of products that have not been +shipped and that do not satisfy the criteria for recognizing revenue. + +13. During RSM’s 2014 Audit, Kirn and Piqueira learned Revolution had used +bill and hold sales in the 2014 fiscal year. Kirn and Piqueira rated the bill and hold sales as +a “significant risk” (the highest risk level under the audit standards) and a significant risk of +material misstatement due to fraud. RSM’s audit team sampled and tested Revolution’s +bill and hold revenue for GAAP compliance. + +14. Under GAAP applicable at the time of the audits, revenue could not be +recognized until it was: (1) earned and (2) realized or realizable. Bill and hold sales were +required to meet specific criteria under GAAP for a company to recognize revenue from +those transactions. RSM’s work papers reflected that the team applied the following seven +criteria to test Revolution’s recognition of revenue from purported bill and hold sales: + + Risks of ownership must have passed to buyer. + Buyer has a fixed commitment to purchase, preferably in writing. + Buyer, not seller, requested the bill and hold transaction and there is a substantial +business purpose for ordering the goods on a bill and hold basis. + A fixed delivery schedule with reasonable delivery dates exists. + Seller has not retained any specific performance obligations. + Product is complete and ready for shipment. + The ordered goods must have been segregated from the seller’s inventory and not +be subject to being used to fill other orders. + +15. Kirn, Piqueira, and the RSM audit team nominally applied these criteria +during its 2014 Audit through the 2017 Audit. These seven well-established criteria +closely tracked the language set forth in the Commission’s Accounting and Auditing + 6 +Enforcement Release (“AAER”) 108 and Staff Accounting Bulletin (“SAB”) No. 104. +RSM understood that failure to satisfy any of the criteria disqualified the revenue from +being recognized on a bill and hold basis. + +b. Kirn and Piqueira Failed to Adequately Plan the Audit, Design and +Implement Bill and Hold Testing Procedures, and Supervise the +Audit Team Members Performing Bill and Hold Revenue Testing + +16. Preceding each audit, the RSM audit team completed an annual risk +assessment form to evaluate the risks of material misstatement and to design audit +procedures responsive to the assessed risks. Based on the audit team’s inputs, RSM’s risk +assessment tool rated the Revolution audit at RSM’s highest audit risk level. + +17. Despite the fact that Revolution was at the top of RSM’s audit risk scale, +and RSM’s determination that the bill and hold transactions presented a significant risk of +material misstatement due to fraud, Kirn and Piqueira assigned the testing of Revolution’s +bill and hold sales to junior members of the audit team (who lacked experience with bill +and hold testing), and failed to adequately supervise the testing. + +18. Under the audit’s design and planning, the reviewers of the bill and hold +testing, including Piqueira and Kirn, were not required to review the underlying audit +evidence for such testing. RSM’s audit team continued this approach through the 2017 +Audit. Despite issues coming to the attention of Kirn and Piqueira during the 2014 and +2015 Audits and despite finding in 2016 that there was a deficiency in Revolution’s +internal control over financial reporting relating to bill and hold sales, Kirn and Piqueira did +not assign more experienced auditors to this significant risk area or review more closely the +bill and hold testing performed by junior associates. Instead, they kept placing the highest +risks of the audit on the shoulders of less experienced team members. + +19. Kirn and Piqueira also failed to design and implement adequate bill and +hold testing. For example, in assessing Revolution’s bill and hold sales, they did not design +or apply adequate cut-off testing to verify that revenue was recognized in the appropriate +period. They directed the RSM audit team to use “bill and hold agreements” as the +principal documentary evidence to test bill and hold revenue recognition. The bill and hold +agreements between Revolution and its customers were often executed after the quarter +close, which was clear from the dates on those agreements. Yet RSM failed to find any +error with recognizing revenue on sales for which the bill and hold arrangements were +agreed to after the quarter close. After Piqueira received copies of bill and hold agreements +dated after the quarter close during the 2015 Audit, he did not require the junior associates +to document whether the customer had agreed to the bill and hold arrangement before the +end of the quarter. + +20. Kirn and Piqueira also did not design and implement adequate procedures to +test whether a customer had initiated the bill and hold arrangement and whether it had a +“substantial business purpose” for requesting the bill and hold arrangement. Nor did Kirn +and Piqueira require adequate audit evidence documenting that a customer initiated the bill +and hold arrangement. + 7 + +21. During the 2014 Audit, RSM’s audit team accepted Revolution’s +representations that its customers requested bill and hold arrangements because of supply +constraints due to the Chinese New Year (most of Revolution’s products were +manufactured in China). Kirn and Piqueira accepted Revolution’s representations without +adequately testing Revolution’s blanket assertion. + +22. In general, Kirn and Piqueira did not perform regular reviews on the +underlying documentation supporting the bill and hold testing to verify that the junior +associates were testing correctly in one of the highest risk areas of RSM’s audit. + +23. Kirn and Piqueira reviewed and approved all of the bill and hold related +audit work papers from the 2014 through the 2017 Audit. But Kirn and Piqueira failed to +meaningfully question illogical and insufficient explanations written on bill and hold work +papers. + +24. Based upon the information presented to RSM’s audit team, almost all of +the revenue from Revolution’s bill and hold sales tested by RSM was not earned and +realizable in the periods in which Revolution recorded the revenue. According to RSM’s +later reevaluation of the bill and hold transactions in connection with Revolution’s +anticipated restatement in late 2018 and early 2019, which was based on later-obtained +information: + + More than two thirds of the bill and hold agreements RSM tested during its 2015 to +2017 Audits were dated after the period when Revolution recognized revenue. + + RSM’s work papers claim it tested the second criteria by analyzing the purchase +orders from Revolution’s customers and the corresponding invoices sent by +Revolution. More than 60% of reported bill and hold sales from 2015 to 2018 +either were missing purchase orders or the purchase orders were dated after the +period for which Revolution recognized revenue. + + Only four of the 198 bill and hold sales from 2015 through 2017 included an actual +“fixed delivery schedule.” + +25. But year after year, RSM signed off on Revolution’s improper accounting +because Kirn and Piqueira failed to adequately supervise the junior members of the audit +team, who had failed to adequately assess Revolution’s application of the seven bill and +hold criteria. Kirn and Piqueira violated PCAOB standards on audit planning and +supervision by inadequately assigning and supervising the testing of Revolution’s bill and +hold sales by the junior members of the audit team, which contributed to RSM’s audit +failures. + + + + + 8 +c. Kirn and Piqueira Failed to Evaluate Adequately Audit Evidence +that Raised Questions About Revolution’s Revenue Recognition + +26. Throughout the audits, when problems came to the RSM audit team’s +attention, Kirn, Piqueira, and the audit team failed to evaluate adequately the significance +of those issues, and failed to evaluate adequately evidence that raised questions about +whether Revolution could appropriately recognize revenue on a bill and hold basis. +Examples of these failures include: + + Failure to document, or failure to instruct the audit team to properly document, +disconfirming customer confirmations or the audit team’s conclusions regarding the +deficiencies in Revolution’s bill and hold agreements; + + Failure to evaluate, or failure to instruct the audit team to properly evaluate, audit +evidence relating to bill and hold agreements that were dated after year end. Even +though several bill and hold agreements were dated after quarter end, RSM did not +question whether revenue could be recognized during such quarter or require +evidence that the bill and hold arrangements in fact had been entered into during the +quarter in which Revolution was recognizing revenue; + + Failure to evaluate audit evidence about whether Revolution agreed to fixed +delivery schedules with its bill and hold customers to satisfy the fourth bill and hold +criterion. Revolution told RSM’s audit team it did not have fixed delivery +schedules with certain customers, and, in most instances, the very terms of the bill +and hold agreements indicated that the delivery schedule was subject to change or +dependent upon when the goods were needed at the customer job site. Kirn and +Piqueira both reviewed and were familiar with the language of Revolution’s bill +and hold agreements, and reviewed and approved RSM’s work papers stating that +there was a fixed delivery schedule for every bill and hold sale that RSM tested. + +II. KIRN, PIQUEIRA, AND CONDON UNREASONABLY CONCLUDED +REVOLUTION’S ACCOUNTING ERRORS WERE IMMATERIAL + +27. During the 2017 Audit, the RSM audit team, including Kirn and Piqueira, +raised for the first time internally at RSM that Revolution may not have been recognizing +revenue on bill and hold sales in accordance with GAAP. Piqueira reached out to the “SEC +Reviewer” assigned to RSM’s audit of Revolution to discuss Revolution’s bill and hold +accounting and whether Revolution was satisfying the criterion requiring a fixed delivery +schedule. The “SEC Reviewer” was an RSM partner and revenue recognition specialist in +RSM’s regional Professional Practice Office (“PPO”). The PPO is a part of RSM’s +national office providing help to RSM professionals on a consulting basis when needed. At +the time, Piqueira and the SEC Reviewer for the Revolution audits discussed whether +Revolution was satisfying the criterion requiring a fixed delivery schedule, and RSM’s +audit team drafted a formal “Record of Consultation” (“ROC”) to send to RSM’s national +office seeking guidance. + + 9 +28. In late February 2018, the SEC Reviewer reached out to Condon, Director +of the Northeast and Southeast PPO, to discuss the audit team’s concern about Revolution’s +bill and hold sales relating to the fixed delivery criterion and the potential impact of any +error on Revolution’s financial statements. Condon reported to RSM’s National Director +of Accounting. + +29. To prepare Condon for a scheduled call, Piqueira sent Condon a spreadsheet +that contained an analysis that used the estimated unshipped inventory as of December 31, +2016. To RSM, the amount of unshipped inventory represented the size of Revolution’s +potential error for 2016. That communication to Condon included an earlier e-mail chain +between the SEC Reviewer and Piqueira indicating that the unshipped percentage as of +December 31, 2016 was an estimate based upon the unshipped percentage from late 2017. +That information was also contained in notes embedded in certain cells in the spreadsheet. + +30. The estimate of the unshipped inventory for 2016 was what Piqueira +described to Kirn as a “rough estimate” of Revolution’s unshipped bill and hold inventory. +Piqueira told Kirn that it was “the best we can do” because RSM was informed by +Revolution management that Revolution could not readily provide RSM with the actual +historical data of Revolution’s unshipped inventory. Because the rough estimate was +contrary to evidence RSM possessed and inaccurate, Kirn, Piqueira, and the RSM audit +team significantly undercounted the potential misstatement of Revolution’s 2016 annual +revenue. In addition, Kirn and Piqueira failed to account for more than one million dollars +of bill and hold revenue from Revolution’s All Around Lighting division in the analysis, +compounding the error. + +31. After discussion with Kirn and Piqueira, Condon directed the audit team to +consult with another partner from RSM’s national office who was a specialist in revenue +recognition for the national accounting group. + +32. In consultation with the revenue recognition specialist and the SEC +reviewer from RSM’s national office, in late February 2018, RSM’s audit team, including +Kirn and Piqueira, concluded that Revolution had improperly recognized revenue in fiscal +year 2017 due to Revolution’s failure to adhere to fixed delivery schedules for its bill and +hold sales, and presumed that this issue also impacted revenue recognition in each of the +preceding three years. This presumption relied on an estimate because RSM assumed for +purposes of its materiality analysis that any bill and hold transactions unshipped at year-end +would not qualify for bill and hold accounting treatment. + +33. The audit team, however, did not adequately document this conclusion in its +work papers. For example, RSM failed to identify any specific bill and hold sale that was +erroneously recognized. Kirn and Piqueira did not direct that the audit team perform any +additional audit procedures to determine which of the bill and hold sales failed to satisfy +the GAAP criteria. And although RSM’s bill and hold testing work paper for the 2017 +Audit referred to the ROC and the passed adjustment on bill and hold transactions, the +work paper also stated the audit team’s conclusion that all tested bill and hold sales +satisfied GAAP. + 10 + +34. Condon spoke with the revenue specialist from RSM’s national office who +consulted with Kirn and Piqueira. Condon agreed with the specialist’s input and the audit +team’s conclusion that there were revenue recognition errors for some bill and hold sales. + +35. After determining Revolution improperly accounted for bill and hold sales, +RSM’s audit team, including Kirn and Piqueira, drafted revised ROCs to analyze whether +Revolution should restate its financial statements. Kirn and Piqueira directed the drafting +and review of the ROCs. Piqueira contributed to the ROCs, including by calculating the +size of Revolution’s misstated financial information and providing the ROC’s materiality +analysis. To do so, he used the inaccurate “rough estimate.” Kirn and Piqueira directed the +revised ROC to Condon because situations where potential errors exceed RSM’s audit +planning materiality thresholds required sign off by a regional PPO member per RSM’s +protocols. + +36. Following the discussion with the RSM national office specialist, Kirn and +Piqueira also informed Revolution’s CFO that there was an issue with the accounting for +bill and hold sales. They told Revolution’s CFO that Revolution needed to evaluate the +impact on Revolution’s financial statements if Revolution only recognized revenue when +the product was shipped. They asked Revolution’s CFO to draft a materiality assessment +in accordance with the SEC’s Staff Accounting Bulletin No. 99 and guided Revolution’s +CFO on the assessment. + +37. On February 28, 2018, Revolution sent the RSM audit team a draft +materiality memo. It was drafted in less than one day, and presented Revolution’s view +that any errors from bill and hold sales were immaterial. Even before receiving +Revolution’s analysis, RSM treated Revolution’s errors as immaterial and suggested that +the potential misstatements did not need to be corrected. + +38. The draft materiality memo was riddled with errors, but Kirn and Piqueira +did not object to Revolution’s numbers, in part, because Revolution adopted RSM’s ROC +figures, including the “rough estimate” ($12.6 million) of the unshipped inventory as of +December 31, 2016. According to the draft materiality memo, the net effect for 2016 was a +decrease in revenue of only $1.3 million, or 0.7%. + +39. After it rushed to file its 2017 Form 10-K on March 8, 2018, Revolution +later concluded in October 2018 that its estimate of unshipped inventory was inaccurate +because it failed to include the unshipped bill and hold sales from its All Around Lighting +division and that it had materially misstated its financial statements. + +40. Kirn and Piqueira also did not recognize that Revolution’s rollover analysis +in its materiality memo contradicted the audit evidence RSM possessed. For example, +Value Lighting’s CFO had given the RSM audit team schedules that showed that some +2015 bill and hold sales did not ship until 2017. Nonetheless, Revolution placed all +deferred 2015 revenue into 2016, instead of apportioning it accurately. + + 11 +41. As part of the audit team’s consultation with RSM’s national office, Kirn +and Piqueira sent Condon the revised ROC along with a draft of Revolution’s materiality +memo. The next day, March 2, 2018, the RSM audit team consulted with Condon and +incorporated his suggestions into a new ROC. The new ROC analyzed the necessity of +adjusting Revolution’s 2017 financial statements and restating prior year financial +statements for the effect of bill and hold revenue that had not been shipped. Similar to +situations where potential errors exceeded RSM thresholds, RSM’s protocols required sign +off by either the regional audit director or RSM’s National Director of Accounting in order +to approve a ROC relating to a possible restatement of a client’s financial statements. +Condon forwarded multiple versions of the ROC to RSM’s National Director of +Accounting, who agreed with the conclusions in the ROC. + +42. Condon then edited the ROC and directed Piqueira to make changes where +he thought the analysis needed further support or where he believed the evidence given did +not support the proposition. + +43. Condon approved the final version of the ROC (“final ROC”) on March 8, +2018 – the very day that Revolution filed its Form 10-K. That final version used the +flawed estimate of unshipped inventory and incorrectly measured the impact of the +improper bill and hold revenue. Revolution’s and RSM’s faulty analysis miscalculated the +actual (larger) size of the potential misstatement in 2016 and 2017. The incorrect smaller +impact contributed to Revolution’s and RSM’s erroneous conclusion that the misstatements +in Revolution’s financial statements were immaterial. + +44. Kirn, Piqueira, and Condon determined that Revolution’s potential +accounting errors from 2014 through 2017 were quantitatively material based on several +metrics (revenue; net income; and earnings before interest, taxes, depreciation, and +amortization (“EBITDA”)). The misstated revenue was many times greater than the audit +materiality levels for each year. RSM, which based its audit materiality threshold on 1% of +expected revenue, found the potential revenue misstatement exceeded 5% for each of the +prior three years on a cumulative basis, using the “iron curtain” method. Under the “iron +curtain” method, the cumulative effect of correcting a prior period misstatement in the +current period financial statements, irrespective of the misstatement’s year of origin, is +considered rather than just the impact of the error originating in each period. Kirn, +Piqueira, and Condon also used the rollover method to quantify the potential misstatement. +The rollover method quantifies a misstatement for a particular period based on the amount +of error originating in that period’s income statement. If errors affect the timing of +revenue, the cumulative quantitative impact of correcting a continuing fraud in the current +period financial statements can be muted under a rollover analysis. Even using the rollover +method, they concluded that the potential revenue misstatement exceeded 5% in two of the +prior three years. + +45. Revolution also concluded that its revenue misstatements were immaterial +and therefore its financial statements did not have to be restated, and Condon, Kirn, and +Piqueira concurred with that conclusion. This concurrence was unreasonable. In + 12 +particular, the concurrence was based on the estimate of the revenue misstatements, which +included certain faulty assumptions. + +46. Given the heightened risk associated with bill and hold sales and the +imprecision of the estimate, Kirn and Piqueira failed to exercise due professional care and +skepticism by relying on an estimate without performing further audit procedures to +validate the estimate and by not requiring Revolution to produce the actual historical +information necessary to calculate the actual impact of the bill and hold revenue +recognition errors. + +47. RSM calculated that Revolution had misstated revenue in 2016 by 0.7%, +when Revolution later ultimately determined that it had misstated revenue by 7.0%. RSM +calculated that Revolution had misstated revenue in 2017 by 4.5%, when Revolution later +calculated that it had misstated revenue by 10.3%. + +48. Kirn and Piqueira, in consultation with Condon, concluded – based on +RSM’s analysis that Revolution’s potential accounting errors from bill and hold sales were +immaterial – that Revolution did not have to restate its 2014 through 2017 financial +statements. It rested upon Kirn, Piqueira, and Condon’s determination that qualitative +factors outweighed the fact that, even under faulty estimates, Revolution’s misstatements of +revenue significantly exceeded the quantitative audit materiality level that RSM had +identified for several of the periods in question. RSM’s analysis was flawed as to both +quantitative and qualitative factors. The failure to restate effectively hid from investors +Revolution’s four years of improperly recognized revenue. + +49. In reaching its conclusion, RSM took a number of unreasonable missteps +and made unsupported conclusions, which contradicted or deviated from RSM’s audit work +over the audits for fiscal years 2014 – 2017, without adequate explanation or support, +including: + + They deviated from the audit team’s prior conclusions in RSM’s work +papers that, for the primary users of the financial statements (including +shareholders), “revenues are the most appropriate benchmark” and the one +that was “most important” to those users. + + In assessing the materiality of the misstatements, they also erroneously used +the numbers from Revolution’s early forecasts of revenue instead of +Revolution’s most current revenue forecasts. They concluded without any +support that once a company misses its revenue forecasts, any lower +revenue results would not be significant to an investor. + + The final version of the ROC stated that “RSM determined that revenue, net +income, and EBITDA are all important metrics that [Revolution’s] investors +and analysts frequently review.” This contradicted RSM's work over the +audits for fiscal years 2014 – 2017, when Kirn, Piqueira, and RSM's audit +team concluded that net income was not an appropriate benchmark for + 13 +materiality because investors expected losses. Similarly, RSM had not +previously referenced EBITDA when it set the audit materiality level and +determined that revenues were the most appropriate benchmark to the +primary users of the financial statements. Neither the final ROC nor the +work papers explained this contradiction. + +50. The final ROC concluded, without support, that because Revolution had +already missed its revenue forecasts, any further reduction in revenue creating an even +larger miss “would likely not have had a significant impact on investor’s views of the +performance.” The final ROC stated this conclusively, and it did not explain why a +quantitatively larger miss in revenue compared to the forecasted guidance would not +significantly alter the total mix of information important to an investor. + +51. Kirn, Piqueira, and Condon did not exercise due professional care when +weighing the qualitative factors against quantitative factors, and they inconsistently applied +the qualitative factors to certain time periods. For example: + + The underlying premise of much of RSM’s argument for immateriality was +that a miss to guidance is important to investors, but not the magnitude of +the miss. Yet in analyzing 2015, when Revolution would have missed +guidance but for the erroneous bill and hold revenue, RSM reversed course +and deemed a failure to meet the analysts’ expectations not material to +investors. + + The assessment of qualitative factors in the final ROC was based on analyst +calls from a limited time period, 2014 and early 2015, which were used to +evaluate what investors cared about during different periods, instead of an +analysis of the qualitative factors for the reasonable investor in each +analyzed year to determine what was material at that time. For example, +one section of the final ROC attempted to explain why the missed forecast +was not significant. It stated that RSM reviewed an analyst report from +December 2014, an analyst report from March 2015, and a 2015 earnings +call, and found that the analysts’ questions were primarily centered on long- +term growth. + + The final ROC also did not address whether the analyst reports and earnings +calls discussed whether Revolution met the revenue forecast. RSM also did +not look to analysts’ reports after Revolution reported it missed revenue +guidance to see if that guidance miss was discussed by analysts. + +52. RSM also noted in its materiality analysis that its concern was mitigated by +Revolution’s representations that it planned to cease using bill and hold sales going +forward. Revolution’s representations about its future bill and hold practices should not +have entered into RSM’s analysis of the materiality of Revolution’s past improper revenue +recognition. + + 14 +53. The final ROC also stated that no material weakness in internal control over +financial reporting existed. Kirn and Piqueira inaccurately concluded that there was only a +significant deficiency over adherence to shipping schedules. + +54. Further, RSM decided no additional audit procedures were necessary to +determine the scope or impact of the potential accounting errors and issued its unqualified +opinion for both Revolution’s financial statements and its internal control over financial +reporting. + +55. As a result, Condon, Kirn, and Piqueira failed to properly evaluate the audit +evidence and exercise due professional care when evaluating the materiality of +Revolution’s erroneously recognized bill and hold revenue and whether Revolution should +restate its financial statements. + +III. KIRN AND PIQUEIRA FAILED TO ADEQUATELY AUDIT +REVOLUTION’S INTERNAL CONTROL OVER FINANCIAL +REPORTING + +56. According to Auditing Standard No. 2201, a material weakness is a +deficiency, or a combination of deficiencies, in internal control over financial reporting, +such that there is a reasonable possibility that a material misstatement of the entity’s annual +or interim financial statements will not be prevented or detected on a timely basis. + +57. During its 2017 audit of Revolution’s internal control over financial +reporting, RSM’s audit team, including Kirn and Piqueira, misidentified the causes and +extent of Revolution’s control deficiencies and improperly classified the control deficiency +as a “significant deficiency” and not a “material weakness.” If RSM had found a material +weakness, Revolution would have had to disclose the material weakness in its internal +control disclosures in its Form 10-K. RSM’s finding of only a significant deficiency meant +that Revolution did not disclose the problems with revenue-related controls. + +58. Kirn, Piqueira, and RSM inappropriately ascribed the cause of the problem +to one control failure that could have no other impact on revenue. Kirn and Piqueira were +deeply involved in developing RSM’s unreasonably narrow view of the deficiencies +through their work on the consultations with RSM’s national office. Kirn and Piqueira also +reviewed and approved RSM’s work papers concerning Revolution’s internal control over +financial reporting. Yet, RSM’s work papers do not adequately document the conclusion in +RSM’s March 7, 2018 letter to Revolution’s audit committee, which came to a +contradictory conclusion about the number of significant deficiencies reported to +Revolution’s audit committee. + +59. Kirn, Piqueira, and RSM’s audit team failed to exercise due professional +care and skepticism in their evaluation of Revolution’s internal control over financial +reporting. + + + 15 +IV. KIRN, PIQUEIRA, AND RSM UNREASONABLY CONCLUDED +THAT REVOLUTION’S REVENUE RECOGNITION POLICY +DISCLOSURE WAS ADEQUATE + +60. As part of its audit, RSM reviewed Revolution’s Form 10-K disclosures +about its revenue recognition policies. From 2014 to 2017, Revolution’s Forms 10-K +stated that Revolution “recognize[d] revenue upon shipment or delivery to [its] customers +in accordance with the respective contractual arrangements.” This was false as to bill and +hold transactions. As RSM was well aware, Revolution recognized a significant amount of +its reported revenue on a bill and hold basis, not upon shipment or delivery. Indeed, +revenue attributed to bill and hold sales exceeded 20% of Revolution’s largest division’s +total revenue. + +61. RSM, including Kirn and Piqueira, specifically considered whether +Revolution’s bill and hold practices should be disclosed. For the 2014, 2015, and 2016 +Audits, RSM, including Kirn and Piqueira, unreasonably concluded that Revolution’s +disclosure about recognizing revenue upon shipment or delivery somehow encompassed +bill and hold sales for which Revolution recognized revenue prior to shipment or delivery. + +62. For the 2017 Audit, RSM, including Kirn and Piqueira, unreasonably +concluded that Revolution’s recognition of revenue on a bill and hold basis was “not +applicable” to Revolution’s revenue recognition disclosure. The RSM audit team, +including Kirn and Piqueira, offered no explanation or analysis to support this unreasonable +conclusion. + +63. Kirn and Piqueira reviewed and approved the disclosure work papers for +each of the 2014 to 2017 Audits. Their signoffs were unreasonable because, in each year, +Kirn and Piqueira had substantial evidence that the disclosure in Revolution’s Form 10-K +did not encompass Revolution’s bill and hold sales. + +V. RSM’S REPORTS CONTAINED FALSE STATEMENTS, WHICH +REVOLUTION INCORPORATED INTO ITS ANNUAL FILINGS + +64. For the audits for each of the years 2014 through 2017, RSM sent +Revolution its financial statements and internal control over financial reporting audit +reports, and Revolution included those reports with its annual SEC filings. In each of those +reports, RSM attested that it had conducted its audits “in accordance with the standards of +the PCAOB.” In reality, as detailed above, RSM, including Kirn and Piqueira, did not +conduct its audits from 2014 to 2017 in accordance with PCAOB standards and its +attestation to the contrary was therefore false. Kirn and Piqueira knew that Revolution +would incorporate its reports into Revolution’s annual filings with the Commission. In this +manner, Kirn and Piqueira caused Revolution to include false statements in its annual +filings with the Commission. + + + + 16 +VI. KIRN AND PIQUEIRA VIOLATED NUMEROUS PCAOB AUDITING +STANDARDS + +a. Failure to Adequately Plan the Audit (AS 2101) + +65. PCAOB Auditing Standard (AS) 2101 requires an auditor to properly plan +the work of an audit. An auditor must plan the nature, timing, and extent of tests of +controls and substantive procedures. + +66. By virtue of their conduct described above, Kirn and Piqueira failed to +adequately plan for and design effective testing of Revolution’s high-risk bill and hold +sales. Kirn and Piqueira also did not plan to have adequately experienced and trained audit +staff conduct the bill and hold testing and did not require more senior members of the audit +team to review critical underlying audit evidence in the highest risk area of the audit. + +b. Failure to Obtain Appropriate Audit Evidence (AS 1105) + +67. PCAOB Auditing Standard 1105 requires an auditor to plan and perform +audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable +basis for his or her opinion. + +68. By virtue of their conduct described above, Kirn and Piqueira failed to +adequately plan and perform audit procedures to obtain sufficient appropriate audit +evidence with respect to Revolution’s accounting for its bill and hold sales. + +c. Failure to Document the Audit Properly (AS 1215) + +69. PCAOB Auditing Standard 1215 requires an auditor to prepare audit +documentation in detail sufficient to provide a clear understanding of its purpose, source, +and conclusions reached. Audit documentation must also include information the auditor +has identified that contradicts the auditor’s final conclusions on significant findings or +issues. + +70. By virtue of their conduct described above, Kirn and Piqueira failed to +instruct the audit team to prepare sufficient audit documentation with respect to the team’s +assessment of Revolution’s accounting for its bill and hold sales and to document +disconfirming audit evidence and bill and hold agreements that controverted Revolution’s +recognition of revenue. + +d. Failure to Perform Confirmation Procedures Properly (AS 2310) + +71. PCAOB Auditing Standard 2310 addresses confirmations to obtain +evidence from third parties about financial statement assertions made by management. +Confirmations must be reliable and relevant, and an auditor should exercise an appropriate +level of professional skepticism throughout the confirmation process, including in +designing the confirmation itself. + + 17 +72. By virtue of their conduct described above, Kirn and Piqueira failed to +perform adequate confirmation procedures by failing to adequately review and document +confirmations that were incomplete and, in some instances, that were inconsistent with bill +and hold revenue recognition. Kirn and Piqueira also failed to perform adequate +confirmation procedures because the audit team designed confirmations that did not obtain +sufficient, appropriate audit evidence of a customer’s substantial business purpose for +requesting the bill and hold arrangement. + +e. Failure to Supervise the Engagement Team Properly (AS 1010 & +1201) + +73. PCAOB Auditing Standard 1010 requires an engagement partner to exercise +seasoned judgment in the varying degrees of his supervision and review of the work done +and judgments exercised by his subordinates. PCAOB Auditing Standard 1201 requires an +auditor to supervise the audit engagement (including the work of engagement team +members) so that the work is performed as directed and supports the conclusions reached. +The engagement partner is responsible for the engagement and its performance. The +partner must review the work of engagement team members to evaluate whether: (i) the +work was performed and documented; (ii) the objectives of the procedures were achieved; +and (iii) the results of the work support the conclusions reached. + +74. PCAOB Auditing Standard 1201 requires an auditor to supervise the audit +engagement (including the work of engagement team members) so that the work is +performed as directed and supports the conclusions reached. Audit managers are +responsible for the parts of the audit they manage and supervise. A manager should review +the work of engagement team members to evaluate whether: (i) the work was performed +and documented; (ii) the objectives of the procedures were achieved; and (iii) the results of +the work support the conclusions reached. + +75. By virtue of their conduct described above, Kirn and Piqueira failed to +properly supervise the audit team’s testing of Revolution’s bill and hold sales. + +f. Failure to Properly Evaluate Audit Results (AS 2810) + +76. PCAOB Auditing Standard 2810 requires an auditor to evaluate whether +sufficient and appropriate audit evidence has been obtained and to evaluate the presentation +of the financial statements, including the disclosures. + +77. By virtue of their conduct described above, Kirn and Piqueira failed to +properly evaluate the audit evidence, which did not support the conclusion that revenue +recognition was proper. They also did not properly evaluate the disclosures in +Revolution’s financial statements, which omitted Revolution’s revenue recognition policy +for bill and hold sales. + + + + 18 +g. Failure to Properly Perform an Audit of Internal Control Over +Financial Reporting (AS 2201) + +78. Under PCAOB Auditing Standard 2201, if one or more material weaknesses +exist, a company’s internal control over financial reporting cannot be considered effective. +A material weakness in internal control over financial reporting may exist even when +financial statements are not materially misstated. The auditor must evaluate the severity of +each control deficiency that comes to his or her attention to determine whether the +deficiencies are material weaknesses, meaning whether there is a reasonable possibility that +the company’s controls will fail to prevent or detect on a timely basis a material +misstatement. In conducting the audit of internal control over financial reporting, the +auditor should use the same materiality levels as those used in the audit of annual financial +statements. + +79. By virtue of their conduct described above, Kirn and Piqueira failed to +properly evaluate the basis and severity of Revolution’s internal control deficiencies. + +VII. CONDON, KIRN, AND PIQUEIRA FAILED TO EXERCISE DUE +PROFESSIONAL CARE (AS 1015) + +80. Under PCAOB Auditing Standard 1015, “due professional care” requires +each professional within an independent auditor’s organization to exercise reasonable care +and diligence. It requires the auditor to exercise professional skepticism—“an attitude that +includes a questioning mind and a critical assessment of audit evidence.” + +81. As a result of their conduct described above, Kirn, Piqueira, and Condon +failed to exercise an appropriate level of professional skepticism or due professional care, +including in their restatement analysis and materiality assessment. In their analysis and +assessment, they concluded that qualitative factors outweighed quantitative factors and, +ultimately, concluded that Revolution’s investors would not find large changes in revenue, +net income, and EBITDA to be material. Rather than exercise an appropriate level of +skepticism in this area—an area they knew required heightened scrutiny—they made +unreasonable determinations in concluding that Revolution’s misstatements were +immaterial. + +VIII. VIOLATIONS + +82. Through the conduct described above, Kirn, Piqueira, and Condon engaged +in improper professional conduct in violation of Section 4C(a)(2) of the Exchange Act and +Rule 102(e) of the Commission’s Rules of Practice. Section 4C(a)(2) of the Exchange Act +and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice provide, in part, that the +Commission may censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before the Commission to any person who is found by the +Commission to have engaged in improper professional conduct. With respect to persons +licensed to practice as accountants, “improper professional conduct” includes either of the +following two types of negligent conduct: (i) a single instance of highly unreasonable +conduct that results in a violation of applicable professional standards in circumstances in + 19 +which an accountant knows, or should know, that heightened scrutiny is warranted; or (ii) +repeated instances of unreasonable conduct, each resulting in violations of applicable +professional standards, that indicate a lack of competence to practice before the +Commission. See Rule 102(e)(1)(iv)(B)(1) and (2). By failing to comply with PCAOB +standards in connection with the 2014 through 2017 Audits of Revolution, as described +above, Kirn and Piqueira engaged in improper professional conduct as defined in Rule +102(e)(1)(iv). By failing to comply with PCAOB standards in connection with the +restatement analysis and materiality assessment in connection with the 2017 Audit of +Revolution, as described above, Condon engaged in improper professional conduct as +defined in Rule 102(e)(1)(iv). + +83. Through the conduct described above, Kirn and Piqueira caused RSM’s +violation of Rule 2-02(b)(1) of Regulation S-X. Then Rule 2-02(b)(1) of Regulation S-X +required an accountant’s report to state whether the audit was performed in accordance +with applicable auditing standards. 17 C.F.R § 210.2-02(b)(1). RSM issued audit reports +for Revolution’s fiscal years 2014 through 2017 attesting that it had conducted those audits +in accordance with PCAOB standards when, because of Kirn and Piqueira’s conduct, it had +not. + +84. Through the conduct described above, Kirn and Piqueira caused +Revolution’s violations of Section 13(a) of the Exchange Act and Rule l3a-l thereunder. +Section 13(a) of the Exchange Act and Rule 13a-1 require issuers of securities registered +under Section 12 to file annual reports with the Commission. Those annual reports must be +audited by an independent public accountant registered with the PCAOB. Revolution filed +annual reports on Form 10-K for fiscal years 2014 through 2017, and included RSM’s audit +reports in those filings. Those audit reports falsely stated that RSM had conducted its +audits in accordance with PCAOB standards. + +IX. FINDINGS + +85. Based on the foregoing, the Commission finds that Kirn, Piqueira, and +Condon 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. + +86. Based on the foregoing, the Commission finds that Kirn and Piqueira +caused RSM’s violations of Rule 2-02(b) of Regulation S-X. + +87. Based on the foregoing, the Commission finds that Kirn and Piqueira +caused Revolution’s violations of Section 13(a) of the Exchange Act and Rule 13a-1 +promulgated thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the +sanctions agreed to in Respondents’ Offer. + + 20 + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondents Kirn and Piqueira shall cease and desist from committing or +causing any violations and any future violations of Rule 2-02(b) of Regulation S-X and +Section 13(a) of the Exchange Act and Rule 13a-1 promulgated thereunder. + + B. Kirn is denied the privilege of appearing or practicing before the +Commission as an accountant. + +1. After 3 years from the date of the Order, Kirn may request that the +Commission consider Kirn’s reinstatement by submitting an application to +the attention of the Office of the Chief Accountant. + +2. In support of any application for reinstatement to appear and practice before +the Commission as a preparer or reviewer, or a person responsible for the +preparation or review, of financial statements of a public company to be +filed with the Commission, other than as a member of an audit committee, +as that term is defined in Section 3(a)(58) of the Exchange Act, Kirn shall +submit a written statement attesting to an undertaking to have Kirn’s work +reviewed by the independent audit committee of any public company for +which Kirn works or in some other manner acceptable to the Commission, +as long as Kirn practices before the Commission in this capacity and will +comply with any Commission or other requirements related to the +appearance and practice before the Commission as an accountant. + +3. In support of any application for reinstatement to appear and practice before +the Commission as a member of an audit committee, as that term is defined +in Section 3(a)(58) of the Securities Exchange Act of 1934 (“Exchange +Act”), as a preparer or reviewer, or as a person responsible for the +preparation or review, of any public company’s financial statements that are +filed with the Commission, Kirn shall submit a statement prepared by the +audit committee(s) with which Kirn will be associated, including the +following information: + +a. A summary of the responsibilities and duties of the specific audit +committee(s) with which Kirn will be associated; + +b. A description of Kirn’s role on the specific audit committee(s) with +which Kirn will be associated; + +c. A description of any policies, procedures, or controls designed to +mitigate any potential risk to the Commission by such service; + +d. A description relating to the necessity of Kirn’s service on the specific +audit committee; and + + 21 +e. A statement noting whether Kirn will be able to act unilaterally on +behalf of the Audit Committee as a whole. + +4. In support of any application for reinstatement to appear and practice before +the Commission as an independent accountant (auditor) before the +Commission, Kirn must be associated with a public accounting firm +registered with the Public Company Accounting Oversight Board (the +“PCAOB”) and Respondent shall submit the following additional +information: + +a. A statement from the public accounting firm (the “Firm”) with which +Kirn is associated, stating that the firm is registered with the PCAOB in +accordance with the Sarbanes-Oxley Act of 2002; + +b. A statement from the Firm with which Kirn is associated that the Firm +has been inspected by the PCAOB and that the PCAOB did not identify +any criticisms of or potential defects in the Firm’s quality control system +that would indicate that Kirn will not receive appropriate supervision; +and + +c. A statement from Kirn indicating that the PCAOB has taken no +disciplinary actions against Kirn since seven (7) years prior to the date +of the Order other than for the conduct that was the basis for the Order. + +5. In support of any application for reinstatement, Kirn shall provide +documentation showing that Kirn is currently licensed as a certified public +accountant (“CPA”) and that Kirn has resolved all other disciplinary issues +with any applicable state boards of accountancy. If Kirn is not currently +licensed as a CPA, Kirn shall provide documentation showing that Kirn’s +licensure is dependent upon reinstatement by the Commission. + +6. In support of any application for reinstatement, Kirn shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +a. That Kirn has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders In the +Matter of Steven Kirn, CPA, Michael Piqueira, CPA, and Richard +Condon, CPA; In the Matter of RSM US LLP; or any related +Commission proceedings, including any orders requiring payment of +disgorgement or penalties; + +b. That Kirn undertakes to notify the Commission immediately in writing +if any information submitted in support of the application for +reinstatement becomes materially false or misleading or otherwise +changes in any material way while the application is pending; + + 22 +c. That Kirn, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would +constitute a basis for a forthwith suspension from appearing or +practicing before the Commission pursuant to Rule 102(e)(2); + +d. That Kirn, since the entry of the Order: + +1) has not been charged with a felony or a misdemeanor involving +moral turpitude as set forth in Rule 102(e)(2) of the Commission’s +Rules of Practice, except for any charge concerning the conduct that +was the basis for the Order; + +2) has not been found by the Commission or a court of the United +States to have committed a violation of the federal securities laws, +and has not been enjoined from violating the federal securities laws, +except for any finding or injunction concerning the conduct that was +the basis for the Order; + +3) has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge +concerning the conduct that was the basis for the Order; + +4) has not been found by a court of the United States (or any agency of +the United States) or any state, territory, district, commonwealth, or +possession, or any bar thereof to have committed an offense (civil or +criminal) involving moral turpitude, except for any finding +concerning the conduct that was the basis for the Order; and + +5) has not been charged by the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, civilly or criminally, with having committed an act of +moral turpitude, except for any charge concerning the conduct that +was the basis for the Order. + +e. That Kirn’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement, the PCAOB’s Division +of Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of +Accountancy, except to the extent that such conduct concerns that +which was the basis for the Order. + +f. That Kirn has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any +action taken by any State Board of Accountancy, or other regulatory +body. + + 23 +7. Kirn shall also provide a detailed description of: + +a. Kirn’s professional history since the imposition of the Order, including + +1) all job titles, responsibilities and role at any employer; + +2) the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Respondent +reported for such work; and + +b. Kirn’s plans for any future appearance or practice before the +Commission. + +8. The Commission may conduct its own investigation to determine if the +foregoing attestations are accurate. + +9. If Kirn provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) +determines that Kirn truthfully and accurately attested to each of the items +required in Kirn’s affidavit, and the Commission discovers no information, +including under Paragraph B.8, indicating that Kirn has violated a federal +securities law, rule or regulation or rule of professional conduct applicable +to Kirn since entry of the Order (other than by conduct underlying Kirn’s +original Rule 102(e) suspension), then, unless the Commission determines +that reinstatement would not be in the public interest, the Commission shall +reinstate the respondent for cause shown. + +10. If Kirn is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered +contrary information, including under Paragraph B.8, the burden shall be on +Kirn to provide an explanation as to the facts and circumstances pertaining +to the matter setting forth why Kirn believes cause for reinstatement +nonetheless exists and reinstatement would not be contrary to the public +interest. The Commission may then, in its discretion, reinstate Kirn for +cause shown. + +11. If the Commission declines to reinstate Kirn pursuant to Section IV, +Paragraphs B.9 and B.10, it may, at Kirn’s request, hold a hearing to +determine whether cause has been shown to permit Kirn to resume +appearing and practicing before the Commission as an accountant. + + C. Piqueira is denied the privilege of appearing or practicing before the +Commission as an accountant. + + 24 +1. After 1 year from the date of the Order, Piqueira may request that the +Commission consider Piqueira’s reinstatement by submitting an application +to the attention of the Office of the Chief Accountant. + +2. In support of any application for reinstatement to appear and practice before +the Commission as a preparer or reviewer, or a person responsible for the +preparation or review, of financial statements of a public company to be +filed with the Commission, other than as a member of an audit committee, +as that term is defined in Section 3(a)(58) of the Exchange Act, Piqueira +shall submit a written statement attesting to an undertaking to have +Piqueira’s work reviewed by the independent audit committee of any public +company for which Piqueira works or in some other manner acceptable to +the Commission, as long as Respondent practices before the Commission in +this capacity and will comply with any Commission or other requirements +related to the appearance and practice before the Commission as an +accountant. + +3. In support of any application for reinstatement to appear and practice before +the Commission as a member of an audit committee, as that term is defined +in Section 3(a)(58) of the Securities Exchange Act of 1934 (“Exchange +Act”), as a preparer or reviewer, or as a person responsible for the +preparation or review, of any public company’s financial statements that are +filed with the Commission, Piqueira shall submit a statement prepared by +the audit committee(s) with which Piqueira will be associated, including the +following information: + +a. A summary of the responsibilities and duties of the specific audit +committee(s) with which Piqueira will be associated; + +b. A description of Piqueira’s role on the specific audit committee(s) with +which Piqueira will be associated; + +c. A description of any policies, procedures, or controls designed to +mitigate any potential risk to the Commission by such service; + +d. A description relating to the necessity of Piqueira’s service on the +specific audit committee; and + +e. A statement noting whether Piqueira will be able to act unilaterally on +behalf of the Audit Committee as a whole. + +4. In support of any application for reinstatement to appear and practice before +the Commission as an independent accountant (auditor) before the +Commission, Piqueira must be associated with a public accounting firm +registered with the Public Company Accounting Oversight Board (the +“PCAOB”) and Piqueira shall submit the following additional information: + 25 + +a. A statement from the public accounting firm (the “Firm”) with which +Piqueira is associated, stating that the firm is registered with the PCAOB +in accordance with the Sarbanes-Oxley Act of 2002; + +b. A statement from the Firm with which Piqueira is associated that the +Firm has been inspected by the PCAOB and that the PCAOB did not +identify any criticisms of or potential defects in the Firm’s quality +control system that would indicate that Piqueira will not receive +appropriate supervision; and + +c. A statement from Piqueira indicating that the PCAOB has taken no +disciplinary actions against Piqueira since seven (7) years prior to the +date of the Order other than for the conduct that was the basis for the +Order. + +5. In support of any application for reinstatement, Piqueira shall provide +documentation showing that Piqueira is currently licensed as a certified +public accountant (“CPA”) and that Piqueira has resolved all other +disciplinary issues with any applicable state boards of accountancy. If +Piqueira is not currently licensed as a CPA, Piqueira shall provide +documentation showing that Piqueira’s licensure is dependent upon +reinstatement by the Commission. + +6. In support of any application for reinstatement, Piqueira shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +a. That Piqueira has complied with the Commission suspension Order, +and with any related orders and undertakings, including any orders +In the Matter of Steven Kirn, CPA, Michael Piqueira, CPA, and +Richard Condon, CPA; In the Matter of RSM US LLP; or any +related Commission proceedings, including any orders requiring +payment of disgorgement or penalties; + +b. That Piqueira undertakes to notify the Commission immediately in +writing if any information submitted in support of the application for +reinstatement becomes materially false or misleading or otherwise +changes in any material way while the application is pending; + +c. That Piqueira, since the entry of the Order, has not been convicted +of a felony or a misdemeanor involving moral turpitude that would +constitute a basis for a forthwith suspension from appearing or +practicing before the Commission pursuant to Rule 102(e)(2); + +d. That Piqueira, since the entry of the Order: + + 26 +1) has not been charged with a felony or a misdemeanor +involving moral turpitude as set forth in Rule 102(e)(2) of +the Commission’s Rules of Practice, except for any charge +concerning the conduct that was the basis for the Order; + +2) has not been found by the Commission or a court of the +United States to have committed a violation of the federal +securities laws, and has not been enjoined from violating the +federal securities laws, except for any finding or injunction +concerning the conduct that was the basis for the Order; + +3) has not been charged by the Commission or the United +States with a violation of the federal securities laws, except +for any charge concerning the conduct that was the basis for +the Order; + +4) has not been found by a court of the United States (or any +agency of the United States) or any state, territory, district, +commonwealth, or possession, or any bar thereof to have +committed an offense (civil or criminal) involving moral +turpitude, except for any finding concerning the conduct that +was the basis for the Order; and + +5) has not been charged by the United States (or any agency of +the United States) or any state, territory, district, +commonwealth, or possession, civilly or criminally, with +having committed an act of moral turpitude, except for any +charge concerning the conduct that was the basis for the +Order. + +e. That Piqueira’s conduct is not at issue in any pending investigation +of the Commission’s Division of Enforcement, the PCAOB’s +Division of Enforcement and Investigations, any criminal law +enforcement investigation, or any pending proceeding of a State +Board of Accountancy, except to the extent that such conduct +concerns that which was the basis for the Order. + +f. That Piqueira has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any +action taken by any State Board of Accountancy, or other regulatory +body. + +7. Piqueira shall also provide a detailed description of: + +a. Piqueira’s professional history since the imposition of the Order, +including + 27 + +1) all job titles, responsibilities and role at any employer; + +2) the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Piqueira +reported for such work; and + +b. Piqueira’s plans for any future appearance or practice before the +Commission. + +8. The Commission may conduct its own investigation to determine if the +foregoing attestations are accurate. + +9. If Piqueira provides the documentation and attestations required in this +Order and the Commission (1) discovers no contrary information therein, +and (2) determines that Piqueira truthfully and accurately attested to each of +the items required in Piqueira’s affidavit, and the Commission discovers no +information, including under Paragraph C.8, indicating that Piqueira has +violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Piqueira since entry of the Order (other than by +conduct underlying Piqueira’s original Rule 102(e) suspension), then, unless +the Commission determines that reinstatement would not be in the public +interest, the Commission shall reinstate the respondent for cause shown. + +10. If Piqueira is not able to provide the documentation and truthful and +accurate attestations required in this Order or if the Commission has +discovered contrary information, including under Paragraph C.8, the burden +shall be on Piqueira to provide an explanation as to the facts and +circumstances pertaining to the matter setting forth why Piqueira believes +cause for reinstatement nonetheless exists and reinstatement would not be +contrary to the public interest. The Commission may then, in its discretion, +reinstate Piqueira for cause shown. + +11. If the Commission declines to reinstate Piqueira pursuant to Section IV, +Paragraphs C.9 and C.10, it may, at Piqueira’s request, hold a hearing to +determine whether cause has been shown to permit Piqueira to resume +appearing and practicing before the Commission as an accountant. + +D. Condon is censured. + + By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4351.txt b/raw/aaer/2022/AAER-4351.txt new file mode 100644 index 0000000000000000000000000000000000000000..9b124fb476fde2590072a4ad6d7d84536a959289 --- /dev/null +++ b/raw/aaer/2022/AAER-4351.txt @@ -0,0 +1,1399 @@ + + + + + + + + + + + + + + + + SEC.gov | Daniel Moser + + + + + + + + !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\/527271","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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Daniel Moser , Case No. 2:22-cv-00629 (M.D. Fla. filed September 30, 2022) + + + + + + + + + The Securities and Exchange Commission today charged Daniel Moser, the former controller of FTE Networks, Inc., a network infrastructure company formerly based in Naples, Florida, for his role in a multi-year accounting fraud. This alleged scheme conducted by Moser, along with three senior executives previously charged by the Commission in July 2021 and June 2022 , inflated the company's revenues for certain periods by as much as 108 percent. + + According to the SEC's complaint, Moser helped FTE's former CEO, Michael Palleschi, CFO, David Lethem, and Chief Administrative Officer and President, Anthony Sirotka, inflate FTE's revenue by directing FTE to improperly recognize revenue and related accounts receivable for nonexistent construction projects. The complaint also alleges that Moser, together with Palleschi, Lethem, and Sirotka, misled FTE's auditor about approximately $12.5 million in fictitious revenue and related accounts receivable, by, among other things, providing false and misleading materials to the auditor. + + The SEC's complaint, filed in the U.S District Court for the Middle District of Florida, charges Moser with violating the antifraud provisions of Sections 17(a)(1) and (a)(3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5(a) and (c) thereunder, and Exchange Act Section 13(b)(5) and Rules 13(b)2-1 and 13(b)2-2 thereunder. The complaint also charges him with aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, the reporting provisions of Exchange Act Section 13(a) and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder, and the books and records and internal controls provisions of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). Moser consented to a bifurcated settlement, subject to court approval, under which he will be enjoined from violating the charged securities laws. The court will determine the amount of a civil penalty upon further motion of the Commission. + + The SEC's continuing investigation is being conducted by Sagiv Edelman, Kathleen E. Strandell, and Carol Der Garry, in the Miami Regional Office and supervised by Jessica M. Weissman and Glenn S. Gordon. The SEC's litigation is being led by Robert K. Levenson and supervised by Teresa Verges. 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Davis, 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\/527241","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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Davis, et. al + + + + + + + + + + + + Steven H. Davis, et. al + + + + + + + + + + + + + + + + + + + + + --> + + SEC Obtains Final Judgment Against Former Dewey & Leboeuf, LLP Executive + + Litigation Release No. 25549 / October 4, 2022 + + Accounting and Auditing Enforcement No. 4352 / October 4, 2022 + + Securities and Exchange Commission v. Steven H. Davis, et. al , Civil Action No. 14-cv-01528 (S.D.N.Y.) + + + + + + + + + The Securities and Exchange Commission announced today that on October 3, 2022, the Honorable Valerie E. Caproni of the United States District Court for the Southern District of New York entered a final judgment against former Dewey & LeBoeuf, LLP executive Joel Sanders, Esq., in an SEC enforcement action arising from his role at the now-defunct international law firm's fraudulent $150 million bond offering. + + In 2014, the SEC filed suit against Sanders and others in federal district court in Manhattan. The SEC's complaint alleged that in 2008 and 2009, Sanders, then the chief financial officer of Dewey & LeBoeuf, in conjunction with other employees, hatched a scheme, and directed his staff, to materially falsify the firm's financial statements in order to meet lender covenants. In March 2010, Dewey & LeBoeuf conducted a $150 million private placement of bonds. According to the SEC's complaint, Sanders defrauded the firm's investors in that offering by, among other things, providing a private placement memorandum to investors that incorporated the fraudulent financial statements. + + Sanders consented to the entry of a final judgment ordering him to pay disgorgement of $86,250.00 and prejudgment interest thereon of $8,779.71. The final judgment to which Sanders consented also contains the previously imposed injunctive relief, which permanently enjoins him from future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act of 1934, and Rule 10b-5 thereunder, and prohibits him from acting as an officer or director of a public company. Sanders was also suspended from appearing or practicing before the Commission as an attorney. The settlement resolves the SEC's case against Sanders, and concludes this litigation. + + The SEC staff in the New York Regional Office responsible for the investigation and the litigation includes William Finkel, Joseph P. Ceglio, Christopher C. Mele, Lee A. Greenwood; and Thomas P. Smith Jr., who has also supervised the case. + + For further information, see Press Release 2014-45 (March 6, 2014), Litigation Release No. 23443 , Litigation Release No. 23475 , and Litigation Release No. 24119 . + + + + + + + + + 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/2022/AAER-4353.txt b/raw/aaer/2022/AAER-4353.txt new file mode 100644 index 0000000000000000000000000000000000000000..e111b67b85ae5745ad58b6d71b9635005d4fa70f --- /dev/null +++ b/raw/aaer/2022/AAER-4353.txt @@ -0,0 +1,48 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 95980 / October 4, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4353 / October 4, 2022 + +Admin. Proc. File No. 3-21139 + + +In the Matter of + +IRA S. VIENER, CPA + + +ORDER REGARDING SERVICE + +On September 22, 2022, the Securities and Exchange Commission issued an Order +Instituting Administrative Proceedings (“OIP”) against Ira S. Viener, CPA, pursuant to Sections +4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules +of Practice.1 It appears that since the issuance of the OIP, there have been no filings regarding +whether the OIP was served upon Viener. Accordingly, IT IS ORDERED that the Division of +Enforcement file a status report concerning service of the OIP by October 11, 2022, and every 14 +days thereafter until service is accomplished. +The parties’ attention is directed to the most recent amendments to the Commission’s +Rules of Practice, which took effect on April 12, 2021, and which include e-filing requirements.2 + +1 Ira S. Viener, CPA, Exchange Act Release No. 95884, 2022 WL 4445472 (Sept. 22, +2022). +2 Amendments to the Commission’s Rules of Practice, Exchange Act Release No. 90442, +2020 WL 7013370 (Nov. 17, 2020), 85 Fed. Reg. 86,464, 86,474 (Dec. 30, 2020), +https://www.sec.gov/rules/final/2020/34-90442a.pdf; Instructions for Electronic Filing and +Service of Documents in SEC Administrative Proceedings and Technical Specifications, +https://www.sec.gov/efapdocs/instructions.pdf. The amendments impose other obligations such +as a redaction and omission of sensitive personal information requirement. Amendments to the +Commission’s Rules of Practice, 85 Fed. Reg. at 86,465-81. +2 + +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4354.txt b/raw/aaer/2022/AAER-4354.txt new file mode 100644 index 0000000000000000000000000000000000000000..9d11970df376c78f5ca8b17e8fe0c80737b2cf99 --- /dev/null +++ b/raw/aaer/2022/AAER-4354.txt @@ -0,0 +1,112 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96071 / October 13, 2022 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4354 / October 13, 2022 +ADMINISTRATIVE PROCEEDING +File No. 3-17746 + +In the Matter of +SATISH +ARUNACHALAM, CA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN +ACCOUNTANT RESPONSIBLE FOR THE +PREPARATION OR REVIEW OF FINANCIAL +STATEMENTS REQUIRED TO BE FILED WITH +THE COMMISSION + +On December 22, 2016, the Commission issued a consented Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e) of the Commission’s Rules +of Practice, Making Findings, and Imposing Remedial Sanctions, a Cease-and-Desist Order, and +a Civil Penalty (the “Suspension Order”) as to Respondent Satish Arunachalam, CA +(“Arunachalam”).1 The Suspension Order denied Arunachalam the privilege of appearing or +practicing before the Commission as an accountant but permitted him, after four years from the +date of the Suspension Order and if certain conditions were met, to request that the Commission +consider his reinstatement 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; or (2) an independent +accountant. +This order is issued in response to Arunachalam’s application for reinstatement to appear +and practice before the Commission as an accountant responsible for the preparation or review of +financial statements required to be filed with the Commission. +In the Suspension Order, the Commission found that from 2006 through 2009, an +accountant in the Controllership Division of Wipro Limited (“Wipro”) embezzled money from + +1 See Accounting and Auditing Enforcement Release No. 3837, dated December 22, 2016. + + 2 +Wipro. Arunachalam, who served as Wipro’s Assistant Controller and General Manager of +Finance, accepted cash from this accountant in violation of Wipro’s conflict of interest policy. At +the same time, Arunachalam failed to correct certain known erroneous accounting entries in +Wipro’s Exchange Rate Fluctuation and certain intercompany accounts. As a result of this +conduct, Arunachalam willfully violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 +thereunder while also causing Wipro’s violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) +of the Exchange Act and Rules 12b-20 and 13a-16 promulgated thereunder. +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. + +Arunachalam has shown good cause for reinstatement and has met all of the conditions +set forth in the Suspension Order to be reinstated to appear and practice before the Commission +as a person responsible for the preparation or review of financial statements required to be filed +with the Commission. In this capacity he has attested that he will have his work reviewed by the +independent audit committee of any company for which he works, or in some other manner +acceptable to the Commission. Arunachalam is not, at this time, seeking to appear or practice +before the Commission as an independent accountant. If, in the future, Arunachalam 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, among other things, +that he has complied and will comply with the terms of the Suspension Order. + +On the basis of the information supplied, representations made, and undertakings agreed +to by Arunachalam, and for the reasons stated immediately above, it appears that he has +complied with the terms of the Suspension Order denying him the privilege of appearing or +practicing before the Commission as an accountant. No information has come to the attention of +the Commission relating to his character, integrity, professional conduct, or qualifications to +practice before the Commission that would be a basis for adverse action against him pursuant to +Rule 102(e) of the Commission’s Rules of Practice. As a result, Arunachalam 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 +Satish Arunachalam, CA is hereby reinstated to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4355.txt b/raw/aaer/2022/AAER-4355.txt new file mode 100644 index 0000000000000000000000000000000000000000..bc27b9ad9b7d921a21eceb2522d6130c96e5dd75 --- /dev/null +++ b/raw/aaer/2022/AAER-4355.txt @@ -0,0 +1,318 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11122 / October 21, 2022 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96126 / October 21, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4355 / October 21, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21213 + + +In the Matter of + +MATTEL, 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 Mattel, Inc. (“Mattel” 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 and +Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set +forth below. + 2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + + +SUMMARY +1. On August 8, 2019, Mattel disclosed in a Form 8-K that it was made aware of an +anonymous whistleblower letter. The letter alleged accounting errors and questioned the +independence of Joshua Abrahams (“Abrahams”), the then-lead engagement partner for Mattel +with the company’s outside audit firm, PricewaterhouseCoopers LLP (“PwC”). Mattel terminated +its pending $250 million senior notes offering, and its audit committee initiated an independent +internal investigation. The audit committee’s investigation concluded that there were material +misstatements in the tax-related valuation allowance for Q3 2017, which was understated by $109 +million, and in the tax expense for Q4 2017, which was overstated by $109 million. The valuation +allowance was understated in Q3 because Mattel’s Thomas the Tank Engine asset (“Thomas”) was +erroneously treated for purposes of the valuation allowance calculation as a definite-lived asset that +should be amortized, whereas at the time it was classified as an indefinite-lived asset on Mattel’s +balance sheet. The audit committee also concluded that Abrahams violated auditor independence +rules. The audit committee did not find that management had engaged in fraud. + +2. On October 29, 2019, Mattel announced that it would restate its financial results for +Q3 and Q4 2017. Because the Q3 understatement and Q4 overstatement self-corrected the error +for the fiscal year ended December 31, 2017, the FYE 2017 financial statements did not need to be +restated. Mattel’s Form 10-K/A, filed on November 12, 2019, disclosed that the Q3 and Q4 +financials were materially misstated and that, as a result of the $109 million misstatement, Mattel’s +Q3 2017 provision for income taxes was understated by 14%, and net loss and net loss per share +were understated by 15%. Additionally, Mattel’s Q4 2017 provision for income taxes was +overstated by 62%, and net loss and net loss per share were overstated by 63% for that period. + +3. Mattel’s Form 10-K/A also disclosed two material weaknesses in internal control +over financial reporting related to the error: (1) failure to design and operate an internal control +over the review of the income tax valuation allowance analysis (calculation), which was +remediated by December 31, 2018; and (2) failure to design and operate internal controls to +properly assess and communicate known financial statement errors and internal control +deficiencies in a timely manner to those parties responsible for taking corrective action, including, +for example, the CEO and board of directors, which was remediated as of December 31, 2019. In +addition, Mattel disclosed that its outside auditor had restated its report on internal control over +financial reporting and issued an adverse opinion. + + +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 + +4. Mattel, Inc. is a Delaware corporation with its headquarters in El Segundo, +California. Mattel’s common stock trades on NASDAQ under the ticker symbol MAT. Mattel’s +common stock is registered pursuant to Section 12(b) of the Exchange Act. + +FACTS + +Mattel’s Q3 2017 Valuation Allowance Calculation Error + +5. At the end of Mattel’s third quarter in 2017, Mattel recorded a valuation allowance +against deferred tax assets. A deferred tax asset is an asset that a company can use to reduce or +eliminate a future tax liability, but if a company does not expect to generate taxable income in the +future, the deferred tax assets have no value because there will be no tax liability to offset. As a +result, once a company determines that it is not likely to have future taxable income, it must record +a valuation allowance against the deferred tax assets and reduce their value. As part of the +calculation, a corporation may lower its valuation allowance by netting out the value of certain +deferred tax liabilities. Under the tax law in Q3 2017, only liabilities classified as definite-lived +(i.e., related to assets which are amortized) could be used to lower the valuation allowance. If a +liability had been classified as indefinite-lived, it could not reduce the valuation allowance. + +6. Prior to Q3 2017, Mattel had never taken a valuation allowance. However, as of +Q3 2017, Mattel had suffered three years of cumulative losses and in September 2017, Mattel’s +largest customer declared bankruptcy. After consulting with its national office, PwC’s engagement +team informed Mattel that it would need to take a valuation allowance. Mattel personnel began +calculating the valuation allowance. At that time, Mattel had no internal control specifically +related to calculating a valuation allowance (as Mattel disclosed in its restatement, this material +weakness was not remediated until the quarter ended December 31, 2018). In mid-October 2017, +days before Mattel was scheduled to report its Q3 2017 earnings, one of PwC’s tax managers +identified a $129 million error because a deferred tax liability related to goodwill had been +included in the initial calculation of the valuation allowance. Because goodwill is an indefinite- +lived asset, a deferred tax liability should not have been used to lower the valuation allowance. +This error in the initial valuation allowance calculation was corrected before Mattel filed its Q3 +2017 Form 10-Q. + +Discovery of Another Error in January 2018 + +7. In mid-January 2018, one of Mattel’s tax directors discovered another error in the +reported calculation of the Q3 2017 valuation allowance. In Q3 2017, Thomas was classified as an + 4 +indefinite-lived asset. However, Mattel’s tax department mistakenly accounted for Thomas as a +definite-lived asset and used a deferred tax liability to reduce the amount of the valuation +allowance by $109 million. As a result, the reported $561.9 million valuation allowance was +understated in Q3 by $109 million. + +8. This Mattel tax director discovered the error on Saturday, January 13, and informed +PwC’s tax partners on the engagement. PwC’s senior tax partner on the engagement sent an email +to the junior tax partner with three possible options to correct the $109 million error: a tax planning +strategy to sell Thomas to a high tax jurisdiction; a reclassification of Thomas from an indefinite- +lived to a definite-lived asset; and moving Thomas’ book basis to the UK. On Monday, January +15, this Mattel tax director informed others in Mattel’s tax department. Mattel’s controller’s office, +along with the head of tax and head of internal audit, started researching the issue and held a series +of internal meetings (in December 2017, Mattel had already decided to evaluate whether Thomas +should be reclassified). On January 16, the head of Mattel’s tax department informed Mattel’s +CFO of the error, and PwC’s tax partners informed Abrahams of the error. On January 17, after +consulting with Abrahams and Mattel’s internal accounting team, both of whom recommended that +Thomas should be reclassified, Mattel’s CFO decided that Mattel should reclassify Thomas. As a +result, Mattel reclassified the Thomas asset as of October 1 (the start of Q4) from indefinite-lived +to definite-lived. Although this error did not affect Mattel’s full year financial results, Mattel’s Q3 +and Q4 2017 tax provisions remained understated and overstated, respectively. Mattel’s CFO did +not inform Mattel’s CEO of the $109 million error. + +9. Mattel’s internal accounting groups failed to document any analysis regarding +whether the Q3 2017 $109 million understatement should be considered material and restated. Not +only was there no documented analysis regarding an assessment of the error’s materiality, but there +was little other documentation of the error. + +10. Similarly, with respect to internal control over financial reporting, Mattel’s +accounting groups should have known that there was an internal control deficiency (as set forth in +the restatement, a material weakness) associated with the calculation of the valuation allowance, +but Mattel did not document how and why the error happened and how it could be remedied, +including with respect to the failure of any internal control over financial reporting and how to +remedy the control deficiency. In addition, Mattel failed to have processes in place to inform its +CEO or the audit committee of the $109 million error or of any associated deficiencies in internal +control over financial reporting. + +Mattel’s CFO Fails To Inform the Audit Committee + +11. In late January, Mattel’s audit committee met to discuss the year end results. +Relying on his discussions regarding materiality with Abrahams and Mattel’s accounting +personnel, Mattel’s CFO did not inform the audit committee of the $109 million error. He also + 5 +failed to inform the audit committee of the impact of the Thomas reclassification on the reporting +of the tax provision amounts (i.e., the self-correcting flip). + +Mattel Repeats the Incorrect Valuation Allowance on its Earnings Call and in its Form 10-K + +12. On February 1, 2018, Mattel held its year-end earnings call. Mattel’s CFO repeated +the erroneous $561.9 million valuation allowance amount from Q3 2017 on the call, stating “[a]s I +mentioned on our third quarter earnings call, we booked a onetime noncash charge of $561.9 +million to record a valuation allowance for a significant portion of our deferred tax assets.” On +February 27, Mattel filed its 2017 Form 10-K, which included the Q3 and Q4 uncorrected quarterly +financial information and, in addition, twice repeated the $561.9 million erroneous valuation +allowance amount that was previously reported in the Q3 2017 Form 10-Q. Additionally, in May +2018, Mattel offered and sold senior notes in an offering at a time in which its financial statements +for the third and fourth quarters of 2017 were materially misstated. + +VIOLATIONS + +13. Section 17(a)(2) of the Securities Act proscribes, in the offer or sale of a security, +obtaining “money or property by means of any untrue statement of a material fact or any omission +to state a material fact necessary in order to make the statements made, in light of the +circumstances under which they were made, not misleading.” Section 17(a)(3) of the Securities Act +proscribes, in the offer or sale of a security, engaging “in any transaction, practice, or course of +business which operates or would operate as a fraud or deceit upon the purchaser.” A violation of +these provisions does not require scienter and may rest on a finding of negligence. See Aaron v. +SEC, 446 U.S. 680, 685 & 701-02 (1980). + +14. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require issuers to file +such periodic and other reports as the Commission may prescribe and in conformity with such +rules as the Commission may promulgate. Exchange Act Rules 13a-11 and 13a-13 require issuers +with securities registered under Section 12 of the Exchange Act to file current and quarterly +reports, respectively. The obligation to file such reports embodies the requirement that they be true +and correct. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978). In addition +to the information expressly required to be included in such reports, Rule 12b-20 of the Exchange +Act requires issuers to add such further material information, if any, as may be necessary to make +the required statements, in the light of the circumstances under which they are made, not +misleading. A violation of these reporting provisions does not require scienter. See SEC v. Wills, +472 F. Supp. 1250, 1268 (D.D.C. 1978). + +15. Section 13(b)(2)(A) of the Exchange Act requires Section 12 registrants to make +and keep books, records, and accounts that accurately and fairly reflect the transactions and +dispositions of their assets. Section 13(b)(2)(B) of the Exchange Act requires all reporting +companies, among other things, to devise and maintain a system of internal accounting controls +sufficient to provide reasonable assurances that transactions are recorded as necessary to permit + 6 +preparation of financial statements in accordance with GAAP. Scienter is not an element of the +books-and-records and internal accounting controls provisions. See Ponce v. SEC, 345 F.3d 722, +737 n.10 (9th Cir. 2003) (noting that a “plain reading of Section 13(b) reveals that it also does not +impose a scienter requirement”). + +16. As a result of the conduct described above, the Commission finds that Mattel +violated Securities Act Sections 17(a)(2) and 17(a)(3), and Exchange Act Sections 13(a), +13(b)(2)(A), 13(b)(2)(B), and Rules 12b-20, 13a-1, 13a-11, and 13a-13, thereunder. + +MATTEL’S COOPERATION AND REMEDIAL EFFORTS + +17. In determining to accept Mattel’s Offer, the Commission considered remedial acts +promptly undertaken by Mattel and cooperation afforded the Commission staff. Mattel filed a +Form 8-K only two days after being made aware of the whistleblower letter and immediately +terminated its senior notes offering. In addition, Mattel’s audit committee promptly commenced +an independent internal investigation, and the company restated its financials only three months +after being made aware of the whistleblower letter. The results of the audit committee’s +investigation were shared with the staff. The company remediated the material weaknesses in +internal control and put new policies in place regarding, among other things, evaluating the +materiality of errors and its internal controls. In addition, when Mattel announced its restatement, +it also announced that its CFO would depart after a six month transition period (briefly extended +because of the pandemic). + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent Mattel cease and desist from committing or causing any violations and any future +violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, and Sections 13(a), 13(b)(2)(A), +and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + + B. Mattel shall, within ten (10) days of the entry of this Order, pay 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 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 Mattel as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Alka N. +Patel, Associate Regional Director, Division of Enforcement, Los Angeles Regional Office, +Securities and Exchange Commission, 444 South Flower St., Suite 900, Los Angeles, CA +90071. + + 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 + 8 +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/2022/AAER-4356.txt b/raw/aaer/2022/AAER-4356.txt new file mode 100644 index 0000000000000000000000000000000000000000..71ce22bc04a2b6833ab5cbffb289ba5504c1ef18 --- /dev/null +++ b/raw/aaer/2022/AAER-4356.txt @@ -0,0 +1,649 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96127 / October 21, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4356 / October 21, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21214 + + +In the Matter of + +Joshua Abrahams, CPA, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE +AND NOTICE OF HEARING + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative proceedings be, and hereby are, instituted against Joshua Abrahams (“Abrahams” or +“Respondent”) pursuant to Section 4C1 of the Securities Exchange Act of 1934 (“Exchange Act”), +and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + + +1 Section 4C provides, in relevant part: +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: +The Commission may censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have engaged in +unethical or improper professional conduct. + 2 +II. + +After an investigation, the Division of Enforcement and the Office of the Chief Accountant +allege that: + +A. SUMMARY + +1. In November 2019, Mattel, Inc. (“Mattel”) restated its financial statements for the +third and fourth quarters of 2017 as a result of a $109 million error in its tax-related valuation +allowance. Before restatement, Mattel’s Q3 2017 and Q4 2017 net loss and net loss per share were +understated by 15% and overstated by 63%, respectively. The restatement also identified two +material weaknesses in internal control over financial reporting associated with the $109 million +error: a weakness in correctly calculating the valuation allowance and a weakness in assessing +materiality of known errors and communicating those errors to company executives and the audit +committee. + +2. Joshua Abrahams (“Abrahams”), a certified public accountant (“CPA”), formerly +served as the lead engagement partner for Mattel. In conducting the interim review of Mattel’s third +quarter 2017 financial statements and in conducting the audit of Mattel’s fiscal year-end 2017 +financial statements, Abrahams engaged in improper professional conduct within the meaning of +Section 4C of the Exchange Act and Rule 102(e) of the Commission’s Rules of Practice. + +3. Abrahams failed to comply with multiple PCAOB professional standards, including +interim review standards, identifying and assessing risks of material misstatement, audit evidence, +audit documentation, and due care in the performance of work. Among other failures, the +engagement team’s workpapers were devoid of any discussion of the $109 million error, any +materiality analysis of the error, and any associated internal control deficiency analysis, and +Abrahams failed to inform the audit committee of the error. Notwithstanding these failures, +Abrahams approved of the Q3 2017 interim review workpapers and the issuance of the 2017 audit +report and the clean opinions on internal control over financial reporting for 2017 and 2018. + +4. Furthermore, throughout his time as lead engagement partner, Abrahams failed to +maintain independence from his audit client by engaging in prohibited human resource services for +Mattel, such as ranking candidates for management positions. + +B. RESPONDENT + +5. Joshua Abrahams (“Abrahams”), age 49, is a resident of Rocky Mountain, North +Carolina. Abrahams worked for Mattel’s outside audit firm, PricewaterhouseCoopers LLP +(“PwC”), from 2004 to 2019 and assumed the lead engagement partner role for Mattel in 2017. He +resigned from PwC in 2019. Abrahams is a CPA with inactive licenses in California, Florida (null +and void), New Jersey and North Carolina, and has no disciplinary record. + + 3 +C. OTHER RELEVANT ENTITIES + +6. Mattel, Inc. is a Delaware corporation with its headquarters in El Segundo, +California. Mattel’s common stock trades on NASDAQ under the ticker symbol MAT. Mattel’s +securities are registered pursuant to Section 12(b) of the Exchange Act. + +D. FACTS + +Mattel’s Q3 2017 Valuation Allowance Calculation Error + +7. At the end of Mattel’s third quarter in 2017, Mattel recorded a valuation allowance +against deferred tax assets. A deferred tax asset is an asset that a company can use to reduce or +eliminate a future tax liability, but if a company does not expect to generate taxable income in the +future, the deferred tax assets have no value because there will be no tax liability to offset. As a +result, once a company determines that it is not likely to have future taxable income, it must record +a valuation allowance against the deferred tax assets and reduce their value. As part of the +calculation, a corporation may lower its valuation allowance by netting out the value of certain +deferred tax liabilities. Under the tax law in Q3 2017, only liabilities classified as definite-lived +(i.e., related to assets which are amortized) could be used to lower the valuation allowance. If a +liability had been classified as indefinite-lived, it could not reduce the valuation allowance. + +8. Prior to Q3 2017, Mattel had never taken a valuation allowance. However, as of +Q3 2017, Mattel had suffered three years of cumulative losses and in September 2017, Mattel’s +largest customer declared bankruptcy. After consulting with its national office, PwC’s engagement +team informed Mattel that it would need to take a valuation allowance. Mattel personnel began +calculating the valuation allowance. At that time, Mattel had no internal control specifically +related to calculating a valuation allowance (as Mattel disclosed in its restatement, this material +weakness was not remediated until the quarter ended December 31, 2018). In mid-October 2017, +days before Mattel was scheduled to report its Q3 2017 earnings, a PwC tax manager identified a +$129 million error because a deferred tax liability related to goodwill had been included in the +initial calculation of the valuation allowance. Because goodwill is an indefinite-lived asset, a +deferred tax liability should not have been used to lower the valuation allowance. The error in the +initial valuation allowance calculation was corrected before Mattel filed its Q3 2017 Form 10-Q. + +9. Abrahams knew of the $129 million calculation error but did not verify that the +engagement team documented the $129 million error or any associated control deficiency in its Q3 +2017 interim review workpapers. Nor did Abrahams communicate this error or any associated +control deficiency to Mattel’s audit committee. + +Discovery of Another Error in January 2018 + +10. In mid-January 2018, one of Mattel’s tax directors discovered a second error in its +calculation of the Q3 2017 valuation allowance. In Q3 2017, Mattel’s Thomas the Tank Engine +asset (“Thomas”), was classified as an indefinite-lived asset. However, Mattel’s tax department +mistakenly accounted for Thomas as a definite-lived asset and used a deferred tax liability to +reduce the amount of the valuation allowance by $109 million. As a result, the reported $561.9 +million valuation allowance was understated in Q3 by $109 million. + 4 + +11. This Mattel tax director discovered the error on Saturday, January 13, and informed +PwC’s tax partners on the engagement. PwC’s senior tax partner on the engagement sent an email +to the junior tax partner with three possible options to correct the $109 million error: a tax planning +strategy to sell Thomas to a high tax jurisdiction; a reclassification of Thomas from an indefinite- +lived to a definite-lived asset; and moving Thomas’ book basis to the UK. On Monday, January +15, this Mattel tax director informed others in Mattel’s tax department. Mattel’s controller’s office, +along with the head of tax and head of internal audit, started researching the issue and held a series +of internal meetings (in December 2017, Mattel had already decided to evaluate whether Thomas +should be reclassified). On January 16, the head of Mattel’s tax department informed Mattel’s +CFO of the error, and PwC’s tax partners informed Abrahams of the error. On January 17, after +consulting with Abrahams and Mattel’s internal accounting team, both of whom recommended that +Thomas should be reclassified, Mattel’s CFO decided that Mattel should reclassify Thomas. As a +result, Mattel reclassified the Thomas asset as of October 1 (the start of Q4) from indefinite-lived +to definite-lived. Although this error did not affect Mattel’s full year financial results, Mattel’s Q3 +and Q4 2017 tax provisions remained understated and overstated, respectively. Mattel’s CFO did +not inform Mattel’s CEO of the $109 million error. Additionally, the $109 million error exceeded +PwC’s overall materiality threshold of $21 million for the audit. Nevertheless, Abrahams failed to +verify that the engagement team documented the $109 million error, any related materiality +analysis, and any associated control deficiency analysis in its workpapers. There is no discussion +whatsoever of the $109 million error in the workpapers. + +Abrahams Fails to Inform the Audit Committee + +12. In late January, Mattel’s audit committee met to discuss the year end results. +Abrahams made PwC’s presentation to the audit committee; in that presentation, Mattel’s valuation +allowance was identified as a significant risk. However, Abrahams failed to inform the audit +committee of the $109 million error in Mattel’s valuation allowance for Q3 and Q4 2017 or of the +associated deficiency in internal control. + +Abrahams Discusses with PwC’s Engagement Quality Review Partner + +13. In late February, a few days before Mattel planned to file its Form 10-K, Abrahams +told PwC’s engagement quality review partner that the Q3 2017 valuation allowance was +understated by $109 million. The quality review partner questioned why this issue was coming up +now, and Abrahams falsely told him that the error was discovered when the company was +completing its internal control testing (which seemed reasonable to the quality review partner +because Mattel usually performed control testing after its earnings announcement, which had been +on February 1). Abrahams did not tell the quality review partner that the error was discovered in +January, weeks before their discussion. Because $109 million was a quantitatively large number, +the quality review partner questioned Abrahams about the decision that it was not material. +Abrahams explained that Mattel believed the error was not material and would not be important to +investors because the affected items were nonrecurring, it was a non-cash error, and the error did +not hit key financial metrics. Based on the incomplete information presented to him by Abrahams, +the quality review partner concurred with the conclusion on materiality. + + 5 +2019 Anonymous Whistleblower Letter and Restatement + +14. On August 8, 2019, Mattel disclosed in a Form 8-K that it was made aware of an +anonymous whistleblower letter. The letter alleged accounting errors and questioned Abrahams’ +independence. Mattel terminated its pending $250 million senior notes offering, and its audit +committee initiated an independent internal investigation. The audit committee’s investigation +concluded that there were material misstatements in the tax-related valuation allowance for Q3 +2017, which was understated by $109 million, and in the tax expense for Q4 2017, which was +overstated by $109 million. The valuation allowance was understated in Q3 because Thomas was +erroneously treated for purposes of the valuation allowance calculation as a definite-lived asset that +should be amortized, whereas at the time it was classified as an indefinite-lived asset on Mattel’s +balance sheet. The audit committee also concluded (as did PwC in its own investigation) that +Abrahams violated auditor independence rules. + +15. On October 29, 2019, Mattel announced that it would restate its financial results for +Q3 and Q4 2017. Because the Q3 understatement and Q4 overstatement self-corrected the error +for the fiscal year ended December 31, 2017, the FYE 2017 financial statements did not need to be +restated. Mattel’s Form 10-K/A, filed on November 12, 2019, disclosed that the Q3 and Q4 +financials were materially misstated. As a result of the $109 million misstatement, Mattel’s Q3 +2017 provision for income taxes was understated by 14%, and net loss and net loss per share were +understated by 15%. Additionally, Mattel’s Q4 2017 provision for income taxes was overstated by +62%, and net loss and net loss per share were overstated by 63% for that period. + +16. Mattel’s Form 10-K/A also disclosed two material weaknesses in internal control +over financial reporting related to the error: (1) failure to design and operate an internal control +over the review of the income tax valuation allowance analysis (calculation), which was +remediated by December 31, 2018; and (2) failure to design and operate internal controls to +properly assess and communicate known financial statement errors and internal control +deficiencies in a timely manner to those parties responsible for taking corrective action, including, +for example, the CEO and board of directors, which was remediated as of December 31, 2019. In +addition, Mattel disclosed that PwC had restated its report on internal control over financial +reporting as of December 31, 2018, and issued an adverse opinion. + +Abrahams’ Failure to Conduct the Q3 2017 Interim Review in accordance with +PCAOB Standards + +Reviews of Interim Financial Information (AS 4105) + +17. In conducting the Q3 2017 interim review, Abrahams departed from the interim +standards in PCAOB Auditing Standard No. (“AS”) 4105, Reviews of Interim Financial +Information. + +18. AS 4105 requires that auditors evaluate and document any issues that in the +accountant’s judgment are significant, for example, possible material misstatements and any +associated impact on internal control over financial reporting. + + 6 +19. AS 4105.26 requires “misstatements identified by the accountant or brought to the +accountant's attention, including inadequate disclosure, should be evaluated individually and in the +aggregate to determine whether material modification should be made to the interim financial +information for it to conform with generally accepted accounting principles. The accountant should +use his or her professional judgment in evaluating the materiality of any likely misstatements that +the entity has not corrected. The accountant should consider matters such as (a) the nature, cause +(if known), and amount of the misstatements; (b) whether the misstatements originated in the +preceding year or interim periods of the current year; (c) materiality judgments made in +conjunction with the current or prior year's annual audit; and (d) the potential effect of the +misstatements on future interim or annual periods.” + +20. AS 4105.52 explains that “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 final conclusions reached.” + +21. When evaluating management’s quarterly certifications about internal control over +financial reporting, AS 4105.18.g requires the auditor to evaluate “the implications of +misstatements identified by the auditor as part of the auditor’s other interim review procedures as +they relate to effective internal control over financial reporting.” + +22. AS 4105.33 states that the auditor “should communicate significant deficiencies or +material weaknesses of which the accountant has become aware to the audit committee or those +responsible for oversight of the company’s financial reporting in a timely manner and prior to the +registrant filing its periodic report with the SEC.” + +23. Similarly, AS 4105.09 states that “the accountant is responsible for communicating +with the audit committee or others with equivalent authority or responsibility, regarding any +significant deficiencies that come to his or her attention.” + +24. Abrahams knew about the $129 million error, but there is no documentation of the +error in PwC’s Q3 2017 review workpapers. Abrahams also failed to verify that the engagement +team documented the $109 million error and any related materiality analysis, as there was no +discussion of the $109 million error in the workpapers. In addition, Abrahams failed to identify +and document the associated material weakness in internal accounting control associated with the +errors and failed to communicate the errors and material weakness to the audit committee. + +Abrahams’ Failure to Conduct the 2017 Audit in accordance with PCAOB Standards + +25. In conducting the 2017 audit, Abrahams failed to comply with multiple PCAOB +auditing standards, as discussed below. + +Identifying and Assessing Risks of Material Misstatement (AS 2110) + +26. AS 2110, Identifying and Assessing Risks of Material Misstatement, requires the +auditor to identify and assess risks of material misstatement. + 7 + +27. AS 2110.74 states that “[t]he auditor’s assessment of the risks of material +misstatement, including fraud risks, should continue throughout the audit. When the auditor +obtains evidence during the course of the audit that contradicts the audit evidence on which the +auditor originally based his or her risk assessment, the auditor should revise the risk assessment +and modify planned audit procedures or perform additional procedures in response to the revised +risk assessments.” + +28. After learning about both the $129 million corrected error and $109 million +uncorrected error, Abrahams should have reassessed the risk of material misstatement associated +with the valuation allowance for deferred tax assets and modified PwC’s planned audit procedures +and performed additional procedures to determine that any material weaknesses in Mattel’s +internal controls relating to Mattel’s calculation of the valuation allowance were addressed. +However, Abrahams did not do so and authorized the issuance of clean opinions by PwC on +Mattel’s 2017 and 2018 internal controls. + +Audit Documentation (AS 1215) + +29. AS 1215, Audit Documentation, requires that an auditor document the procedures +performed, evidence obtained, and conclusions reached with respect to relevant financial statement +assertions. + +30. AS 1215.04 states that “[a]udit documentation should be prepared in sufficient +detail to provide a clear understanding of its purpose, source, and the conclusions reached.” +AS 1215.06 explains that “[a]udit documentation must clearly demonstrate that the work was in +fact performed” and “must contain sufficient information to enable an experienced auditor, having +no previous connection with the engagement (a) to understand the nature, timing, extent, and +results of the procedures performed, evidence obtained, and conclusions reached, and (b) to +determine who performed the work and the date such work was completed as well as the person +who reviewed the work and the date of such review.” + +31. AS 1215.12 requires the “auditor must document significant findings or issues, +actions taken to address them (including additional evidence obtained) and the basis for the +conclusions reached in connection with each engagement.” AS 1215.12 explains that significant +findings or issues are “substantial matters that are important to the procedures performed, evidence +obtained, or conclusions reached” and include, for example, “the existence of material +misstatements . . . [and] the existence of significant deficiencies or material weaknesses in internal +control over financial reporting,” and “evaluation of uncorrected misstatements, including the +quantitative and qualitative factors the auditor considered to be relevant to the evaluation.” + +32. AS 1215.13 adds that “[t]he auditor must identify all significant findings or issues +in an engagement completion document. This document may include either all information +necessary to understand the significant findings, issues or cross-references, as appropriate, to other +available supporting audit documentation” and “should include documentations of significant +findings or issues identified during the review of interim financial statements.” + + 8 +33. Abrahams repeatedly failed to adhere to the audit documentation standards. There +was no documentation in the workpapers of: (1) the $109 million error; (2) any deficiency in +internal control over financial reporting associated with the error, much less a significant +deficiency or material weaknesses; and (3) any analysis of the error’s materiality, including +quantitative and qualitative factors. + +Audit Evidence (AS 1105) + +34. AS 1105, Audit Evidence, requires the auditor to obtain “sufficient appropriate” +audit evidence to provide a reasonable basis for his or her opinion.” + +35. AS 1105.02 states that audit evidence consists of both information that supports and +corroborates management's assertions regarding the financial statements or internal control over +financial reporting and information that contradicts such assertions. + +36. AS 1105.05 explains that sufficiency is measured by the quantity of the evidence +and is affected by the risk of material misstatement or the risk associated with the control. +AS 1105.05 further states that “[a]s the risk increases, the amount of evidence that the auditor +should obtain also increases.” + +37. AS 1105.06 explains that appropriateness is measured by the quality of the +evidence which “must be both relevant and reliable.” + +38. Despite being aware of both the $129 million corrected error and $109 million +uncorrected error, Abrahams did not obtain sufficient appropriate evidence that there was no +material weakness in Mattel’s internal controls relating to the calculation of the company’s +valuation allowance and authorized the issuance of clean opinions by PwC on Mattel’s 2017 and +2018 internal control over financial reporting. + +An Audit of Internal Control Over Financial Reporting that Is Integrated with an Audit +of Financial Statements (AS 2201) + +39. AS 2201, An Audit of Internal Control Over Financial Reporting that Is Integrated +with an Audit of Financial Statements, sets forth the requirements applicable to an audit of +management’s assessment of the effectiveness of internal control over financial reporting. See +AS 2201.01. + +40. AS 2201.20 requires that “[i]n planning the audit of internal control over financial +reporting, the auditor should use the same materiality considerations he or she would use in +planning the audit of the company’s annual financial statements.” + +41. AS 2201.62 requires that the auditor “evaluate the severity of each control +deficiency that comes to his or her attention to determine whether the deficiencies, individually or +in combination, are material weakness as of the date management’s assessment.” + + 9 +42. AS 2201.63 states that “the severity of a deficiency depends on…[t]he magnitude +of the potential misstatement resulting from the deficiency or deficiencies.” + +43. AS 2201.66 states that “[f]actors that affect the magnitude of the misstatement that +might result from a deficiency or deficiencies in controls include, but are not limited to . . . [t]he +financial statement amounts or total transactions exposed to the deficiency.” + +44. AS 2201.78 mandates that the auditor “communicate, in writing, to management +and the audit committee all material weaknesses identified during the audit.” + +45. AS 2201.90 explains that “[i]f there are deficiencies that, individually or in +combination, result in one or more material weaknesses, the auditor must express an adverse +opinion on the company's internal control over financial reporting, unless there is a restriction on +the scope of the engagement.” + +46. Abrahams failed to use the same materiality considerations in planning the audit of +Mattel’s internal control over financial reporting as he used in planning the audit of its financial +statements. The known error, i.e., the $109 million error, exceeded the audit plan’s overall +materiality of $21 million. Abrahams failed to identify or evaluate the severity of the deficiency in +internal control over financial reporting associated with the error by considering the magnitude of +potential misstatement and failed to inform the audit committee, in writing or otherwise, of this +material weakness. Abrahams subsequently authorized the issuance of PwC’s reports on Mattel’s +2017 and 2018 internal control over financial reporting, which had clean opinions. + +Communications with Audit Committees (AS 1301) + +47. AS 4105.34 requires the auditor to determine whether any of the matters described +in AS 1301, as they relate to interim financial information, have been identified. AS 1301, +Communications with Audit Committees, requires the auditor to discuss (or determine that +management has adequately discussed) with the audit committee, the basis for any determination +that the uncorrected misstatements were immaterial, including the qualitative factors considered. +See AS 1301.18. + +48. AS 1301.18 states that “[t]he auditor should provide the audit committee with the +schedule of uncorrected misstatements related to accounts and disclosures that the auditor +presented to management. The auditor should discuss with the audit committee, or determine that +management has adequately discussed with the audit committee, the basis for the determination +that the uncorrected misstatements were immaterial, including the qualitative factors considered.” + +49. Even though PwC had identified the valuation allowance as a significant risk, +Abrahams failed to communicate the $109 million error or the associated deficiency in internal +control to the audit committee. + + 10 +Due Professional Care in the Performance of Work (AS 1015) + +50. AS 1015, Due Professional Care in the Performance of Work, requires the auditor +to exercise “due professional care” in the planning and performance of the audit, and to “plan and +perform his or her work with due professional care.” AS 1015.01, 02. + +51. AS 1015.07 explains that due professional care requires the auditor to exercise +professional skepticism and explains that “[p]rofessional skepticism is an attitude that includes a +questioning mind and a critical assessment of audit evidence.” + +52. AS 1015.08 states that “[g]athering and objectively evaluating audit evidence +requires the auditor to consider the competency and sufficiency of the evidence. Since evidence is +gathered and evaluated throughout the audit, professional skepticism should be exercised +throughout the audit process.” + +53. Abrahams knew that Q3 2017 was the first time that Mattel had reported a +valuation allowance and knew of the uncorrected $109 million Thomas error. Abrahams failed, +however, to verify that the engagement team documented the error, any related materiality +analysis, and any associated internal control deficiency analysis. The $109 million error appears +nowhere in the workpapers. Additionally, Abrahams knew that the valuation allowance was +identified as one of three significant risks for the 2017 audit by PwC and was included in +Abrahams’ January 2018 presentation to the audit committee. Even though Abrahams discussed +the valuation allowance with the audit committee, he never told the audit committee of the $109 +million error in the calculation of the valuation allowance – a calculation that remained +uncorrected. + +54. The complete lack of documentation of the error and Abrahams’ failure to +communicate to the audit committee demonstrate his lack of due professional care in conducting +the audit. + +Abrahams Failure to Maintain Independence from His Audit Client + +55. Throughout his time as lead engagement partner, Abrahams failed to maintain +independence from his audit client by providing prohibited human resource services to Mattel. + +56. In texts and emails to Mattel’s chief financial officer, Abrahams ranked candidates +against each other. For example, Abrahams informed Mattel’s chief financial officer that he +believed a certain candidate whose resume Abrahams had provided to Mattel was the best +candidate for the senior vice president of tax position (that candidate was hired by Mattel in +October 2018). + +57. Abrahams also made comments recommending that Mattel not hire particular +candidates after having reviewed their resumes and/or participated in the interview process. + + 11 +Independence (AS 1005) + +58. AS 1005, Independence, requires the auditor to maintain an independence in mental +attitude and explains that “[i]t is of the utmost importance to the profession that the general public +maintain confidence in the independence of independent auditors.” See AS 1005.01, 1005.03. + +59. AS 1005.01 requires the auditor to maintain “an independence in mental attitude.” + +60. AS 1005.02 states that independence “recognizes an obligation for fairness not only +to management and owners of a business but also to creditors and those who may otherwise rely +(in part, at least) upon the independent auditor's report, as in the case of prospective owners or +creditors.” + +61. AS 1005.03 emphasizes that”[i]t is of the utmost importance to the profession that +the general public maintain confidence in the independence of independent auditors.” AS 1005.03 +explains that “[t]o be independent, the auditor must be intellectually honest; to be recognized as +independent, he must be free from any obligation to or interest in the client, its management or its +owners.” (emphasis in original). AS 1005.03 further states that “[i]ndependent auditors should not +only be independent in fact; they should avoid situations that may lead outsiders to doubt their +independence.” + +62. AS 1005.05 explains that the SEC has “adopted requirements for independence of +auditors who report on financial statements filed with it.” As set forth in Regulation S-X Rules 2- +01(b) and (c)(4)(vii), “[t]he Commission will not recognize an accountant as independent, with +respect to an audit client” if an accountant performs certain human resource services for a client, +including “(E) Recommending, or advising the audit client to hire, a specific candidate for a +specific job (except that the accounting firm may, upon request by the audit client, interview +candidates and advise the audit client on the candidate’s competence for financial accounting, +administrative, or control positions).” + +63. The Commission has stated, “Excessive involvement in human resource selection +or development places the auditor in the position of having an interest in the success of the +employees that the auditor has selected, tested, or evaluated.” Revision of the Commission’s +Auditor Independence Requirements, Exchange Act Rel. No. 43602 (Nov. 21, 2000). + +64. The Commission has further stated that “[a]ssisting management in human resource +selection or development places the accountant in the position of having an interest in the success +of the employees that the accountant has selected, tested, or evaluated. Accordingly, observers +may perceive that an accountant would be reluctant to suggest the possibility that those employees +failed to perform their jobs appropriately, or at least reasonable investors might perceive the +accountant to be reluctant, because doing so would require the accountant to acknowledge +shortcomings in its human resource service. The accountant also might have other incentives not +to report such employees' ineffectiveness, including that the accountant would identify and be +identified with the recruited employees.” Strengthening the Commission’s Requirements +Regarding Auditor Independence, Exchange Act Rel. No. 47265 (Jan. 28, 2003). + + 12 +65. As described above, Abrahams advised Mattel as to which candidates should and +should not be hired for specific positions. Because Abrahams was excessively involved in +assisting management with its human resource selection process, by providing prohibited human +resource services to Mattel, he failed to maintain his independence. + +E. VIOLATIONS + +Respondent Engaged in Improper Professional Conduct + +66. As a result of the conduct described above, Respondent engaged in improper +professional conduct. Section 4C of the Exchange Act and Rule 102(e) of the Commission's Rules of +Practice allows the Commission to censure a person or deny the privilege of appearing or practicing +before it to any person if it finds that such person has engaged in “improper professional conduct.” +Exchange Act § 4C(a)(2); Rule 102(e)(1)(ii). In addition, regarding accountants, Section 4C(b) of the +Exchange Act and Rule 102(e)(1)(iv)(B) provide that the following two types of negligent conduct +may constitute “improper professional 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. + +67. As discussed above, in the third quarter 2017 interim review and fiscal year-end +2017 audit, Abrahams engaged in repeated instances of unreasonable conduct, each resulting in a +violation of applicable professional standards, including his failures to recognize the complete lack +of documentation of materiality analysis, to identify any deficiencies in internal control, to +communicate with the audit committee, and to maintain independence. + +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: + +Whether the allegations set forth in Section II hereof are true and, in connection therewith, +to afford Respondent an opportunity to establish any defenses to such allegations; and + +What, if any, remedial action is necessary and appropriate against Respondent pursuant to +Section 4C of the Exchange Act and Rule 102(e) of the Commission’s Rules of Practice. + +IV. + +IT IS ORDERED that a public hearing before the Commission for the purposes of taking +evidence on the questions set forth in Section III hereof shall be convened at a time and place to be + 13 +fixed by further order of the Commission, pursuant to Rule 110 of the Commission’s Rules of +Practice, 17 C.F.R. § 201.110. + +IT IS FURTHER ORDERED that Respondent shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule +220(b) of the Commission’s Rules of Practice, 17 C.F.R. § 201.220(b). + +IT IS FURTHER ORDERED that the Division of Enforcement and Respondent shall +conduct a prehearing conference pursuant to Rule 221 of the Commission’s Rules of Practice, 17 +C.F.R. § 201.221, within fourteen (14) days of service of the Answer. The parties may meet in +person or participate by telephone or other remote means; following the conference, they shall file +a statement with the Office of the Secretary advising the Commission of any agreements reached at +said conference. If a prehearing conference was not held, a statement shall be filed with the Office +of the Secretary advising the Commission of that fact and of the efforts made to meet and confer. + +If any Respondent fail to file the directed Answer, or fails to appear at a hearing or +conference after being duly notified, the Respondent may be deemed in default and the proceedings +may be determined against him upon consideration of this Order, the allegations of which may be +deemed to be true as provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission’s Rules +of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), 201.221(f), and 201.310. + +This Order shall be served forthwith upon Respondent by any means permitted by the +Commission’s Rules of Practice. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to service of +paper copies, service to the Division of Enforcement of all opinions, orders, and decisions +described in Rule 141, 17 C.F.R. § 201.141, and all papers described in Rule 150(a), 17 C.F.R. § +201.150(a), in these proceedings shall be by email to the attorneys who enter an appearance on +behalf of the Division, and not by paper service. + +Attention is called to Rule 151(a), (b) and (c) of the Commission’s Rules of Practice, 17 +C.F.R. § 201.151(a), (b) and (c), providing that when, as here, a proceeding is set before the +Commission, all papers (including those listed in the following paragraph) shall be filed +electronically in administrative proceedings using the Commission’s Electronic Filings in +Administrative Proceedings (eFAP) system access through the Commission’s website, +www.sec.gov, at http://www.sec.gov/eFAP. Respondent also must serve and accept service of +documents electronically. All motions, objections, or applications will be 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 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, + 14 +231, 232, 233, and 250, shall be directed to and, as appropriate, decided by the Commission. This +proceeding shall be deemed to be one under the 120-day timeframe specified in Rule of Practice +360(a)(2)(i), 17 C.F.R. § 201.360(a)(2)(i), for the purposes of applying Rules of Practice 233 and +250, 17 C.F.R. §§ 201.233 and 250. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that the Commission shall issue a decision on the basis of the record in this +proceeding, which shall consist of the items listed at Rule 350(a) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.350(a), and any other document or item filed with the Office of the +Secretary and accepted into the record by the Commission. The provisions of Rule 351 of the +Commission’s Rules of Practice, 17 C.F.R. § 201.351, relating to preparation and certification of a +record index by the Office of the Secretary or the hearing officer are not applicable to this +proceeding. + +The Commission will issue a final order resolving the proceeding after one of the +following: (A) The completion of post-hearing briefing in a proceeding where the public hearing +has been completed; (B) The completion of briefing on a motion for a ruling on the pleadings or a +motion for summary disposition pursuant to Rule 250 of the Commission’s Rules of Practice, 17 +C.F.R. § 201.250, where the Commission has determined that no public hearing is necessary; or +(C) The determination that a party is deemed to be in default under Rule 155 of the Commission’s +Rules of Practice, 17 C.F.R. § 201.155, and no public hearing is necessary. + +In the absence of an appropriate waiver, no officer or employee of the Commission engaged +in the performance of investigative or prosecuting functions in this or any factually related +proceeding will be permitted to participate or advise in the decision of this matter, except as witness +or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule making” within +the meaning of Section 551 of the Administrative Procedure Act, it is not deemed subject to the +provisions of Section 553 delaying the effective date of any final Commission action. + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4358.txt b/raw/aaer/2022/AAER-4358.txt new file mode 100644 index 0000000000000000000000000000000000000000..734d6f889e014a065f2aea656264a71149503f2b --- /dev/null +++ b/raw/aaer/2022/AAER-4358.txt @@ -0,0 +1,550 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11124 / October 24, 2022 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96138 / October 24, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4358 / October 24, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21216 + + + +In the Matter of + +WILLIAM HILSON, CPA, CA + +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 William +Hilson (“Respondent” or “Hilson”) 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, Respondent consents to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act, +Sections 4C and 21C of the Exchange Act, and Rule 102(e) of the Commission’s Rules of Practice, +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 fraudulent conduct by William Hilson, a former senior +executive of Cronos Group Inc. (“Cronos”), a Canadian-based issuer in the cannabis industry. In +the third quarter of 2019, Hilson, the company’s then-Chief Commercial Officer (“CCO”), + +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 + +negotiated the sale of cannabis flower, also known as biomass, to a third-party manufacturer +(“Company A”). The sale was part of a broader effort by Cronos to dispose of its existing stock of +cannabis flower, which was of lower quality, and therefore, unsaleable in its retail market, to clear +out the company’s limited vault storage space. Cronos was also motivated to increase its revenue +for the pertinent quarter in order to close the gap with internal revenue targets. + +2. To induce Company A into agreeing to purchase the biomass in the third quarter, +Hilson orally agreed with Company A to repurchase the cannabis, either as a derivative product or +in some other form, in the following quarter. Hilson was not authorized to enter into such a buy +back arrangement with Company A. Nor did Hilson disclose to anyone else at Cronos the nature of +his oral repurchase agreement with Company A. Under the applicable accounting guidance, the +agreement between Hilson and Company A precluded Cronos from recognizing the revenue from +this sale of biomass. + +3. Because Hilson did not disclose to others at Cronos the terms of his oral repurchase +agreement, Cronos improperly recognized revenue in the amount of $2.3 million USD in connection +with the sale of the cannabis flower to Company A, resulting in a material error in its financial +statements furnished to the Commission for the third quarter of 2019. + +RESPONDENT + +4. William Hilson, a Canadian citizen, resides in Toronto. Hilson served as Cronos’ +Chief Financial Officer (“CFO”) from October 2016 to April 2019. He served as Cronos’ CCO +from April 2019 to December 2019, at which point he left the company. Since 1999, Hilson has +held a Chartered Accountant (CA) designation in Canada and has subsequently also been +designated as a Chartered Professional Accountant (CPA).4 + +RELATED PARTY + +5. Cronos Group Inc. is incorporated in the Province of British Columbia and is +principally headquartered in Toronto, Ontario. Cronos engages in the cultivation, +manufacturing, and marketing of cannabis and cannabis-derived products. Cronos’ securities, +which are registered with the Commission pursuant to Section 12(b) of the Exchange Act, are +dually-listed on the Toronto Stock Exchange and on the NASDAQ (ticker: CRON). From March +2018 through December 31, 2019, Cronos qualified as a foreign private issuer and had reporting, +books and records, and internal controls obligations under Sections 13(a) and 13(b) of the + +4 A “Chartered Accountant” designation was one of three professional designations granted by Canadian +accounting bodies to accountants who satisfied requisite educational coursework and training and passed required +exams, similar to Certified Public Accountant licenses in the United States. In 2014, the Canadian accounting +bodies merged to form a unified Chartered Professional Accountants of Canada (CPA Canada), which would +thereafter offer the single CPA designation. Accountants with any of the previously he ld designations, including +chartered accountants, were allowed to waive into CPA Canada membership and until November of this year, mu st +use the designation “CPA, CA” after which they should only use the “CPA” designation. + + +4 + +Exchange Act and related rules thereunder. As a foreign private issuer, Cronos’ financial +statements were prepared in accordance with International Financial Reporting Standards +(“IFRS”). As of January 1, 2020, Cronos began reporting as a U.S. domestic issuer and prepared +its financial statements in accordance with U.S. generally accepted accounting principles +(“GAAP”). During the relevant period, Cronos offered and sold securities through the Amended +and Restated Stock Option Plan, dated May 26, 2015, and the 2018 Stock Option Plan, dated June +28, 2018, which were registered on Forms S-8 filed with the Commission. + +FACTS + +Cronos’ Evolving Business in 2019 + +6. At the start of 2019, Cronos’ business was primarily focused on the cultivation +and growth of cannabis flower, which the company in turn expected to sell under various brands +in the retail market. However, beginning in early 2019 and continuing throughout that year, an +insect infestation of certain biomass in the company’s cultivation facilities rendered that biomass +unsuitable for cannabis flower retail sales as originally expected. Cronos also lacked the +manufacturing ability to convert the biomass to other uses. As a result, Cronos was left with a +large supply of lower-quality biomass in its limited vault storage facilities. In response, Cronos +was motivated throughout 2019 to sell off its inventory of lower-quality biomass to free up space +in its storage facilities. + +7. Around the same time, in anticipation of forthcoming regulatory changes, Cronos +made a strategic decision to enter the cannabis vaporizer market. As part of its shift in business +strategy, Cronos sought to procure a supply of cannabis resin, a key input of vaporizer cartridges +used in the production of vaporizer products. Cronos, however, lacked the in-house +manufacturing capability to convert biomass into resin. + +8. To that end, in July 2019, Cronos entered into a contract manufacturing +agreement (the “CMO Agreement”) with Company A. As described in the CMO Agreement, +Cronos and Company A would jointly source biomass as the raw material input—either from +Cronos or from third-party cultivators—and Company A would perform all other steps in the +production of vaporizer cartridges, including converting the biomass into resin. Cronos preferred +that Company A procure the biomass for its vaporizer products from third-parties to avoid using +Cronos’ lower-quality biomass. + +9. Pursuant to the terms of the CMO Agreement, Cronos retained title and ownership +of any biomass and other input materials provided to Company A as well as any vaporizer +products produced by Company A. Accordingly, the provision of biomass to Company A by +Cronos did not constitute a sales transaction or result in the recognition of revenue. Rather, +Cronos could recognize revenue under the CMO Agreement only when a vaporizer cartridge was +ultimately sold by Cronos. The CMO Agreement did not include terms permitting Cronos to sell +biomass outright to Company A. + +5 + + +10. Company A proceeded to procure biomass for the purpose of converting the +biomass into resin for use in vaporizer products and, in accordance with the terms of the CMO +Agreement, would then issue an invoice to Cronos for payment. + +11. Hilson served as Cronos’ CFO until April 2019, and thereafter became CCO until +he separated from Cronos in December 2019. In his role as CCO, Hilson was familiar with the +CMO Agreement with Company A, as well as the terms under which Cronos would provide +biomass to Company A for conversion into resin. + +Third Quarter 2019 Sale of Biomass to Company A + +12. In September 2019, consistent with its goal of increasing space in its limited +storage facilities, Cronos approached Company A about the possibility of selling some of its +existing lower-quality biomass to Company A. In addition, Cronos was seeking to increase +reported revenue in its third quarter 2019 as the company was facing a shortfall between its +projected third quarter revenue and internal revenue targets for the quarter largely due to lower +than expected sales in its retail channel. Revenue from its wholesale channel, which the +company had not anticipated would be a core sales channel, became necessary to bridge the gap. + +13. On September 19, 2019, a senior executive at Company A emailed Hilson +informing him that, although Company A had no need to purchase Cronos’ biomass, the +company would enter into such a transaction, in part to help Cronos meet its revenue goals. +However, the senior executive made clear that Company A would purchase Cronos’ biomass +only if Cronos agreed to buy it back as a derivative product or in some other form in the +following quarter. Hilson orally agreed to the condition proposed by the senior executive at +Company A although he was not authorized to enter into such a buy back arrangement. Hilson +did not disclose to others at Cronos that he had orally committed to Company A that Cronos +would repurchase the cannabis as a derivative product or in some other form in the following +quarter. + +14. As Hilson led the negotiations for the sale of biomass to Company A, he was +specifically instructed by a senior company executive that the biomass sale to Company A could +not be pursuant to the CMO Agreement, in part because Cronos did not want its lower-quality +biomass being used by Company A as part of the vaporizer production. As a result, the +contemplated sale of biomass from Cronos to Company A would be treated as a routine sales +transaction, unrelated to the CMO Agreement. + +15. On September 27, 2019, Company A issued a purchase order to Cronos for +approximately $3.1 million CAD ($2.4 million USD) of biomass, and a few days later, Cronos +issued an invoice to Company A for the sale and shipped the product to Company A. Neither the +purchase order nor the invoice made any reference to the CMO Agreement. In connection with + +6 + +this biomass sale in September 2019, Cronos recognized $3.0 million CAD ($2.3 million USD) +in revenue in its third quarter 2019 financial results. + +16. In November 2019, as part of the quarterly close process, Hilson signed a sub- +certification as a financial statement reviewer certifying that Cronos’ quarterly financial +statements were accurate, within his areas of responsibility, and that he was not aware of any +fraud involving the statements. Hilson did not disclose that he had entered into an oral buy back +agreement with Company A related to the September 2019 sale of biomass. + +17. In early December 2019, upon learning of Hilson’s upcoming departure from +Cronos, the senior executive at Company A contacted Hilson to discuss payment in connection +with their prior agreement. + +18. In January 2020, Company A informed Cronos that it had purchased the biomass +in September 2019 based on an oral commitment by Hilson to buy back the biomass in a +processed form. To date, Company A has not paid for the biomass sale, and Cronos ceased +collection efforts in March 2020 after writing off the receivable. + +Hilson’s Conduct Resulted in a Material Error in Cronos’ Financial Statements + +19. In September 2019, at the time Hilson entered into the oral agreement with +Company A, Cronos was required to prepare financial statements in accordance with IFRS. As +is relevant here, IFRS requires that contracts have commercial substance in order to be +recognized as revenue—that is, that the risk, timing, or amount of the entity’s future cash flows +is expected to change as a result of the contract. See IFRS 15.9(d).5 + +20. By virtue of Hilson’s verbal agreement with Company A, which conditioned the +sale of biomass to Company A on Cronos’ commitment to repurchase the derivative product or +product in some other form in the subsequent quarter, Cronos did not meet the IFRS standards to +recognize revenue in connection with the biomass sale. Specifically, the risk, timing, or amount +of Cronos’ cash flows was not expected to change as a result of this proposed round-trip +transaction and thus, the transaction lacked commercial substance under IFRS. + +21. Because of the agreement to repurchase cannabis from Company A, Cronos +improperly recognized revenue from the sale transaction in the amount of $3.0 million CAD +($2.3 million USD). The improper revenue recognition represented 22% of Cronos’ gross +revenue recognized in that quarter. As a result, Cronos furnished materially inaccurate financial +statements on Form 6-K on November 11, 2019. + +5 Although Cronos was required to furnish financial statements prepared in accordance with IFRS in 2019, +Cronos subsequently assessed whether a restatement was necessary under GAAP. The pertinent provisions of IFRS +and GAAP, as applied here, are similar and require that a contract have commercial substance. See ASC 606-10-25- +1(d). + + +7 + + +22. In March 2020, Cronos furnished a Form 6-K/A for the third quarter of 2019 that +restated its quarterly financial results by, among other things, excluding revenue associated with +the sale of biomass to Company A in September 2019. + +VIOLATIONS + +23. As a result of the conduct described above, Hilson willfully violated Section 17(a) +of the Securities Act, which prohibits fraudulent conduct in connection with the offer or sale of +securities, and Section 10(b) of the Exchange Act and Rules 10b-5(a) and 10b-5(c) thereunder, +which prohibit fraudulent conduct in connection with the purchase or sale of securities. + +24. As a result of the conduct described above, Hilson willfully violated Section +13(b)(5) of the Exchange Act which prohibits anyone from knowingly circumventing or +knowingly failing to implement a system of internal accounting controls, or knowingly falsifying +any book, record or account. Also, Hilson willfully violated Exchange Act Rule 13b2-1, which +prohibits any person from, directly or indirectly, falsifying or causing to be falsified, any book, +record or account subject to Exchange Act Section 13(b)(2)(A). + +25. As a result of the conduct described above, Hilson willfully violated Exchange +Act Rule 13b2-2, which prohibits any director or officer of an issuer from, directly or indirectly: +(a) making or causing to be made a materially false or misleading statement; or (b) omitting or +causing another person to omit to state a material fact necessary in order to make statements +made, in light of the circumstances under which such statements were made, not misleading, to +an accountant in connection with financial statement audits, reviews, or examinations or the +preparation or filing of any document or report required to be filed with the Commission. + +26. As a result of the conduct described above, Hilson willfully aided and abetted and +caused Cronos’ violations of Section 13(a) of the Exchange Act and Rules 13a-16 and 12b-20 +promulgated thereunder, which require foreign private issuers with securities registered under +Section 12 of the Exchange Act to furnish certain reports on Forms 6-K to the Commission and +mandate that such reports contain such further material information necessary to make the required +statements not misleading. + +27. As a result of the conduct described above, Hilson willfully aided and abetted and +caused Cronos to violate Section 13(b)(2)(A) of the Exchange Act, which requires reporting +companies to make and keep books, records and accounts which, in reasonable detail, accurately +and fairly reflect their transactions and dispositions of their assets. + +28. As a result of the conduct described above, Hilson willfully aided and abetted and +caused Cronos to violate Section 13(b)(2)(B) of the Exchange Act, which requires reporting +companies to devise and maintain a system of internal accounting controls sufficient, among other +things, to permit preparation of financial statements in conformity with GAAP or any other criteria + +8 + +applicable to such statements. Hilson also willfully aided and abetted and caused Cronos’ +violation of Exchange Act Rule 13a-15(a), which requires issuers to maintain internal control over +financial reporting. + +FINDINGS + +29. Based on the foregoing, the Commission finds that Hilson willfully violated +Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and +Rules 10b-5(a), 10b-5(c), 13b2-1 and 13b2-2 thereunder and willfully aided and abetted and +caused Cronos’ violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act +and Rules 12b-20, 13a-15(a) and 13a-16 thereunder. + +RELATED SETTLEMENT + +30. Hilson has entered into a settlement agreement with the Ontario Securities +Commission (“OSC”) that involves misconduct related to certain of the findings in the Order. +Hilson acknowledges that the Commission is not imposing a civil penalty on him based on his +anticipated payment of $70,000 CAD (approximately $54,000 USD) as part of his settlement +agreement with the OSC. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Hilson’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Respondent shall cease and desist from committing or causing any violations and +any future violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), +13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-15(a), 13a-16, 13b2-1, +and 13b2-2 promulgated thereunder. + +B. Respondent is prohibited for three years from the date of this Order from acting as +an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of +the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act. + +C. Respondent is denied the privilege of appearing or practicing before the +Commission as an accountant. + +D. After three years from the date of the Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the attention of +the Office of the Chief Accountant. + + +9 + +E. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Respondent +shall submit a written statement attesting to an undertaking to have Respondent’s work reviewed +by the independent audit committee of any public company for which Respondent works or in +some other manner acceptable to the Commission, as long as Respondent practices before the +Commission in this capacity and will comply with any Commission or other requirements related +to the appearance and practice before the Commission as an accountant. + +F. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Exchange Act, as a preparer or reviewer, or as a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission, Respondent shall +submit a statement prepared by the audit committee(s) with which Respondent will be associated, +including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Respondent will be associated; + +2. A description of Respondent’s role on the specific audit committee(s) with +which Respondent will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Respondent’s service on the specific +audit committee; and + +5. A statement noting whether Respondent will be able to act unilaterally on behalf +of the Audit Committee as a whole. + +G. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Respondent must be +associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (the “PCAOB”) and Respondent shall submit the following additional +information: + +1. A statement from the public accounting firm (the “Firm”) with which +Respondent is associated, stating that the firm is registered with the PCAOB in +accordance with the Sarbanes-Oxley Act of 2002; + + +10 + +2. A statement from the Firm with which the Respondent is associated that the +Firm has been inspected by the PCAOB and that the PCAOB did not identify +any criticisms of or potential defects in the Firm’s quality control system that +would indicate that Respondent will not receive appropriate supervision; and + +3. A statement from Respondent indicating that the PCAOB has taken no +disciplinary actions against Respondent since seven (7) years prior to the date of +the Order other than for the conduct that was the basis for the Order. + +H. In support of any application for reinstatement, Respondent shall provide +documentation showing that Respondent is currently licensed as a Chartered Professional +Accountant and that Respondent has resolved all other disciplinary issues with any applicable +boards of accountancy. If Respondent is not currently licensed as a Chartered Professional +Accountant, Respondent shall provide documentation showing that Respondent’s licensure is +dependent upon reinstatement by the Commission. + +I. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders in this +proceeding or any related Commission proceedings, including any orders +requiring payment of disgorgement or penalties; + +2. That Respondent undertakes to notify the Commission immediately in writing if +any information submitted in support of the application for reinstatement +becomes materially false or misleading or otherwise changes in any material +way while the application is pending; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a basis +for a forthwith suspension from appearing or practicing before the Commission +pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +(a) has not been charged with a felony or a misdemeanor involving +moral turpitude as set forth in Rule 102(e)(2) of the +Commission’s Rules of Practice, except for any charge +concerning the conduct that was the basis for the Order; + +(b) has not been found by the Commission or a court of the United +States to have committed a violation of the federal securities + +11 + +laws, and has not been enjoined from violating the federal +securities laws, except for any finding or injunction concerning +the conduct that was the basis for the Order; + +(c) has not been charged by the Commission or the United States +with a violation of the federal securities laws, except for any +charge concerning the conduct that was the basis for the Order; + +(d) has not been found by a court of the United States (or any +agency of the United States) or any state, territory, district, +commonwealth, or possession, or any bar thereof to have +committed an offense (civil or criminal) involving moral +turpitude, except for any finding concerning the conduct that +was the basis for the Order; and + +(e) has not been charged by the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, civilly or criminally, with having committed an act +of moral turpitude, except for any charge concerning the conduct +that was the basis for the Order. + +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis for +the Order. + +6. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by any State Board of Accountancy, or other regulatory body. + +J. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for +entities regulated by the Commission, and the persons to whom +Respondent reported for such work; and + + +12 + +2. Respondent’s plans for any future appearance or practice before the +Commission. + +K. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +L. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under Paragraph K, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +M. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph K, the burden shall be on the Respondent to provide an explanation as +to the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + +N. If the Commission declines to reinstate Respondent pursuant to Paragraphs L and +M, it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an accountant. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4360.txt b/raw/aaer/2022/AAER-4360.txt new file mode 100644 index 0000000000000000000000000000000000000000..960c089dc3aaa3c8cf6f16ccdf0b62c9bcc18821 --- /dev/null +++ b/raw/aaer/2022/AAER-4360.txt @@ -0,0 +1,356 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11129 / November 1, 2022 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96193 / November 1, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4360 / November 1, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21223 + + +In the Matter of + +Koppers Holdings 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 and in the +public interest that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section +8A of the Securities Act of 1933 (“Securities Act”) and Section 21C of the Securities Exchange +Act of 1934 (“Exchange Act”), against Koppers Holdings Inc. (“Respondent” or “Koppers”). + +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 + +2 + + +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. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds that: + +Summary + +1. This matter concerns Koppers’ failure to disclose material information about its debt +reduction efforts that rendered statements it made materially misleading during fiscal year 2019. +Throughout 2019, Koppers emphasized debt reduction and regularly reported two debt-related +non-GAAP financial measures – net debt and net leverage ratio – in its press releases for +quarterly earnings which were attached to its Forms 8-K furnished to the Commission at +quarterly and year-end, and during its earnings calls.1 In connection with its 2018 year-end press +release, Koppers specifically announced that it planned to reduce debt by $80 million during +fiscal year 2019. Koppers continued to highlight its debt reduction goal throughout the 2019 +fiscal year and announced that it had achieved its goal in its 2019 year-end earnings +announcement. + +2. As recognized by Koppers, the company’s high debt and leverage were concerning +to investors. These measures were also emphasized by analysts who covered Koppers. Koppers +itself tracked its debt on a daily basis. + +3. However, to achieve its announced debt reduction target, Koppers delayed making +material amounts of overdue payments to vendors. For instance, at fiscal year-end 2019, Koppers +delayed the payment of approximately $72 million in vendor invoices, which corresponded to over +85% of its reported $81.6 million net debt reduction for 2019. Koppers then paid those past due +invoices the week after the end of the reporting period through a drawdown of its revolving line of +credit, thereby reversing most of its reported 2019 net debt reduction. Accordingly, Koppers’ net +debt reduction was only temporary and was reversed soon after the close of each reporting period +of 2019. Without these actions, Koppers would not have achieved the 2019 year-end debt +reduction goal it had highlighted to investors. + + + +1 A non-GAAP financial measure is a numerical measure of a registrant’s historical or future financial performance, financial +position, or cash flows that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that +are included in the most directly comparable measure calculated and presented in accordance with Generally Accepted +Accounting Principles (“GAAP”) in the statement of income, balance sheet or statement of cash flows (or equivalent +statements) of the issuer; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that +are excluded from the most directly comparable measure so calculated and presented. 17 C.F.R. § 244.101(a)(1). A non- +GAAP financial measure does not include financial measures required to be disclosed by GAAP. Id. § 244.101(a)(3). +3 + + +4. As a result of Koppers’ failure to disclose the impact of its debt reduction practices, +Koppers’ public statements were materially misleading. In particular, throughout 2019, Koppers +made positive statements regarding its debt reduction efforts, goals, and the ultimate achievement +of the 2019 goal, without disclosing its practice of delaying significant payments on past due +vendor invoices. Koppers also failed to disclose that without these practices, it could not have met +the debt reduction goal it highlighted to investors for 2019 nor that the net debt reduction the +company announced was temporary and soon reversed after the close of the quarter. + +5. As a result of this conduct, Koppers violated Section 17(a)(3) of the Securities Act, +Section 13(a) of the Exchange Act, Exchange Act Rules 12b-20 and 13a-11, and Rule 100(b) of +Regulation G thereunder. + +Respondents + +6. Koppers Holdings Inc., a Pennsylvania corporation headquartered in Pittsburgh, +Pennsylvania, is a global provider of wood products, wood treatment chemicals, and carbon +compounds. Koppers’ common stock is registered with the Commission pursuant to Section 12(b) +of the Exchange Act, and its shares trade on the New York Stock Exchange under the ticker “KOP.” +Koppers files periodic reports, including Forms 10-K and 10-Q with the Commission, pursuant to +Section 13(a) of the Exchange Act and the related rules thereunder. On February 27, 2020, +contemporaneous with its 2019 fourth quarter earnings release, Koppers filed a 424B3 prospectus +supplement for an at-the-market offering. Substantially all of Koppers’ operations are conducted +through its sole operating subsidiary, Koppers Inc. + +FACTS + +Koppers Emphasized Reducing Net Debt and Net Leverage Ratio + +7. Koppers has a long history of repurposing steel production byproducts. In 2013, +these product lines accounted for 60% of Koppers’ revenue. However, in 2014, Koppers began a +reorientation of its business around wood preservation products; this entailed facility consolidation +and debt-funded acquisitions. To that end, Koppers purchased a chemical company in 2014, a +utility pole company in 2018, and a railroad tie disposal company in 2018. As a result, by the end +of 2018, Koppers’ debt and leverage exceeded that of its peers. + +8. At the start of 2019, Koppers announced debt reduction as one of three main areas +of focus for the year. Koppers used two non-GAAP financial measures to communicate its debt +profile: “net debt” which it defined as total debt minus cash and “net leverage ratio” which it +defined as the ratio of net debt to trailing twelve month adjusted earnings before interest, taxes, +depreciation and amortization. For 2019, Koppers announced a goal of reducing net debt by $80 +million by year-end and achieving a net leverage ratio of between 3.8 and 4.1. Koppers closely +monitors its net debt against its expected adjusted earnings. In fact, Koppers’ net debt was the only +measure which was tracked on a daily basis and distributed to senior management. +4 + + + +9. Koppers understood that investors were concerned with its high debt and leverage. +In February 2020, on the year-end 2019 earnings call, Koppers explained, “It's been clear for some +time that the investment community has concerns about our leverage although just about every +other measure of performance and risk has improved from where we started five years ago.” +Koppers was also regularly asked about its debt in meetings with investors. + +10. Analysts covering Koppers also emphasized the importance of debt reduction to the +company’s health and stock price improvement and noted that the company expected to use its +historically higher cash flows in the second half of 2019 to pay down debt. For instance, in +August 2019, one analyst wrote: “We do expect a significant increase in free cash flow generation +which will be used to reduce debt and move enterprise value from debt to equity holders.” +Similarly, in October 2019, an analyst wrote: “Our investment thesis has been underpinned by debt +pay down and improving operating efficiency.” Another analyst titled his October 2019 report +“Upside Hinges on Debt Reduction, Productivity Gains” and still another wrote in November +2019, “Despite levering up in the past for acquisitions, the company has shown an ability to reduce +debt through profit generation. . . . The company is focused on reducing its leverage to 3.0x by the +end of 2020.” + +Koppers’ Undisclosed Practice for Achieving Debt Reduction and Misleading 2019 +Disclosures + +11. Throughout 2019, Koppers discussed its net debt and net leverage ratio on quarterly +earnings calls as well as in press releases for quarterly earnings, which were attached to Forms 8-K +it furnished to the Commission. On each quarterly and year-end call for 2019, Koppers reemphasized +its year-end debt reduction goals and highlighted its progress towards achieving those goals. + +12. However, Koppers did not disclose material information about its reported debt +reduction. Every quarter, Koppers delayed paying its vendors beyond the payment terms of their +invoices. Koppers had the ability to pay its vendors, but it chose not to do so in order to meet its net +debt targets. Koppers delayed these vendor payments en masse until after the reporting period had +ended, excepting only critical vendors to avoid disrupting the operations of the company. Then, +within a week after the close of the reporting period, Koppers would draw down from its +revolving line of credit to pay the past due vendor invoices and thereby materially increase its net +debt and net leverage ratio. Indeed, by the time Koppers was announcing progress towards debt +reduction for the quarter, a significant portion of that reduction had already been reversed. + + +5 + + +13. In its first quarter 2019 press release, Koppers stated, “The [net leverage] ratio is +projected to be in the range of 3.8x to 4.1x at December 31, 2019. The company continues to focus +on debt repayment and plans to reduce debt by a minimum of $80 million in 2019.” For the +quarter, the company reported net debt of $974.6 million and a net leverage ratio of 4.8. However, +Koppers delayed about $48.1 million in past due vendor payments to achieve this debt level. If it +had not done so, Koppers would have had a net debt of over $1.02 billion and a net leverage ratio +of 5.1. + +14. In its second quarter earnings press release, Koppers stated, “We continue to have a +positive story to tell, starting with our strong first-half performance, which keeps us squarely on +track to meet or exceed our financial goals for 2019…We should see operating cash flows improve +in the second half of the year as typically occurs and in turn, this will allow us to focus on our near- +term priority of reducing leverage and risk, which we believe will have a strong impact on +improving total shareholder return.” During the earnings call, Koppers similarly highlighted its +progress and that it was on track to meet its announced goal of reducing net debt by $80 million +by year end. The company reported net debt of $965.1 million and a net leverage ratio of 4.6. +However, Koppers did not disclose that it had delayed approximately $24 million in past due +vendor payments to achieve this debt level. Had it not done so, Koppers would have had a net debt +of over $989.1 million and a net leverage ratio of 4.7. + +15. In its third quarter earnings press release, Koppers stated that net debt was lower +from year end 2018 by $31.4 million “consistent with the company’s focus on debt reduction. At +September 30, 2019, the company’s net leverage ratio was 4.2, and a decrease from 4.6 at June 30, +2019.” Koppers reiterated its debt reduction guidance to reduce debt by $80 million by year end +and stated “we remain committed to further paying down debt in order to reduce leverage and risk +to create shareholder value.” The company reported net debt of $918.4 million and a net leverage +ratio of 4.2. However, it did not disclose that to achieve this debt level, it delayed $20 million in +past due vendor payments. Had it not done so, Koppers would have had a net debt of over +$938.4 million and a net leverage ratio of 4.3. + +16. On February 18, 2020, Koppers provided a preview of its year-end operating +results which underperformed the company’s guidance and the consensus analysts’ estimates for +earnings per share and revenue. However, the company announced that it achieved its debt +reduction goals, stating, “On a year-over-year basis, the net debt was lower by $81.6 million, +which reflects our relentless focus on debt reduction.” Notwithstanding the disappointing quarter, +the company stated “On the positive side, we had a very strong fourth quarter cash flow, which +has brought our net debt at year-end to below $870 million.” In its February 27, 2020 earnings +announcement, Koppers confirmed its $81.6 million reduction of net debt and reported that “The +company’s net leverage ratio was 4.1 at December 31, 2019, compared with 4.2 on a pro forma +basis at December 31, 2018.” On the same day, Koppers filed an automatic shelf registration on +Form S-3 along with a prospectus supplement for an at-the-market offering. + + +6 + + +17. However, Koppers’ announced $81.6 million net debt reduction was only made +possible by delaying $72 million in past due vendor payments. If Koppers had not delayed these +payments, the company would not have met its net debt reduction target and would have reduced +net debt by only $9.6 million as of year-end 2019. Similarly, its net leverage ratio would have +been 4.5 - a leverage ratio higher, not lower, than its prior year reported leverage ratio of 4.2. +Indeed, shortly after the close of the year-end, Koppers paid the delayed vendor payments and its +net debt and net leverage ratios returned to these higher levels shortly after the end of the +reporting period. + +18. Koppers’ debt reduction was material to investors in assessing Koppers’ execution +of its business transition, its achievement of its own guidance and goals, and the financial risk +associated with its high leverage. But Koppers’ public statements created the impression that +Koppers reduced its debt by improving the company’s cash flow. Knowing that the reported debt +reduction was achieved by means that would be reversed soon after the end of a reporting period +would have been material to investors’ evaluation of Koppers’ statements about debt reduction. +Koppers’ failure to provide that material information rendered those statements materially +misleading. + +Violations + + +19. Section 17(a)(3) of the Securities Act, makes it unlawful, in the offer or sale of +securities to engage in any transaction, practice, or course of business which operates or would +operate as a fraud or deceit upon the purchaser. Negligence is sufficient to establish violations of +Section 17(a)(3); no finding of scienter is required. Aaron v. SEC, 446 U.S. 680, 696-97 (1980). +As a result of the conduct described above, Koppers violated Section 17(a)(3) of the Securities Act. + +20. Section 13(a) of the Exchange Act and Rule 12b-20 and 13a-11 promulgated +thereunder require issuers of securities registered pursuant to Section 12 of the Exchange Act to +file with the Commission accurate current reports on Form 8-K that contain material information +necessary to make the required statements made in the reports not misleading. As a result of the +conduct described above, Koppers violated Section 13(a) of the Exchange Act, and Rule 12b-20 +and 13a-11 promulgated thereunder. + +21. Rule 100(b) of Regulation G of the Exchange Act, prohibits registrants from +making public a non-GAAP financial measure that contains an untrue statement of material fact or +omits to state a material fact necessary in order to make the presentation of the non-GAAP +financial measure, in light of the circumstances under which it is presented, not misleading. As a +result of the conduct described above, Koppers violated Rule 100(b) of Regulation G of the +Exchange Act. + + + +7 + + +Koppers’ Remedial Efforts + +In determining to accept the Offer, the Commission considered remedial acts promptly +undertaken by Respondent, including engaging an outside consultant to identify and adopt +remedial measures strengthening policies and procedures relating to accounts payable and non- +GAAP disclosures, and cooperation afforded to the Commission staff. + +IV. + +In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent’s Offer. + +Accordingly, pursuant to Section 8A of the Securities Act and 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 Section 17(a)(3) of the Securities Act, Section 13(a) of the Exchange Act, +Exchange Act Rules 12b-20 and 13a-11, and Rule 100(b) of Regulation G thereunder. + +B. Respondent shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $1.3 million to the Securities and Exchange Commission for transfer to +the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + + +8 + + +Payments by check or money order must be accompanied by a cover letter identifying Koppers +Holdings, 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 Carolyn Welshhans, 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. + +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/2022/AAER-4361.pdf b/raw/aaer/2022/AAER-4361.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ba272bf71e5ff5bf28659b46a59a909e0fbe9155 Binary files /dev/null and b/raw/aaer/2022/AAER-4361.pdf differ diff --git a/raw/aaer/2022/AAER-4361.txt b/raw/aaer/2022/AAER-4361.txt new file mode 100644 index 0000000000000000000000000000000000000000..fc585845cc2a5a73071e294593934b90665215a1 --- /dev/null +++ b/raw/aaer/2022/AAER-4361.txt @@ -0,0 +1,37 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96196 / November 1, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4361 / November 1, 2022 + +Admin. Proc. File No. 3-18292 + + +In the Matter of + +GREGORY A. WAHL, CPA, MICHAEL +DEUTCHMAN, CPA, and GEORGIA CHUNG, CPA + + + + + + + +ORDER EXTENDING TIME TO ISSUE DECISION + + The Commission has determined, in its discretion, that it is appropriate to extend by 90 +days the period within which the decision in this matter may be issued. Accordingly, IT IS +ORDERED that such period be, and hereby is, extended to January 30, 2023. + + By the Commission. + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4362.txt b/raw/aaer/2022/AAER-4362.txt new file mode 100644 index 0000000000000000000000000000000000000000..806ea8925e9d19c28bb6db40b51948a306e4f259 --- /dev/null +++ b/raw/aaer/2022/AAER-4362.txt @@ -0,0 +1,67 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96224 / November 3, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4362 / November 3, 2022 + +Admin. Proc. File No. 3-21139 + + +In the Matter of + +IRA S. VIENER, CPA + + +ORDER + +On September 22, 2022, the Securities and Exchange Commission issued an Order +Instituting Administrative Proceedings (“OIP”) against Ira S. Viener, CPA, pursuant to Sections +4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules +of Practice.1 In compliance with the statutory provision governing cease-and-desist proceedings, +the OIP specified that a “public hearing before the Commission for the purpose of taking +evidence . . . shall be convened not earlier than 30 days and not later than 60 days” from service +of the OIP.2 The statute also provides that “an earlier or later date” for the hearing may be “set +by the Commission with the consent of any respondent so served.”3 +The Division of Enforcement served Viener with the OIP on October 14, 2022.4 As a +consequence, in the absence of Viener’s consent to a later hearing date, a public hearing will be + +1 Ira S. Viener, CPA, Exchange Act Release No. 95884, 2022 WL 4445472 (Sept. 22, +2022). +2 Id. at *8. +3 15 U.S.C. § 78u-3(b). +4 On October 25, 2022, the Division filed a status report stating that it mailed a copy of the +OIP to Viener’s counsel at the counsel’s address in New York City. The status report appended +tracking information showing delivery of the certified mailing on October 14, 2022. This +information is sufficient for us to conclude that service was effected. See Rule of Practice +141(a)(2)(i), 17 C.F.R. § 201.141(a)(2)(i) (providing that service on an individual can be made +2 + +set for a date on or before December 13, 2022. To facilitate the orderly and expeditious +resolution of this matter, it is ORDERED that the parties shall file a statement advising the +Commission of any agreement to a later hearing date (or a statement that no agreement could be +reached) by November 10, 2022. In the event the parties do not reach an agreement by that date, +this order does not preclude the parties from reaching such an agreement subsequently. The +Commission will specify further proceedings by subsequent order. +The parties’ attention is directed to the most recent amendments to the Commission’s +Rules of Practice, which took effect on April 12, 2021, and which include e-filing requirements.5 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + +by delivering a copy of the OIP to the individual’s “agent authorized by appointment or by law +to receive such notice” and “obtaining confirmation of receipt” of the mailing). +5 Amendments to the Commission’s Rules of Practice, Exchange Act Release No. 90442, +2020 WL 7013370 (Nov. 17, 2020), 85 Fed. Reg. 86,464, 86,474 (Dec. 30, 2020), +https://www.sec.gov/rules/final/2020/34-90442a.pdf; Instructions for Electronic Filing and +Service of Documents in SEC Administrative Proceedings and Technical Specifications, +https://www.sec.gov/efapdocs/instructions.pdf. The amendments impose other obligations such +as a redaction and omission of sensitive personal information requirement. Amendments to the +Commission’s Rules of Practice, 85 Fed. Reg. at 86,465-81. \ No newline at end of file diff --git a/raw/aaer/2022/AAER-4367.txt b/raw/aaer/2022/AAER-4367.txt new file mode 100644 index 0000000000000000000000000000000000000000..6eae0a71a4588189112f2b77a788bc8bc902d5a8 --- /dev/null +++ b/raw/aaer/2022/AAER-4367.txt @@ -0,0 +1,104 @@ + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96349 / November 18, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4367 / November 18, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21242 + +In the Matter of +DANIEL MOSER +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Daniel +Moser (“Respondent” or “Moser”) 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 findings in Paragraph +III.2 below and consents to the entry of this Order Instituting Public Administrative Proceedings + +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 +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. Moser served as controller of FTE Networks, Inc. (“FTE”), from April 2017 until +May 2019. Moser has never been licensed as a CPA. FTE was, at all relevant times, a Nevada +corporation headquartered in New York, New York and Naples, Florida. FTE’s common stock +was registered with the Commission pursuant to Section 12(b) of the Securities Exchange Act of +1934 (“Exchange Act”) and traded on the New York Stock Exchange under the ticker symbol +FTNW from December 14, 2017 until December 17, 2019. Prior to that, FTE’s common stock +was registered with the Commission pursuant to Section 12(g) of the Exchange Act and traded +on the OTC Pink marketplace as FTNW. Currently, FTE’s common stock is not publicly traded +on any exchange nor quoted on the OTC Pink marketplace. However, its common stock remains +registered pursuant to Section 12(g) of the Exchange Act. + +2. On October 12, 2022, a final judgment was entered against Moser, among other +things permanently enjoining him from future violations of Sections 10(b) and 13(b)(5) of the +Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and aiding and abetting violations +of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and +13a-13 thereunder, in the civil action entitled Securities and Exchange Commission v. Daniel +Moser, Case No. 22-cv-00629, in the United States District Court for the Middle District of +Florida. + +3. The Commission’s complaint alleged, among other things, that Moser, at the +direction of the former Chief Executive Officer and Chief Financial Officer of FTE, participated +in a fraudulent scheme which resulted in FTE filing materially false and misleading financial +statements in the company’s annual report on Form 10-K for the fiscal years ended December 31, +2016 and December 31, 2017, and in the company’s quarterly reports on Form 10-Q for fiscal +year 2017. The Complaint alleged that Moser, among other things, sent documents to FTE’s +auditor and prepared other documents that falsely recognized and explained fictitious revenue on +FTE’s 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 Moser’s Offer. + +Accordingly, it is hereby ORDERED, effective immediately, that: + 3 + + A. Moser 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/2022/AAER-4368.txt b/raw/aaer/2022/AAER-4368.txt new file mode 100644 index 0000000000000000000000000000000000000000..bfccd55cd95088529a33f75b01a885944a74a6c7 --- /dev/null +++ b/raw/aaer/2022/AAER-4368.txt @@ -0,0 +1,406 @@ +1 + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 96529 / December 19, 2022 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4368 / December 19, 2022 + +ADMINISTRATIVE PROCEEDING +File No. 3-21255 + + +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 Honeywell International Inc. +(“Honeywell” or “Respondent”). +II. +In anticipation of the institution of these proceedings, Honeywell has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over it and the subject matter of these proceedings, and consents to the entry of this +Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities +Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as +set forth below. + +In the Matter of + +HONEYWELL +INTERNATIONAL INC. + +Respondent. +III. +On the basis of this Order and Honeywell’s Offer, the Commission finds1 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 (“FCPA”) by +Honeywell International Inc. (“Honeywell”), in connection with bribery schemes in Brazil +and Algeria. In Brazil, Honeywell’s U.S. wholly-owned subsidiary, Honeywell UOP +(“UOP”), which, with the assistance of an intermediary, offered as much as $4 million to a +Brazilian official to win a contract with the Brazilian state-owned oil company, Petróleo +Brasileiro S.A. – Petrobras (“Petrobras”). In Algeria, employees of the Honeywell Process +Solutions (“HPS”) business unit, with the assistance of an intermediary, paid money to an +Algerian government official to secure a contract amendment with La Société Nationale pour +la Recherche, La Production, Le Transport, la Transformation, et la Commercialisation des +Hydrocarbures (“Sonatrach”), the Algerian state-owned oil company. Honeywell’s books +and records were not accurately maintained in connection with the schemes and it failed to +have sufficient internal accounting controls in place to detect or prevent the misconduct. +RESPONDENT +2. Honeywell International Inc. (“Honeywell”), incorporated in Delaware, is a +multinational manufacturing and technology company headquartered in Charlotte, North +Carolina. Honeywell’s shares are registered with the Commission pursuant to Section 12(b) of +the Exchange Act and trade on the NASDAQ Stock Exchange under the symbol “HON.” At +the time of the relevant transactions, Honeywell operated through three business segments: (i) +Aerospace, (ii) Automation and Control Solutions (“ACS”), and (iii) Performance Materials +and Technologies (“PMT”). Honeywell Process Solutions (“HPS”) is one of Honeywell’s +business units that at the time reported to Honeywell through ACS. +OTHER RELEVANT ENTITIES +3. Honeywell UOP (“UOP”) is a wholly-owned subsidiary of Honeywell with +offices in Des Plaines, Illinois. UOP reported to Honeywell through the PMT business segment +and at all relevant times its books and records were consolidated into the books and records of +Honeywell. +4. Honeywell S.A. Belgique (“Honeywell Belgium”) is a wholly-owned subsidiary +of Honeywell with offices in Diegem, Belgium. Honeywell Belgium reported to Honeywell +through the HPS business unit, and at all relevant times its books and records were consolidated +into the books and records of Honeywell. +5. Petróleo Brasileiro S.A. – Petrobras (“Petrobras”) is an integrated energy + +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 + +company headquartered in Rio de Janeiro, Brazil. The Brazilian government owns +approximately 50.26% of Petrobras’s common shares with voting rights, and the Brazilian +Economic and Social Development Bank controls an additional 9.87% of Petrobras’s common +shares. Petrobras’s common and preferred stock is registered with the Commission pursuant to +Section 12(b) of the Exchange Act and trades on the New York Stock Exchange in the forms of +ADRs under the symbols “PBR” and “PBR.A,” respectively. +6. La Société Nationale pour la Recherche, La Production, le Transport, la +Transformation, et la Commercialisation des Hydrocarbures (“Sonatrach”) is Algeria’s +national state-owned oil company, headquartered in Algiers, Algeria. +7. Brazil Agent is a small oil and gas consulting firm located in Rio de Janeiro, +Brazil. Brazil Agent, through its owner and director, acted as a consultant to UOP, and was an +agent of Honeywell, the “issuer,” as that term is used in the FCPA. +8. Monaco Agent was a Monaco-based company that acted as an intermediary and +consultant in the oil and gas industry. The Monaco Agent acted as a consultant to a Honeywell +subsidiary, and was an agent of Honeywell, the “issuer,” as that term is used in the FCPA. +FACTS +UOP and the Petrobras Scheme in Brazil +9. In 2008 and 2009, Petrobras developed the Premium Refinery (“Premium”) +project to design and construct two grassroots refineries to process heavy oil in Maranhão and +Ceará, Brazil. The bidding process had three phases: technical ranking, design competition, +and commercial valuation. At the time, Honeywell was interested in developing a stronger +foothold in the Brazilian oil industry. +10. In July 2009, Petrobras invited UOP and a number of other companies to +participate in the first phase of the bidding process. The companies submitted technical +proposals for the project, and UOP and two other companies received the highest technical +rankings from Petrobras to proceed to the second and third phases. +UOP Retained the Brazil Agent to Gain Access to High-Ranking Petrobras Officials +11. Sometime in April 2010, UOP began searching for a potential sales intermediary +to represent it in connection with the Premium project bid. UOP executives believed they +needed higher-level contacts at Petrobras to succeed in the bidding process and UOP’s +Petrobras account manager recommended the Brazil Agent, who said that he had access to +Petrobras’s downstream director responsible for the Premium project. +12. On May 31, 2010, UOP submitted an internal request for approval to retain the +Brazil Agent as a consultant on the Premium bid. The request, which called for a 3% sales +commission or $12 million, omitted the fact that the Brazil Agent’s work would entail +interacting with government officials and, at the direction of UOP’s regional sales director for +Latin America, it also falsely stated that UOP had known the Brazil Agent for two years. High- +4 + +level executives at Honeywell, including individuals at UOP and PMT, reviewed and approved +the request to retain the Brazil Agent in July 2010. The Brazil Agent and UOP finalized their +sales consultancy agreement on August 18, 2010. +13. Sometime between May and August 2010, the Brazil Agent and UOP’s +Petrobras account manager met with a Brazilian lobbyist with close ties to Petrobras’s +downstream director. At that meeting, UOP’s Petrobras account manager offered the Brazilian +lobbyist and Petrobras’s downstream director a portion of the consulting contract (1% to 3%) in +exchange for helping UOP win the Premium bid. UOP’s Petrobras account manager +subsequently met with Petrobras’s downstream director and the Brazilian lobbyist at a shopping +mall in Rio de Janeiro and they agreed that the Petrobras director would assist UOP in the +bidding process in exchange for a percentage of the Premium contract. +UOP Submitted the Winning Bid Based on +Information Provided by Petrobras’s Downstream Director +14. UOP emerged as the lead in the design contest by mid-July 2010, at which point +the bidders began to prepare their commercial proposals to Petrobras in connection with the +commercial phase of the bidding process. Only the commercial phase or phase three of the +bidding process remained. Beginning at or about the same time, UOP’s Petrobras account +manager emailed his immediate supervisors with updates of meetings with Petrobras’s +downstream director, the Brazilian lobbyist and the Brazil Agent in which he or the Brazil +Agent tried to obtain information on what to bid to win the commercial phase of the Premium +bidding process. In these communications, UOP’s Petrobras account manager and his +supervisors referred to Petrobras’s downstream director as the “King” and the Brazilian +lobbyist as the “King’s Assistant.” +15. UOP submitted an initial commercial bid of $425 million on July 28, 2010. +Petrobras’s technical buyer, who was at a lower decision-making level than Petrobras’s +downstream director, rejected UOP’s bid as far too high. +16. On August 18, 2010, UOP’s regional sales director for Latin America emailed +high-level UOP executives that “we are pushing the King to step up and intercede . . . . [the +King] is trying to pull the numbers and decisions up to his level in order to control.” Also on +August 18, 2010, UOP’s regional account manager for Latin America emailed UOP’s senior +management, urging him to sign the sales consultancy agreement between the Brazil Agent and +UOP that day and stating, “I want to get this back to [the Brazil Agent] as soon as possible, +because we are pushing the king to step up and intercede.” That same day, UOP submitted a +revised commercial bid of $348 million to Petrobras based on guidance provided by the +Petrobras downstream director. +17. On August 24, 2010 Petrobras’s technical buyer accepted UOP’s revised bid. +UOP also expected the Petrobras downstream director to prevent the technical buyer from +negotiating any further reductions in the contract price until October 8, 2010, when Petrobras +officially awarded UOP the Premium project. + +5 + +UOP Paid the Brazil Agent +18. UOP paid the Brazil Agent a total $10.4 million in commissions from a U.S. +bank account. In many instances, the UOP employee responsible for processing the Brazil +Agent’s commission payments calculated the Brazil Agent’s commission using numbers from +UOP’s invoice and neither asked for nor included an invoice from the Brazil Agent before +forwarding the payment request to Honeywell’s accounting group. The payment requests +lacked relevant information and when the Brazil Agent changed his company’s name and +wanted the commission payments routed to a Swiss bank account in the new company’s name, +she forwarded the payment requests without question. +19. Petrobras terminated the Premium contract due to financial and other +difficulties, making its last payment to UOP on October 9, 2014. UOP made its last payment to +the Brazil Agent on November 14, 2014. +20. In connection with the Brazil conduct above, Respondent obtained at least +$61,554,213 in profits to be disgorged to the Commission. +The Monaco Agent and the Sonatrach Scheme in Algeria +21. In November 2004, Honeywell Belgium contracted with Algeria’s state-owned +downstream oil company, La Société Nationale de Raffinage de Pétrole (“NAFTEC”), to use +HPS products to modernize the instrumentation and control systems at NAFTEC’s Arzew +refinery in Oran, Algeria. In 2008, Honeywell Belgium and NAFTEC renegotiated the +technical specifications for upgrading Zone 4 of the Arzew refinery. +22. In July 2009, Sonatrach absorbed NAFTEC in a restructuring of the state oil +industry. By at least late 2009, Sonatrach and Honeywell Belgium were at a standstill on Zone +4. The parties could not reach agreement concerning the construction schedule and the amount +of liquidated damages that Sonatrach believed Honeywell Belgium should pay for the delay. +Sonatrach’s downstream development director (“the Sonatrach official”) was a key decision +maker in the resolution of the disputed issues. +23. Beginning in early 2009, HPS’s regional general manager for Southern Europe +and North Africa (“the HPS Regional GM”) discussed retaining the Monaco Agent to develop +business opportunities for HPS in Algeria. On behalf of Honeywell Belgium, the HPS +Regional GM signed a memorandum of understanding with the Monaco Agent on November +26, 2010. A representative of the Monaco Agent signed the memorandum of understanding on +January 4, 2011. On February 6, 2011 Honeywell initiated a due diligence review of the +Monaco Agent, which was completed and approved on March 4, 2011. +A Honeywell Subsidiary Used +the Monaco Agent to Further the Scheme +24. On February 22, 2011, the HPS Regional GM and Sonatrach reached an oral +agreement on the liquidated damages and Zone 4 scheduling issues. The Monaco Agent was +6 + +not involved in the resolution of the Zone 4 issues or on any other aspect of the Arzew refinery +contract. That same day, the HPS Regional GM falsely informed Honeywell Belgium’s Arzew +refinery project manager by email that HPS had a new agreement with the Monaco Agent to +work on Zone 4 and other sales projects in Algeria. +25. Around this time, an executive of the Monaco Agent received a panicked phone +call from the HPS Regional GM asking him to make a pass-through payment to a group of +people in Europe who purportedly had helped Honeywell Belgium secure a contract with +Sonatrach. The Monaco Agent executive understood this to mean that the payment was +possibly a bribe. +26. The HPS Regional GM delegated the details of negotiating the pass-through +payment with the Monaco Agent to his subordinate, a regional sales manager at HPS. +According to the Monaco Agent, the HPS regional sales manager told him that the Monaco +Agent needed only to make the pass-through payment and it would receive a lump sum +payment from Honeywell. The HPS regional sales manager also explained that the Sonatrach +official was the source of Honeywell’s problems with Sonatrach. On March 22, 2011, an email +internal to the Monaco Agent provided contact details of a shell entity that Honeywell Belgium +“wants us to sign with” for purposes of the pass-through payment. +27. Sometime before April 19, 2011, the HPS regional sales manager engaged an +individual to work unofficially to help resolve the company’s problems with Sonatrach (the +“Consultant”). On April 19, 2011, the Consultant, on behalf of Honeywell Belgium, paid the +Sonatrach official $50,000 from a Swiss bank account and an additional $25,000 from the same +Swiss bank account on December 28, 2011. +28. During much of the spring of 2011, Sonatrach and Honeywell Belgium +continued to dispute the Zone 4 construction schedule, which Honeywell thought was too +aggressive. Sonatrach also threatened to transfer the work on Zone 4 to a competitor if +Honeywell Belgium did not agree to Sonatrach’s scheduling demands. On June 19, 2011, after +the first $50,000 payment to the Sonatrach official, Honeywell Belgium and Sonatrach +executed an amendment to the Arzew refinery contract memorializing the parties’ oral +agreement on the Zone 4 construction schedule and liquidated damages amount. +29. Two weeks later, the Monaco Agent and a Honeywell wholly-owned subsidiary +entered into a fictitious sales consultancy agreement whereby the Monaco Agent would +purportedly promote sales in Algeria for a 2% to 4.5% commission without exceeding +$500,000 per year. The agreement made no mention of Zone 4. Although the Monaco Agent +never achieved certain milestones required for payments over $50,000 or obtained any new +business for HPS as contemplated under the consulting agreement, the Monaco Agent was +nevertheless paid $300,000. +The Monaco Agent Repaid the Consultant Who Provided Funds +to a Sonatrach Official Through a Series of Transactions +30. On December 19, 2011, the Monaco Agent sent an invoice to the HPS Regional +GM requesting a “Lump Sum Fee of $300,000” in connection with “Sonatrach Arzew Refinery +7 + +– Change Order / Zone 4.” Thereafter, the HPS Regional GM sent a copy of the invoice to +Honeywell’s Arzew project manager, who had previously questioned the basis for the $300,000 +lump sum payment and thought it was higher than previously mentioned. The HPS Regional +GM reiterated that $300,000 was the agreed upon amount, and the project manager did not +question him further or raise the issue to anyone else at Honeywell. Shortly thereafter, the HPS +Regional GM forwarded the invoice to finance for their review and approval. +31. Honeywell Belgium approved the Monaco Agent’s invoice in late January 2012 +and, on February 22, 2012, Honeywell Belgium paid a lump sum of $300,000 to the Monaco +Agent, which was falsely recorded as a sales commission. Through a series of intermediary +transfers, the Monaco Agent used a portion of the money from Honeywell Belgium to repay the +Consultant who had paid the $75,000 in bribe payments to the Sonatrach official. The series of +intermediary transfers involved multiple U.S. correspondent banks located in New York. The +Monaco Agent admitted that it recorded the payments with internal codes the Monaco Agent +sometimes used for bribe payments. +32. In connection with the Algeria Conduct above, Honeywell obtained $3,118,350 +in profits to be disgorged to the Commission. +LEGAL STANDARDS AND FCPA VIOLATIONS +33. Under Section 21C(a) of the Exchange Act, the Commission may impose a +cease-and-desist order upon any person who is violating, has violated, or is about to violate any +provision of the Exchange Act or any rule or regulation thereunder, and upon any other person +that is, was, or would be a cause of the violation, due to an act or omission the person knew or +should have known would contribute to such violation. +Honeywell Violated Exchange Act Section 30A +34. The anti-bribery provisions of the FCPA, Section 30A of the Exchange Act, +make it unlawful for any issuer with a class of securities registered pursuant to Section 12 of +the Exchange Act, or any employee or agent of such issuer, to make use of the mails or any +means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, +promise to pay, or authorization of the payment of any money, or offer, gift or promise to give +anything of value to any foreign official for purposes of influencing any act or decision of such +foreign official in his official capacity in order to assist such issuer in obtaining or retaining +business for or with any person. As a result of the conduct described above Honeywell violated +Exchange Act Section 30A. +Honeywell Violated Exchange Act Section 13(b)(2)(A) +35. The books and records provision of the FCPA, Section 13(b)(2)(A) of the +Exchange Act, requires every issuer with a class of securities registered pursuant to Section 12 +of the Exchange Act to make and keep books, records, and accounts, which, in reasonable +detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. +As a result of the conduct described above, Honeywell violated Exchange Act Section +8 + +13(b)(2)(A). +Honeywell Violated Exchange Act Section 13(b)(2)(B) +36. Section 13(b)(2)(B) of the Exchange Act requires companies with a class of +securities registered under Section 12 of the Exchange Act to devise and maintain a system of +internal accounting controls sufficient to provide reasonable assurances that (i) transactions are +executed in accordance with management’s general or specific authorization; (ii) transactions +are recorded as necessary (I) to permit preparation of financial statements in conformity with +generally accepted accounting principles or any other criteria applicable to such statements, and +(II) to maintain accountability for assets; (iii) access to assets is permitted only in accordance +with management’s general or specific authorization; and (iv) the recorded accountability for +assets is compared with the existing assets at reasonable intervals and appropriate action is +taken with respect to any differences. As described above, Honeywell failed to implement a +system of internal accounting controls sufficient to provide reasonable assurances that +transactions were executed in accordance with management’s general or specific authorization +and that access to assets was permitted only in accordance with management’s general or +specific authorization. By this conduct, Honeywell violated Exchange Act Section 13(b)(2)(B). +Honeywell’s Remedial Actions and Cooperation +37. In determining to accept the Offer, the Commission considered remedial acts +undertaken by Honeywell and cooperation afforded the Commission staff. Honeywell +cooperated in the Commission’s investigation by identifying and timely producing key +documents identified in the course of its own internal investigation, providing the facts +developed in its internal investigation, and making current or former employees available to the +Commission staff, including those who needed to travel to the United States. +38. Honeywell’s remediation included: (i) strengthening its ethics and compliance +organization; (ii) terminating sales directors involved in the misconduct in Brazil and demoting +an employee with significant supervisory responsibilities over the misconduct in Brazil; (iii) +implementing a program to eliminate UOP’s use of sales agents altogether (as of 3Q 2021, +UOP had reduced its sales agent force by two-thirds); (iv) enhancing Honeywell’s policies and +procedures including with respect to due diligence of third parties (including consolidating the +due diligence process into one automated system and requiring third parties to submit quarterly +reports and FCPA certifications); (v) improving Honeywell’s financial controls over third +parties (including implementing digital end-to-end controls over payments to third party sales +agents and ensuring that payments to sales intermediaries are made by wire transfer to an +account belonging to the same party and to a bank account where the sales intermediary +resides); and (vi) enhancing training provided to Honeywell employees and sales intermediaries +regarding anti-corruption, controls, and other compliance issues. + + + +9 + + +39. UOP has entered into a three-year deferred-prosecution agreement with the +United States Department of Justice in which it acknowledges criminal responsibility for +criminal conduct relating to the findings in the Order concerning Brazil. +DISGORGEMENT AND NON-IMPOSITION OF A CIVIL PENALTY +40. Honeywell acknowledges that the Commission is not imposing a civil penalty +based upon the imposition of a $39,621,375 million criminal fine (after providing a 50% offset +for payments made to Brazilian authorities) as part of UOP’s resolution with the United States +Department of Justice concerning the conduct in Brazil. +41. The disgorgement and prejudgment interest ordered in paragraph IV.B is +consistent with equitable principles, does not exceed Respondent’s net profits from its +violations, and returning the money to Respondent would be inconsistent with equitable +principles. Therefore, in these circumstances, distributing disgorged funds to the U.S. Treasury +is the most equitable alternative. The disgorgement and prejudgment interest ordered in +paragraph IV.B shall be transferred to the general fund of the U.S. Treasury, subject to Section +21F(g)(3) of the Exchange Act. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the +sanctions agreed to in 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 Sections 30A, +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. +B. Respondent is liable to the U.S. Securities and Exchange Commission for +disgorgement of $64,672,563 and prejudgment interest of $16,485,630, for a total of +$81,158,193. Respondent shall receive a disgorgement and prejudgment interest offset of up to +$38,712,216 based on the U.S. dollar value (based on the exchange rate on the date of the +payment) of any disgorgement paid to the Controladoria-Geral de União (“CGU”)/Advocacia- +Geral de União (“AGU”) and the Ministério Publico Federal (“MPF”) reflected by evidence +acceptable to the Commission staff in its sole discretion, in a parallel proceeding against +Respondent in Federal Court in Brazil. Such evidence of payment shall include a copy of the +wire transfer or other evidence of the amount of the payment, the date of the payment, and the +name of the government agency to which payment was made. To receive this offset, +Respondent must make the above-identified payments within 90 days from the date of this +Order. Any amounts not paid as an offset within the specific time shall be immediately due to +the U.S. Securities and Exchange Commission. Respondent shall, within 30 days of the entry +of this Order, pay disgorgement of $33,895,456 and prejudgment interest of $8,550,521 for a +total payment of $42,445,977 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to the Exchange Act Section 21F(g)(3). If +10 + +timely payment is not made, additional interest shall accrue pursuant to SEC Rule of Practice +600. +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 Web site at +http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, +or United States postal money order, made payable to the +Securities and Exchange Commission and hand-delivered or +mailed to: + Enterprise Services Center + Accounts Receivable Branch + HQ Bldg., Room 181, AMZ- 341 + 6500 South MacArthur Boulevard Oklahoma City, OK 73169 + Payments by check or money order must be accompanied by a cover letter +identifying Honeywell as the Respondent in these proceedings, and the file number of +these proceedings; a copy of the cover letter and check or money order must be sent to +Charles Cain, Unit Chief, FCPA Unit, Division of Enforcement, Securities and +Exchange Commission, 100 F St., NE, Washington, DC 20549. + + By the Commission. + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4481.txt b/raw/aaer/2024/AAER-4481.txt new file mode 100644 index 0000000000000000000000000000000000000000..cfaf65878a67b4956189fd1c18133f4b971c658f --- /dev/null +++ b/raw/aaer/2024/AAER-4481.txt @@ -0,0 +1,550 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 99308 / January 10, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4481 / January 10, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-21824 + + +In the Matter of + +SAP SE, + +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 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 SAP SE (“SAP” 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 +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 SAP’s violations of the anti-bribery, books and records, and +internal accounting controls provisions of the Foreign Corrupt Practices Act (the “FCPA”). SAP is +a global software company headquartered in Walldorf, Germany. From at least December 2014 +through December 2018, SAP employed third-party intermediaries and consultants in various +schemes to make improper payments to government officials in order to obtain and retain business +in South Africa, Greater Africa (Malawi, Kenya, Tanzania, and Ghana), and Indonesia. +Additionally, an SAP Azerbaijan employee provided improper gifts to a government official in +order to obtain and retain business in Azerbaijan in January 2022. + +2. SAP failed to make and keep accurate books and records and failed to devise and +maintain a sufficient system of internal accounting controls necessary to detect and prevent the +improper payments. The bribes were inaccurately recorded as legitimate business expenses in +SAP’s books and records. SAP failed to implement sufficient internal accounting controls over the +engagement of, and payments to, third parties and lacked sufficient entity level controls over its +subsidiaries in South Africa, Greater Africa, Indonesia, and Azerbaijan. + +Respondent + +3. SAP SE is a European Union corporation headquartered in Walldorf, Germany. +SAP’s American Depositary Shares are registered with the Commission pursuant to Section +12(b) of the Securities Act of 1933, and listed on the New York Stock Exchange. SAP markets +its software all over the world through various country subsidiaries, including wholly-owned +subsidiaries in South Africa, Greater Africa (Malawi, Kenya, Tanzania, and Ghana), Indonesia, +and Azerbaijan, which SAP manages and supervises. SAP is a recidivist. In 2016, the +Commission charged SAP with books and records and internal accounting controls violations in +connection with a bribe scheme in Panama.2 + +Related Entities + +4. SAP South Africa Ltd. (“SAP South Africa”) is a Johannesburg, Gauteng +Province, South Africa-based wholly-owned subsidiary of SAP engaged in selling software in the +South African market. SAP South Africa is authorized by SAP to distribute, sell, license, and +sublicense software directly and indirectly to customers. SAP South Africa’s financial statements +are consolidated and reported in SAP’s financial statements. + +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 In the Matter of SAP SE, Exchange Act Release No. 77005 (Feb. 1, 2016). + 3 + +5. SAP Africa Ltd. (“SAP Africa”) is a Johannesburg, Gauteng Province, South +Africa-based wholly-owned subsidiary of SAP engaged in selling software in the Sub-Saharan +African market outside of South Africa. SAP Africa is authorized by SAP to distribute, sell, +license, and sublicense software directly and indirectly to customers. SAP Africa’s financial +statements are consolidated and reported in SAP’s financial statements. + +6. PT. SAP Indonesia (“SAP Indonesia”) is a Jakarta, Indonesia-based wholly-owned +subsidiary of SAP engaged in selling software in the Indonesian market. SAP Indonesia is +authorized by SAP to distribute, sell, license, and sublicense software directly and indirectly to +customers. SAP Indonesia’s financial statements are consolidated and reported in SAP’s financial +statements. + +7. SAP AZ LLC (“SAP Azerbaijan”) is a Baku, Azerbaijan-based wholly-owned +subsidiary of SAP engaged in selling software in the Azerbaijan market. SAP Azerbaijan is +authorized by SAP to distribute, sell, license, and sublicense software directly and indirectly to +customers. SAP Azerbaijan’s financial statements are consolidated and reported in SAP’s +financial statements. + +FACTS + +Background + +8. SAP sells software licenses and related services. Its operations are currently divided +into seven regions: (1) North America region, (2) Latin America/Caribbean (LAC) region, (3) the +Europe/Middle East/Africa (EMEA) North region, (4) EMEA South region, (5) the Middle and +Eastern Europe MEE region, (6) Asia Pacific/Japan region, and (7) Greater China region. +Revenues are allocated to these seven regions based on the location of the customer. SAP’s global +business is executed through its numerous subsidiaries and the subsidiaries’ financial statements +are consolidated into SAP’s financial statements. SAP conducts its business by using local +business partners, consultants, resellers, value added resellers and other intermediaries. + +9. While SAP uses third parties for a variety of legitimate business reasons, it knows +that the use of third parties can increase the risk of improper payments being made to secure +business. In the past, these included Business Development Partners (“BDPs”), which were +eligible to earn commissions for SAP sales on which they assisted. The BDP program was +terminated in 2018. + +10. During the relevant time frame, SAP’s internal policies and procedures for working +with third parties required employees to conduct due diligence to assess risk and ensure: (1) That a +third party had no relations (as a family member) to the SAP customer or a potential customer, and +(2) That the third party was not a government official, government employee, political party +official or candidate, or officer or employee of any public international organization or an +immediate family member of any of these. In addition, with respect to BDPs, all sales commission +contracts had to be in writing and clearly define the services to be provided and the related business + 4 +and payment terms. SAP subsidiaries and employees were required to use a model agreement that +included standard commission rates and to follow a standardized internal approval process, which +required the involvement and approval of the local legal department or compliance officer, the +subsidiary’s local managing director, and its local chief financial officer. In cases where a BDP +agreement required non-standard terms, regional management had to provide additional approvals. +The policy documents explicitly state that they were put into place to ensure that no relationship +with a third party would be used to inappropriately influence a business decision or pay bribes to +government officials. + +11. SAP’s wholly-owned subsidiaries—SAP South Africa, SAP Africa, SAP Indonesia +and SAP Azerbaijan—repeatedly violated these internal policies to engage in bribery schemes with +the help of third party intermediaries from at least December 2014, to obtain or retain business. +Because the payments were made by third parties acting outside of SAP’s own systems, SAP lacks +sufficient records to determine with specificity the full scope of the bribe schemes. + +SAP South Africa + +12. SAP South Africa retained multiple third party consultants in South Africa to +offer or pay bribes to government officials or intermediaries in order to obtain contracts with +public sector customers. SAP South Africa recorded the payments as legitimate business +expenses in SAP’s books and records, despite the fact that certain intermediaries could not show +that they provided the services for which they had been contracted. + +13. On December 23, 2014, SAP South Africa closed on a $4.4 million deal with South +African state-owned rail and logistics company, Transnet, with an intermediary third party (“SA +Intermediary 1”) purportedly acting as a BDP. SA Intermediary 1 is a South African tech +company, known for various corrupt business activities, and is controlled by a South African-based +family. According to the terms of the deal, SA Intermediary 1 was to receive a 10% commission +for the deal and was to perform certain deliverables. In reality, it did not perform any actual work +for SAP. There is no record of SA Intermediary 1 ever being present at meetings with Transnet, +nor does SA Intermediary 1 appear to have a credible IT background or experience. Furthermore, +bank records indicate that shortly after the deal closed, SA Intermediary 1 paid $562,215, +characterized as “loans,” to an individual known to be involved in making bribe payments. + +14. SAP South Africa and its employees used another intermediary also controlled by +the same South African-based family (“SA Intermediary 2”), which was also known as a conduit +for bribing government officials, to help it secure a September 30, 2015 contract valued at $6.58 +million with Transnet. SAP South Africa paid approximately $1 million in commission fees to SA +Intermediary 2, a South African 3D printing firm despite the fact that it provided no tangible +services to SAP. SAP South Africa and its employees knew about the red flags relating to SA +Intermediary 2’s ownership. The former director of SA Intermediary 2 admitted that the entity had +“no expertise” or skills to provide meaningful services on the Transnet deal and also said he had no +knowledge of SA Intermediary 2 providing any services. During an SAP-initiated audit of SA +Intermediary 2, the third party failed to provide evidence of any services performed. + + 5 +15. SAP South Africa again used SA Intermediary 2 in connection with a June 1, 2016 +contract with the South African Revenue Service. + +16. SAP South Africa also paid bribes in order to obtain a December 29, 2015 contract +with the City of Johannesburg valued at $13.16 million for a license consolidation. SAP did so +with the help of two BDPs, each of whom were contracted to receive a 10% commission. In +August 2016, an SAP South Africa account executive directed one of the partners to make an +improper ZAR 2.2 million (approximately $120,000) payment to an account for an entity known to +be involved with corrupt activities. Chat messages between the SAP South Africa local account +executive and a City of Johannesburg employee corroborate that the local account executive +directed, and the business partner made, the improper payment. In addition to these cash +payments, SAP South Africa paid for trips to New York for government officials in May and +September 2015, including the officials’ meals and golf outings on the trips. + +17. In November 2016, SAP South Africa closed a deal with Eskom, a state-owned +entity and the largest producer of electricity in South Africa, to renew software licenses for +approximately $28.58 million. Internally, SAP South Africa set aside several million dollars from +this renewal fee to pay SA Intermediary 3, a purported IT consultant on the Eskom project. SA +Intermediary 3, however, never performed any services. Instead, SAP South Africa’s Managing +Director instructed SAP South Africa employees to perform the consulting work in SA +Intermediary 3’s stead and still paid the entity a total of $1.6 million. Notably, officials at Eskom +approved these payments despite SA Intermediary 3’s absence on the project. SAP also retained +SA Intermediary 2 to perform vague services on Eskom contracts dated March, 2016 and +November 2016 that, as a 3D printing company, SA Intermediary 2 was unqualified to perform. +Regardless, SAP South Africa paid SA Intermediary 2 a total of $5.18 million in consulting fees. + +18. Finally, SAP South Africa used two local BDPs in connection with obtaining deals +valued at $35.4 million with South African public sector customer, Department of Water and +Sanitation (“DWS”) in December 2015 and July 2016. The local business partners were paid at a +14.9% commission rate, the maximum allowed under SAP policy without approval from the +Board. SAP South Africa employees engaged both BDPs at the highest commission percentage +allowed, staying under the 15% commission rate so as to avoid the need to obtain higher level +approvals, and authorized the payment despite the local partners’ failure to meet deliverables +relating to the DWS transactions. + +SAP Greater Africa + +19. SAP Africa used resellers to conduct business throughout Greater Africa, including +a Zimbabwe-based reseller (“GA Intermediary 1”) that was used to conduct business in Malawi, +Tanzania, Ghana, and Kenya. GA Intermediary 1 engaged in bid-rigging and arranged corrupt +payments to government officials in connection with SAP Africa deals in all four countries +between 2014 and 2018. + +20. GA Intermediary 1 helped SAP Africa improperly access tender documents to +obtain a December 29, 2017 contract with the Government of Malawi valued at $1,416,878 in + 6 +exchange for improper payments to Malawi government officials. GA Intermediary 1 benefited +from this deal as a reseller of the SAP products to the government. Emails indicate that certain +SAP Africa employees, including an account executive and a local sales director, knew of efforts +by employees at GA Intermediary 1 to access draft tender documents to influence the outcome of +the tender in SAP Africa’s favor. The CEO of GA Intermediary 1 emailed two SAP Africa sales +executives saying, “we have already seen the documents in confidence. Please keep this very +confidential.” One of those two sales executives sent the other an internal email stating, “[GA +Intermediary 1] has been ready for quite some time now—they got the script months ago—of +course from ‘internal friends.’” + +21. Again with the help of GA Intermediary 1, SAP Africa paid bribes to win a tender +for a June 2015 sales contract and a subsequent June 2016 contract with the Tanzania Ports +Authority (“TPA”), valued at $768,561 and $41,745, respectively. GA Intermediary 1 again +benefited from these deals as a reseller. Emails and documents show that the Kenya country +manager for GA Intermediary 1 shared TPA draft tender materials with an SAP Africa account +executive on a thumb drive in order to get information on bid specifications that could help win the +tender. SAP Africa executives contacted individuals known as bribe “facilitators” around the time +of the TPA tender to assist GA Intermediary 1 to pay bribes to TPA officials in exchange for the +materials that helped SAP Africa win the tender. + +22. SAP Africa worked with two reseller partners, GA Intermediary 1 and a second +intermediary (“GA Intermediary 2”), to pursue a 2016 contract with the Ghana National Petroleum +Corporation (“GNPC”) valued at $1,205,175. GA Intermediary 2 was unqualified for the project +and was retained for its political connections. Initially, GA Intermediary 1 tried to win the contract +on behalf of SAP Africa by offering to pay a company associated with a government official, “40% +of the total deal value” in exchange for unspecified “support services leading to the successful +award of the opportunity.” The “support services” to be performed were not legitimate, rather the +payment was in return for the government official’s help ensuring that GNPC would forego the +tender process and sole source the contract to GA Intermediary 1. Two senior SAP Africa +executives knew of and encouraged the arrangement. Emails indicate that SAP Africa provided +GA Intermediary 1 with the specifications needed for GNPC to justify sole sourcing the contract, +and then the intermediary passed those specifications to GNPC in order to win the tender. GA +Intermediary 1’s efforts ultimately failed, however, leaving GA Intermediary 2, with its political +connections, to secure the deal instead. + +23. SAP Africa again used GA Intermediary 1 to help it improperly influence a tender +by the Kenya Revenue Authority in 2015. Again, GA Intermediary 1 stood to benefit as the +reseller. SAP Africa violated its own internal processes and procedures regarding due diligence, +and the retention of third parties when it failed to properly vet GA Intermediary 1, and ignored +repeated red flags—including payment requests for vague and undefined deliverables— +indicating that GA Intermediary 1 was funneling money to make improper payments. + +24. While GA Intermediary 1 was suspended on September 12, 2018, after red flags +surfaced indicating it was paying bribes to officials at the Tanzania Ports Authority and the Kenya +Revenue Authority, SAP Africa allowed the reseller to start resales later in 2018 despite the + 7 +continuing presence of red flags. SAP Africa ultimately terminated GA intermediary 1 in July +2019. + +SAP Indonesia + +25. During the relevant time, the SAP Indonesia public sector market consisted +almost entirely of indirect sales through local Value Added Resellers (“VARs”). SAP Indonesia, +with its VARs, engaged in a variety of schemes in Indonesia to make, offer, or attempt to make +improper payments to government officials at eight state-owned-entities—Balai Penyedia dan +Pengelola Pemdiayaan Telekomunikasi dan Informatika (“BP3TI”), the Ministry of Maritime +Affairs and Fisheries, the Social Ministry, PT Pertamina, Pemda DKI, PT Mass Rapid Transit +(“MRT”) Jakarta, PT Angkasa Pura I, and PT Angkasa Pura II—to obtain or retain contracts +with those customers. The schemes were orchestrated by two SAP Indonesia account executives +who worked with at least one VAR (“Indonesia Intermediary 1”) known for a pattern of corrupt +business dealings and paying bribes. In some cases, SAP Indonesia and Indonesia Intermediary +1 used fake training invoices to issue payments that created slush funds to pay bribes. +Employees at Indonesia Intermediary 1 created shell companies to generate these false expenses. +Some of the false invoices generated kickback payments to employees at the Indonesia +Intermediary 1, some paid for customer excursions, and others generated cash payments to +government officials at state-owned entities. + +26. The two SAP Indonesia account executives orchestrating the schemes told +employees at Indonesia Intermediary 1 to do “whatever was needed” to secure deals. WhatsApp +messages between the account executives and employees of Indonesia Intermediary 1 show +requests for “baggage” and “envelopes,” both understood to be codes for bribes to government +officials. In certain cases, photographs and videos evidence cash payments made to government +officials. One of the SAP Indonesia local account executives admitted facilitating and, in some +cases, personally making payments to public sector clients while he was an employee of +Indonesia Intermediary 1. He also said that SAP VARs were active participants in these efforts +and specifically named Indonesia Intermediary 1 as helping with these schemes. Two Indonesia +Intermediary 1 employees also admitted to facilitating payments to government officials. + +27. With the help of Indonesia Intermediary 1, SAP Indonesia paid bribes to +government officials at BP3TI, an entity formed by the Indonesian Ministry of Communication +and Information Technology. SAP Indonesia paid the bribes to obtain a March 23, 2018 contract +with BP3TI valued at $268,135. WhatsApp chat transcripts show one of the SAP Indonesia +account executives messaging an Indonesia Intermediary 1 employee saying, “Hehehe…This is +government bro, to catch a big fish we need to use a large bait (sic).” In another message chain +discussing a transfer of funds to an intermediary that was intended to benefit officials at BP3TI, an +Indonesia Intermediary 1 employee confirmed the transfer amount as being “around 1 billion +rupiahs,” which amounted to $67,380 at the time of transfer. Some of the payments were routed +through a sham entity created by Indonesia Intermediary 1 employees. In addition, SAP Indonesia, +through Indonesia Intermediary 1 employees, paid for shopping excursions and dining for a BP3TI +official and his wife during a June 2018 trip to New York City, in route to attending the 2018 SAP +Sapphire Conference in Orlando, Florida. + 8 + +28. An SAP Indonesia account executive also paid cash bribes to government officials +to obtain a December 16, 2015 deal with the Indonesian Ministry of Maritime Affairs and Fisheries +valued at $80,750. WhatsApp chats between the SAP Indonesia account executive and a freelance +consultant and former Indonesia Intermediary 1 employee contain explicit discussions of cash +payments made in person to Ministry officials in which the consultant states, “Seventy million, in +fifty thousand bills…Bring empty envelope.” + +29. The same SAP Indonesia account executive also discussed bribes in connection +with an Applicant Tracking Software (ATS) maintenance tender by the Indonesian Social +Ministry, which was won by another SAP Indonesia VAR partner (“Indonesia Intermediary 2”). +WhatsApp messages, between the SAP Indonesia account executive involved and a freelance +consultant, show them clearly discussing improper payments and a demand that SAP Indonesia use +the issuance of Letters of Support to guarantee the preferred tender outcome. The SAP Indonesia +account executive’s supervisor, who was at that time the SAP Indonesia Public Sector Sales Lead, +was aware of the scheme. Indonesia Intermediary 2 was awarded the contract renewal with the +Social Ministry in July 2018. The total amount of SAP Indonesia revenue stemming from this deal +includes ongoing services associated with the original 2015 sales contract. + +30. Indonesia Intermediary 1, and an SAP Indonesia account executive also paid for +golfing excursions for officials at PT Pertamina, a state-owned oil and natural gas corporation. +The benefits were provided to obtain a January 23, 2017 contract, which included maintenance +services relating to licenses valued at $13,331,423. WhatsApp chats also indicate that others at +SAP Indonesia and employees at various VARs discussed requests to pay for meals and travel +expenses for employees of public sector customers. + +31. SAP Indonesia violated internal processes and procedures regarding management, +due diligence, and the retention of third parties, when it retained and repeatedly used Indonesia +Intermediaries 1 and 2. SAP Indonesia continued to work with Indonesia Intermediary 1 to obtain +a November 26, 2018 contract with Pemda DKI (the provincial government of Jakarta) valued at +$208,198, a March 22, 2018 contract with PT Mass Rapid Transit Jakarta valued at $174,908, and +a renewal of a June 27, 2012 contract with PT Angkasa Pura I (one of two separate state-owned +enterprises responsible for the management of airports in Indonesia) valued at $1,097,119. SAP +Indonesia also continued to work with Indonesia Intermediary 2 to pay bribes while seeking to +obtain July 31, 2018 and December 28, 2018 contracts with PT Angkasa Pura II (the second of two +state owned enterprises responsible for the management of airports) valued at $2,535,987 and +$2,594,695, respectively. The first of these contracts was awarded to Indonesia Intermediary 2. + + + +SAP Azerbaijan + +32. An SAP Azerbaijan employee provided improper gifts to government officials in +connection with a May 2022 deal with the State Oil Company of the Republic of Azerbaijan +(SOCAR) valued at $1,645,703. SAP Azerbaijan’s mid-level employee provided improper gifts in + 9 +December 2021 and January 2022 to multiple SOCAR officials in an effort to close the deal. +Several SOCAR officials received gifts totaling approximately $3,000, well above SAP’s gift limit +of $30. Text messages indicate that the employee was rewarding senior officials who supported, +and were directly responsible for, approving the pending sale. The employee also prepared a fake +Act of Acceptance between SOCAR and a SAP Azerbaijan partner, which she submitted to the +SAP contract booking team on February 4, 2022. SOCAR signed the real Act of Acceptance on +May 12, 2022. Evidence indicates that the employee was attempting to claim a commission on the +deal before her pending promotion to SAP Azerbaijan Managing Director became effective, after +which she would not be eligible to earn additional compensation from the sale. + +SAP Had Inaccurate Books and Records and +Insufficient Accounting Controls to Detect or Prevent Bribery + +33. The bribe payments made by SAP South Africa, SAP Africa, SAP Indonesia, and +SAP Azerbaijan were inaccurately recorded as legitimate commission or other expenses in SAP’s +books and records. SAP lacked the internal accounting controls sufficient to detect or prevent such +payments. Specifically, SAP lacked adequate due diligence and vetting to properly assess risk and +approve payments to the third parties it worked with in these jurisdictions. + +34. SAP did not adequately address the high risk of bribery and corruption in South +Africa, Greater Africa, Indonesia, and Azerbaijan and did not implement sufficient internal +accounting controls to address those risks. The company failed to implement sufficient payment +approval controls to ensure that services were actually rendered, or expenses were actually +incurred, before issuing payments to third parties. Although SAP had a corporate anti-corruption +policy in place during the relevant time period, SAP had insufficient formal monitoring, or internal +controls in place, to ensure that SAP South Africa, SAP Africa, SAP Indonesia, or SAP Azerbaijan +were adhering to the relevant policies. + +35. Lastly, SAP lacked entity level controls over SAP South Africa, SAP Africa, SAP +Indonesia, and SAP Azerbaijan because of the lack of oversight over personnel in those +jurisdictions. + +SAP Violated Exchange Act Section 30A + +36. As a result of the conduct described above, SAP violated section 30A of the +Exchange Act, which prohibits any issuer with securities registered pursuant to Section 12 of the +Exchange Act or which is required to file reports under Section 15(d) of the Exchange Act, or any +officer, director, 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 government officials for the purpose of influencing their official +decision making, in order to assist in obtaining or retaining business. + + + + + 10 +SAP Violated Exchange Act Section 13(b)(2)(A) + +37. As a result of the conduct described above, SAP 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 disposition of the assets of the +issuer. + + +SAP Violated Exchange Act Section 13(b)(2)(B) + +38. As a result of the conduct described above, SAP 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. + +COOPERATION AND REMEDIATION + +39. In determining to accept the Offer of Settlement, the Commission considered SAP’s +self-reporting of certain conduct, remedial acts promptly undertaken by Respondent, and the +significant cooperation afforded the Commission staff. SAP cooperated in the Commission’s +investigation by identifying and timely producing key documents identified in the course of its own +internal investigation, providing the facts developed in its internal investigation, and making +current or former employees available to the Commission staff. + +40. SAP’s remedial efforts included: (i) termination of employees and third parties +responsible for the misconduct, (ii) elimination of the BDP program; (iii) enhancements to internal +accounting and compliance controls; (iv) implementation of analytics to identify and review high- +risk transactions and third party controls; (v) strengthening and expansion of the ethics and +compliance organization; (vi) enhancements to its code of conduct, policies and procedures +regarding gifts and hospitality, and the use of third parties; (vii) increased training of employees on +anti-bribery issues; and (viii) establishment of an enhanced whistleblower platform. + +DISGORGEMENT AND NON-IMPOSITION OF A CIVIL PENALTY + +41. SAP acknowledges that the Commission is not imposing a civil penalty based upon +the imposition of an $ 118.8 million criminal fine as part of SAP’s resolution with the United +States Department of Justice. + +42. On March 15, 2022, SAP entered into a civil settlement with the South African +Special Investigating Unit and others relating to the DWS conduct described above and paid ZAR + 11 +344.78 million ($21.4 million), which represented reimbursement of the entire amount SAP +received from DWS under the 2015 and 2016 deals with DWS. + +43. On October 18, 2023, SAP entered into a settlement agreement with the South +African Special Investigative Unit and others relating to the Transnet conduct described above, +pursuant to which it paid ZAR 214.39 million (approximately $11.42 million based on the +exchange rate on the date of payment). + +44. On November 1, 2023, SAP entered into a civil settlement with the South African +Special Investigating Unit and others relating to the Eskom conduct described above, pursuant to +which it paid ZAR 500 million (approximately $26.63 million based on the exchange rate on the +date of payment). + +45. The disgorgement and prejudgment interest ordered in paragraph IV.B is consistent +with equitable principles, does not exceed Respondent’s net profits from its violations, and +returning the money to Respondent would be inconsistent with equitable principles. Therefore, in +these circumstances, distributing disgorged funds to the U.S. Treasury is the most equitable +alternative. The disgorgement and prejudgment interest ordered in paragraph IV.B shall be +transferred to the general fund of the U.S. Treasury, subject to Section 21F(g)(3) of the Exchange +Act. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in 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 Sections 30A, +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. + +B. Respondent is liable to the U.S. Securities and Exchange Commission for +disgorgement of $85,046,035 and prejudgment interest of $13,405,149, for a total payment of +$98,451,184. Respondent shall receive a disgorgement offset of up to $59,455,779 based on the +U.S. dollar value (based on the exchange rate on the date of the payment) of any payments made +or to be made to the Government of South Africa or a South African state-owned entity reflected +by evidence acceptable to the Commission staff in its sole discretion, in a parallel proceeding +against Respondent in South Africa. Such evidence of payment shall include a copy of the wire +transfer or other evidence of the amount of the payment, the date of the payment, and the name of +the government agency or state-owned entity to which payment was made. To receive this offset, +Respondent must make the above-identified payments within 365 days from the date of this +Order. Any amounts not paid as an offset within the specific time shall be immediately due to the +U.S. Securities and Exchange Commission. Respondent shall, within 30 days of the entry of this +Order, pay disgorgement of $25,590,256 and prejudgment interest of $13,405,149 for a total + 12 +payment of $38,995,405 to the Securities and Exchange Commission for transfer to the general +fund of the United States Treasury, subject to the 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 three ways: + +1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofin.htm; or + +3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission +and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +SAP 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 Ansu N. Banerjee, Assistant Regional +Director, Division of Enforcement, Securities and Exchange Commission, 444 South Flower +Street, Los Angeles, California 90071. + + By the Commission. + + + + Vanessa A. Countryman + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4482.txt b/raw/aaer/2024/AAER-4482.txt new file mode 100644 index 0000000000000000000000000000000000000000..efd82cdc6cdc830bae64cd18f5aa7944d17c9a62 --- /dev/null +++ b/raw/aaer/2024/AAER-4482.txt @@ -0,0 +1,79 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 99348 / January 16, 2024 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4482 / January 16, 2024 +ADMINISTRATIVE PROCEEDING +File No. 3-20600 + +In the Matter of +CRAIG A. GOLDING, +CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN +ACCOUNTANT RESPONSIBLE FOR THE +PREPARATION OR REVIEW OF FINANCIAL +STATEMENTS REQUIRED TO BE FILED WITH +THE COMMISSION, OTHER THAN AS A +MEMBER OF AN AUDIT COMMITTEE, AND AS +AN INDEPENDENT ACCOUNTANT + +On September 27, 2021, the Commission issued a consented Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e) of the Commission’s Rules +of Practice, Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order +(the “Suspension Order”) against Respondent Craig A. Golding, CPA.1 The Suspension Order +denied Golding the privilege of appearing or practicing before the commission as an accountant +but permitted him, after one year from the date of the Suspension Order and if he provided +certain documentation and attestations, to request that the Commission consider his reinstatement +to resume appearing or practicing before the Commission as (1) a preparer or reviewer, or a +person responsible for the preparation or review, of financial statements that are 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 Exchange Act; (2) a preparer or reviewer, or a person responsible for +the preparation or review, of financial statements that are required to be 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; or (3) an independent accountant. +This order is issued in response to Golding’s application for reinstatement to appear and +practice before the Commission as an accountant responsible for the preparation or review of + +1 See Accounting and Auditing Enforcement Release No. 4258, dated September 27, 2021. + + 2 +financial statements required to be filed with the Commission, other than as a member of an +audit committee, and as an independent accountant. +In the Suspension Order, the Commission found that Golding, as the Engagement Quality +Reviewer for CohnReznick LLP’s 2017 audit of Longfin Corp., failed to comply with relevant +Public Company Accounting Oversight Board standards. Specifically over the course of the +audit, Golding failed to appropriately review two critical areas of the audit. As a result, Golding +caused CohnReznick LLP’s violations or Rule 2-02(b)(1) of Regulation S-X, caused Longfin +Corp.’s violation of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, and engaged +in improper professional conduct pursuant to Section 4C of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. + + Golding has provided the requisite information set forth in the Suspension Order and the +Commission has not discovered any contrary information or any other information indicating +that Golding has violated a federal securities law, rule, or regulation or rule of professional +conduct since the entry of the Order. The Commission further finds no basis to determine that +reinstatement would not be in the public interest. Therefore, it is accordingly, + +ORDERED for cause shown that Craig A. Golding, 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/2024/AAER-4483.txt b/raw/aaer/2024/AAER-4483.txt new file mode 100644 index 0000000000000000000000000000000000000000..cb24219c62a0a313094cf697d3be116a7b828853 --- /dev/null +++ b/raw/aaer/2024/AAER-4483.txt @@ -0,0 +1,1415 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 11267 / January 18, 2024 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 99384 / January 18, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4483 / January 18, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-21831 + +In the Matter of +Edward F. Hackert, CPA, +Respondent. +CORRECTED ORDER INSTITUTING +ADMINISTRATIVE AND CEASE- AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE, AND NOTICE OF +HEARING +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate +and in the public interest that public administrative and cease-and-desist proceedings be, +and hereby are, instituted pursuant 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) of the Commission’s Rules of Practice2 against Edward F. Hackert +(“Respondent” or “Hackert”). + + + + +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 relevant part, that “the Commission may . . . deny, temporarily or +permanently, the privilege of appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct.” +2 +II. + +After an investigation, the Division of Enforcement alleges the following: +SUMMARY + +1. Edward F. Hackert, a certified public accountant (“CPA”), engaged in +improper professional conduct, within the meaning of Section 4C of the Exchange Act +and Rule 102(e) of the Commission’s Rules of Practice, due to his numerous violations of +the Public Company Accounting Oversight Board’s (“PCAOB”) auditing standards +relating to, among other things, audit supervision and audit documentation. + +2. From approximately July 2006 to the present, Hackert worked as an +engagement partner at the public accounting firm Marcum LLP (“Marcum”). As an +engagement partner, Hackert was responsible for the Marcum audit engagements to +which he was assigned, including proper supervision of the engagement team and +compliance with PCAOB auditing standards. During his time as an engagement partner, +Hackert was responsible for hundreds of audits. + +3. Under PCAOB auditing standards, the date on which an audit firm grants +permission to use its audit report in connection with the issuance of its client’s financial +statements is called the “report release date.” Before releasing the audit report (on the +report release date), the auditor must perform necessary audit procedures and conclude +that sufficient evidence has been obtained to support the representations in the audit +report. Then, once the audit report is released, the auditor’s client includes the audit +report in its filing(s) with the Commission and those filings become public and available +to investors. + +4. From 2012 through 2022 (the “relevant period”), Hackert failed to +properly supervise numerous audit engagements and to ensure that the engagements were +performed in compliance with PCAOB auditing standards. Among other things, Hackert +repeatedly failed to review the work of the engagement team members and to document +that review prior to the report release date. + +5. During the relevant period, Hackert served as the engagement partner for +at least 240 audits of public companies, and he approved the release of Marcum’s audit +reports for those audits. Those audits included 88 audits of operating public companies +and 152 audits of special purpose acquisition companies (“SPACs”). For 204 of those +audit engagements (or approximately 85%), Hackert failed to supervise the work of the +engagement team as shown by, among other things, Hackert’s failure to review the work +of the engagement team and to document his review by the report release date. + +6. Under PCAOB auditing standards, the auditor should assemble a complete +and final set of audit documentation for retention by 45 days after the report release date, +which is called the “documentation completion date.” +3 +7. During the relevant period, Hackert repeatedly failed to assemble +complete and final audit documentation by the documentation completion date. For 126 +of the audit engagements during the relevant period (or approximately 53%), Hackert +failed to ensure that a complete and final set of audit documentation was assembled by +the documentation completion date. + +8. Proper audit documentation in accordance with the PCAOB auditing +standards is not merely a technical requirement. It is essential to demonstrate that the +required audit work was performed and reviewed by the report release date, and to +support the conclusions reached by the auditor and the representations contained in the +audit report. As Marcum’s internal training slides instructed its auditors in August 2021: +“If you didn’t document it, you didn’t do it!” +3 + +9. Hackert’s failure to properly supervise audit engagements and to review +the work of his engagement team members resulted in multiple deficient audits. As +explained below, those failures independently violated PCAOB auditing standards. + +10. Through his conduct described herein, Hackert engaged in improper +professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice by engaging in repeated +instances of unreasonable conduct, each resulting in violation of applicable professional +standards. In connection with each of the audit engagements described herein on which +Hackert failed to comply with applicable PCAOB auditing standards, he acted +negligently, unreasonably, and without due professional care. + +11. In October 2021, in a video presentation for Marcum personnel, Hackert +admitted that Marcum’s audit work fell short of the PCAOB auditing standards, stating: +“the standard of how we carry out our work, and document it, acc ording to the auditing +standards, . . . we’re still coming up short.” (Emphasis added.) + +12. Hackert’s conduct also caused Marcum to repeatedly violate Rule 2- +02(b)(1) of Regulation S-X. +4 In connection with each of the audits described herein, +Marcum issued an audit report stating that the audit was performed in accordance with +PCAOB auditing standards. In fact, due to Hackert’s actions, those audits were not +performed in accordance with PCAOB standards. Marcum therefore violated Rule 2- +02(b)(1) of Regulation S-X. Hackert caused Marcum’s violations of Rule 2-02(b)(1) +because his actions as the engagement partner contributed to Marcum’s violations and +Hackert knew or should have known that his conduct would contribute to a violation. + + + +3 Similarly, the PCAOB has stated that “if audit documentation does not exist for a particular procedure or +conclusion related to a significant matter, its absence casts doubt as to whether the necessary work was +done.” Audit Documentation and Amendment to Interim Auditing Standards, PCAOB Release No. 2004- +006 at 3 (June 9, 2004). + +4 Marcum is not a respondent in this proceeding. The Commission brought a separate proceeding against +Marcum. See infra ¶ 14. +4 +RESPONDENT + +13. Hackert, age 62, resides in East Meadow, New York. From approximately +July 2006 to the present, Hackert has been an engagement partner at Marcum. From June +2004 through July 2006, Hackert was a senior manager at Marcum. Hackert is licensed as +a CPA in the State of New York. + +OTHER RELEVANT ENTITIES + +14. Marcum, a New York limited liability partnership headquartered in New +York, New York, is a public accounting firm in the United States. Marcum has more than 40 +offices in cities across the United States and additional offices in other countries. Marcum +has been registered with the PCAOB since October 2003. In June 2023, the Commission +charged Marcum with systemic quality control failures and violations of audit standards in +connection with audit work for hundreds of SPAC clients. See In the Matter of Marcum +LLP, Exchange Act Rel. No. 97773 (June 21, 2023). + +15. Ault Alliance, Inc. (“AAI”) is a Delaware corporation with its principal +place of business in Las Vegas, Nevada.5 AAI is a holding company that, since 2016, has +engaged in operating businesses that include, among others, power products and systems, +digital asset mining of Bitcoin, the manufacture and sale of textile technology machinery, +and commercial lending. AAI’s stock is registered under Section 12(b) of the Exchange +Act, and its common stock trades on NYSE American. Marcum issued audit reports for +AAI from 2016 to the present. Hackert served as the engagement partner on audits of AAI +from 2016 through 2020. In August 2023, the Commission charged AAI for financial +disclosure failures, improper accounting, and reporting, internal controls, and books and +records violations from 2017 through 2023. See In the Matter of Ault Alliance, Inc., et al., +Exchange Act Rel. No. 98131 (August 15, 2023). + +16. + Avalanche International Corp. (“Avalanche”), a holding company, is a +Nevada corporation with its principal place of business in Las Vegas, Nevada. AAI has +disclosed Avalanche as a related party since 2017. AAI invested over $17 million in +Avalanche from 2016 to 2021. In June 2022, AAI acquired over 90% of Avalanche’s stock +and began consolidating Avalanche’s financial results with AAI’s results. Avalanche’s +common stock was publicly traded until September 2021. + + + + + + + + +5 AAI has had several different names: AAI (from January 3, 2023, to present); BitNile Holdings, Inc. +(from December 13, 2021, to January 2, 2023); Ault Global Holdings, Inc. (January 19, 2021, to December +12, 2021); DPW Holdings, Inc. (September 19, 2017, to January 18, 2021); and Digital Power Corporation +(prior to September 19, 2017). +5 +FACTS + +Relevant PCAOB Auditing Standards + +17. The PCAOB was created as part of the Sarbanes-Oxley Act of 2002. The +PCAOB oversees audits of public companies that are subject to the securities laws in order +to protect the interests of investors and further the public interest in the preparation of +informative, accurate, and independent audit reports. The PCAOB established Auditing +Standards (“AS”) for registered public accounting firms to follow in the preparation of +audit reports for public companies, other issuers, and broker-dealers. Certain of the +standards relevant to this proceeding are summarized below.6 + +Due Professional Care + +18. Due professional care is to be exercised in the planning and performance of +an audit and preparation of the audit report. AS 1015.01. Due professional care requires an +auditor to exercise “professional skepticism,” which includes “a questioning mind and a +critical assessment of audit evidence.” AS 1015.07. Negligent conduct by an auditor violates +the duty of due care. See AS 1015.03. + +19. The engagement partner should know, at a minimum, the relevant +professional accounting and auditing standards and should be knowledgeable about the +client. The engagement partner is responsible for the assignment of tasks to, and supervision +of, members of the engagement team. AS 1015.06. + +Supervision of the Audit + +20. The audit engagement partner is responsible for the audit engagement and its +performance. The engagement partner is thus responsible for, among other things, proper +supervision of the work of the engagement team and compliance with PCAOB standards, +including standards regarding using the work of specialists. AS 1201.03. + +21. + In supervising an audit, the engagement partner should, among other things, +(a) inform engagement team members of their responsibilities; (b) direct engagement team +members to bring significant accounting and auditing issues to the attention of the +engagement partner or other supervisors; and (c) review the work of the engagement team +members. AS 1201.05. The engagement partner should review the work of the engagement +team to evaluate whether (1) the work was performed and documented; (2) the objectives of +the procedures were achieved; and (3) the results of the work support the conclusions +reached. AS 1201.05.c. + +6 PCAOB Rule 3101 discusses the meaning of certain terms used in the PCAOB auditing standards. The +rule provides that the words “must,” “shall,” and “is required” indicate unconditional responsibilities. The +word “should” indicates responsibilities that are presumptively mandatory. Additionally, under Rule +3101(a)(2) the “[f]ailure to discharge a presumptively mandatory responsibility is a violation of the relevant +standard . . . unless the auditor demonstrates that, in the circumstances, compliance with the specified +responsibility was not necessary to achieve the objectives of the standard.” +6 +22. While the engagement partner may seek assistance from appropriate +engagement team members, the engagement partner’s supervision of the audit work cannot +be eliminated and “higher risk areas of the audit require more supervisory attention from +the engagement partner.” Auditing Standards Related to the Auditor’s Assessment of and +Response to Risk and Related Amendments to PCAOB Standards, PCAOB Release No. +2010-004 at A10-17 to A10-18 (Aug. 5, 2010). +Audit Documentation + +23. Audit documentation (the “work papers”) provides the written record of the +basis for the auditor’s conclusions. Audit documentation also facilitates the planning, +performance, and supervision of the audit engagement. AS 1215.02. + +24. An auditor must prepare audit documentation in connection with each audit +engagement conducted pursuant to PCAOB auditing standards. AS 1215.04. The audit +documentation should demonstrate, among other things, that the engagement complied with +the standards of the PCAOB. AS 1215.05.a. + +25. “Audit documentation must clearly demonstrate that the work was in fact +performed.” AS 1215.06. Further, “[a]udit documentation must contain sufficient +information to enable an experienced auditor, having no previous connection with the +engagement” to determine (1) who performed the work, (2) the date such work was +completed, (3) who reviewed the work, and (4) the date of such review. AS 1215.06.b. + +26. “Oral explanation alone does not constitute persuasive other evidence, but it +may be used to clarify other written evidence.” AS 1215.09. + +27. Before the report release date, the auditor must complete all necessary audit +procedures and obtain sufficient evidence to support the representations in the auditor’s +report. AS 1215.15. Additionally, a “complete and final set of audit documentation should +be assembled for retention as of a date not more than 45 days after the report release date” – +i.e., by the documentation completion date. Id. + +28. Audit documentation must not be deleted or discarded after the +documentation completion date. AS 1215.16. Any documentation added after the +documentation completion date must indicate (1) the date the information was added, (2) the +name of the person who prepared the additional documentation, and (3) the reason for +adding it. Id. + +29. “Documentation added to the working papers well after completion of the +audit or other engagement is likely to be of a lesser quality than that produced +contemporaneously when the procedures were performed. It is very difficult to reconstruct +and recall specific activities related to gathering audit evidence months, and perhaps years, +after the work was actually performed.” PCAOB Release No. 2004-006 at 7. +7 +Training and Proficiency + +30. An auditor must study, understand, and apply new pronouncements on +accounting principles and auditing procedures as they are developed by authoritative bodies +within the accounting profession. AS 1010.04. + +Audit Evidence + +31. An auditor must plan and perform audit procedures to obtain sufficient +appropriate audit evidence to provide a reasonable basis for the auditor’s opinion. AS +1105.04. And appropriate audit evidence “must be both relevant and reliable in providing +support for the conclusions on which the auditor’s opinion is based.” AS 1105.06. + +32. When using information produced by an audited company as audit evidence, +an auditor should evaluate whether the information is sufficient and appropriate for purposes +of the audit by performing procedures to: “[t]est the accuracy and completeness of the +information, or test the controls over the accuracy and completeness of that information; +and [e]valuate whether the information is sufficiently precise and detailed for purposes of +the audit.” AS 1105.10. + +Evaluating Audit Results + +33. When evaluating the results of the audit, the auditor should evaluate whether +the accumulated results of auditing procedures and other observations affect the assessment +of the fraud risks made throughout the audit and whether the audit procedures need to be +modified to respond to those risks. AS 2810.28. + +Audit Sampling + +34. When an auditor is unable to examine samples that have been chosen for +testing, the auditor “should evaluate whether the reasons for his or her inability to examine +the items have (a) implications in relation to his or her risk assessments (including the +assessment of fraud risk), (b) implications regarding the integrity of management or +employees, and (c) possible effects on other aspects of the audit.” AS 2315.25. +Consideration of Fraud +35. An auditor must exercise professional skepticism when considering fraud +risks and “conduct the engagement with a mindset that recognizes the possibility that a +material misstatement due to fraud could be present, regardless of any past experience with +the entity and regardless of the auditor’s belief about management's honesty and integrity +…. In exercising professional skepticism in gathering and evaluating evidence, the auditor +should not be satisfied with less-than-persuasive evidence because of a belief that +management is honest.” AS 2401.13. +8 +36. Further, “[w]henever the auditor has determined that there is evidence that +fraud may exist, that matter should be brought to the attention of an appropriate level of +management. This is appropriate even if the matter might be considered inconsequential.” +AS 2401.79. Fraud involving senior management should be reported directly to the audit +committee in a timely manner and prior to issuance of the auditor’s report. Id. + +Use of Specialists + +37. If using a specialist engaged by the auditor’s firm, 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. AS 1210.12. +Auditing Estimates +38. In evaluating reasonableness, the auditor should obtain an understanding of +how management developed an estimate. Based on that understanding, the auditor should +use one or a combination of the following approaches: (a) review and test the process used +by management to develop the estimate; (b) develop an independent expectation of the +estimate to corroborate the reasonableness of management's estimate; and/or (c) review +subsequent events or transactions occurring prior to the date of the auditor's report. AS +2501.10. +Hackert Failed to Properly Supervise and Document Audits + +39. In the accounting industry, the generally accepted method for engagement +partners to document their supervision of an audit in compliance with the PCAOB auditing +standards, and their review of the work performed by engagement team members, is by +signing and dating (or “signing off”) on work papers when they perform or review work. +Historically, sign offs occurred on hard copies of work papers but, in recent years, many +audit firms, including Marcum, moved to electronic sign offs. Whether a sign off occurs in +hard copy or electronic form, it provides evidence of who performed or reviewed audit +work and the date on which such work or review occurred. By signing off on work papers, +an engagement partner documents his or her supervision of the audit. +40. During the relevant period, Hackert failed to appropriately supervise audits +for which he was the engagement partner by (a) failing to review the work of the +engagement team members and to document that review prior to the report release date, +and/or (b) failing to ensure that audit documentation was assembled for retention by the +documentation completion date. Hackert’s conduct demonstrated a lack of due professional +care and resulted in deficiencies in some of the audit work performed. + +41. As noted above, during the relevant period, Hackert served as the +engagement partner for at least 240 audits, which included 88 audits of operating public +companies and 152 audits of SPACs. +9 +42. As the engagement partner, Hackert was responsible for sending (or +authorizing a member of the engagement team to send) an email authorizing Marcum’s +audit report to be filed with the Commission by the relevant issuer. The email authorizations +contained a representation that the audits were conducted in accordance with PCAOB +standards. But because of his actions on the audits, Hackert knew or should have known that +those representations were not accurate. + +43. Marcum issued audit reports in connection with each of the audits referenced +herein, and each of the audit reports stated that the audits were performed in accordance +with PCAOB auditing standards. In fact, because of Hackert’s actions, the audits were not +performed in accordance with PCAOB standards. Nevertheless, Marcum’s clients included +Marcum’s audit reports in their filings with the Commission, including, among others, +Forms 10-K and S-1. + +44. Hackert repeatedly failed to review the work of the engagement team +members and to document that review prior to the report release date. In 204 of the 240 +audits on which Hackert was the engagement partner during the relevant period (or about +85%), Hackert did not review significant portions of the audit work performed or +conclusions reached prior to the report release date. + +45. For two audit engagements, the audit of Operating Company 14 for 2015 +and the audit of Operating Company 18 for 2016, Hackert did not review and sign off on +any work papers containing substantive audit work by the engagement team.7 + +46. In 2017, in response to findings made by the PCAOB after an inspection, +Marcum changed its policy to require engagement partners and engagement quality review +(“EQR”) partners to sign off on certain specific work papers in every audit binder, as well +as work papers related to other significant risk areas. This policy became effective for +audits with fiscal years ended December 31, 2016, or later. + +47. But even after Marcum’s policy changed, Hackert’s review and sign off +practices did not improve. In at least 14 audit engagements to which this policy applied, +Hackert failed to review the work of the engagement team on significant audit areas and key +work papers and to evidence his review before the report release date. +48. For example, in the audit of Operating Company 12 for 2017, the +engagement team identified related party transactions as an area of the audit that had +significant and fraud risks. Nevertheless, for the related party section of the audit, Hackert +did not review the work of the engagement team and evidence his review prior to the report +release date. + +49. Likewise, in the audit of Operating Company 22 for 2017, Hackert did not +review the work of the engagement team and evidence his review prior to the report release +date on the Risk Assessment Summary Form, a key document requiring an engagement + +7 Except for AAI, the relevant issuers that Hackert and Marcum audited – both operating companies and +SPACs – have been anonymized herein and in the attached Appendices A and B. +10 +partner signature under Marcum policy. Hackert also failed to review the work of the +engagement team and evidence his review prior to the report release date on significant risk +areas in the audit identified by the engagement team, including accounts receivable and +sales and inventory and cost of sales. In the same engagement, Hackert did not review the +work of the engagement team and evidence his review on the Summary of Unadjusted +Misstatements (“SUAM”), a key audit document that requires an engagement partner sign +off under Marcum policy and that should be included as part of the auditor’s evaluation of +audit results in accordance with PCAOB auditing standards. + +50. In the AAI 2018 audit engagement, Hackert failed to review the work of the +engagement team and evidence his review of work papers in significant areas of the audit, as +identified by the engagement team, including areas involving crypto asset miners and +goodwill or intangibles valuation. He also failed to review the work of the engagement team +and evidence his review of certain key documents before the report release date, including +the summary memorandum, work papers related to communications with the audit +committee, and the SUAM. + +51. In the AAI 2019 audit engagement, Hackert never reviewed the work of the +engagement team and evidenced his review on certain key documents that required an +engagement partner to sign off under Marcum policy, including the work papers related to +planning the audit, engagement team discussion and risk identification, and the auditor’s +report. Hackert also did not review the work of the engagement team and evidence his +review before the report release date on work papers related to communications to the audit +committee and the summary memorandum, which were key documents for the audit under +Marcum policy and PCAOB auditing standards. + +52. In 2020, Hackert’s practice shifted mostly to auditing SPACs, and his +supervision and review failures became even more prevalent. Between 2020 and 2022, +Hackert served as the engagement partner for at least 152 audits of SPACs. In 52 of those +audits, Hackert did not review the work of the engagement team members and document +that review on any audit documentation prior to the report release date. In 140 of those +audits, Hackert did not review the work of the engagement team and document his review of +at least some of the audit documentation prior to the report release date. In one of the SPAC +audits, Hackert did not review the substantive work of the engagement team and document +his review of any work papers before or after the report release date. + +53. Beginning with audits for the fiscal year that ended on December 31, 2016, +and continuing to the present, Marcum policy required Hackert to sign a “routing slip” +work paper before the report release date for every audit on which he was the engagement +partner. At Marcum, a routing slip is the work paper that engagement partners, engagement +managers, and EQR partners sign to attest and document that their procedures and review +are complete, and that they authorize release of the audit report. + +54. Hackert sometimes failed to sign the required routing slips prior to the +report release date and then backdated his signature to make it appear that the routing slip +had been timely signed. For example, on the audit of Operating Company 14 for 2015, the +11 +2016 and 2017 audits of AAI, and the audit of Operating Company 22 for 2017, Hackert +dated his signature as of the report release date, but the electronic metadata in the routing +slip indicates that the document was not created until weeks after the purported date of +Hackert’s signature. Hackert knew or should have known that backdating documentation +violates, at a minimum, his duties under AS 1015, 1201, and 1215. + +55. On at least 37 of the SPAC audits, Hackert failed to sign the routing slips, +which were important audit documentation, prior to the report release date. + +56. Hackert’s supervision failures extended to the PCAOB requirement to +assemble a “complete and final set of audit documentation” within 45 days after the report +release date (i.e., by the documentation completion date), as required by AS 1215.15. +Marcum’s policies referred to this requirement as “Finalizing and Locking Engagement +Binders.” During the relevant period, on 126 of the audit engagements for which Hackert +was the engagement partner, he failed to ensure that a complete and final set of audit +documentation was assembled for retention by the documentation completion date. + +57. Marcum required engagement teams to prepare a so-called “AS 3 memo” +for any engagement where documentation was added to the work papers after the +documentation completion date. The AS 3 memo was a quality control document +ostensibly intended to meet the requirements of AS 1215.16 that any audit documentation +added after the report release date “must indicate the date the information was added, the +name of the person who prepared the additional documentation, and the reason for adding +it.” But for 23 audits on which Hackert was the engagement partner, he added sign offs to +the work papers after the documentation completion date and the required documentation +under AS 1215.16 was not added, whether through an AS 3 memo or otherwise. + +58. Accordingly, Hackert violated AS 1015, 1201, and 1215 in connection with +at least 210 audits. Attached hereto and incorporated herein are Appendix A, which +summarizes Hackert’s failures to evidence his supervision by the report release date, and +Appendix B, which summarizes Hackert’s failures to assemble a complete and final set of +audit documentation by the documentation completion date.8 Additionally, in connection +with the audits listed on Appendices A and B, Hackert caused Marcum to violate Rule 2- +02(b)(1) of Regulation S-X. + +Additional Deficiencies in Hackert’s Audits of AAI + +59. Hackert’s conduct also demonstrated a lack of due professional care and +violated PCAOB auditing standards in connection with multiple audits of AAI, from 2018 +through 2020, on which Hackert was the engagement partner. + + + +8 Appendix A shows 204 audits on which Hackert failed to evidence his supervision by the report release +date. Additionally, for 6 of the audits shown on Appendix B (and not on Appendix A), Hackert signed off +by the report release date, but he failed to ensure that complete documentation was assembled by the +documentation completion date. +12 +Crypto Asset Miners + +60. In 2018, AAI purchased approximately $9 million worth of computer +equipment known as crypto asset miners. During Marcum’s audit of AAI for 2018, +Hackert’s engagement team identified the existence and valuation of the crypto asset +mining equipment as a significant risk area. Because the value of the miners was material +to AAI’s balance sheet (approximately 15% of total assets), the engagement team identified +this as a significant audit area along with risks that the equipment (a) did not exist due to +accounting error or misappropriation, (b) did not belong to the company, (c) was recorded +at “incorrect values,” and/or (d) was impaired and not adjusted to net realizable value. + +61. Despite identifying the foregoing risks related to the existence and valuation +of the miners, the only work paper that contained evidence of Hackert’s review in this +section of the audit binder was the “Audit Program for Property,” which listed audit +procedures performed and referenced the work papers documenting those procedures. The +audit program indicated that all the procedures were performed by, and the underlying +work papers were prepared by, a junior member of Hackert’s team. Hackert, however, did +not review and document his review of any underlying work papers to determine whether +the audit work in this significant area was appropriate and complete. + +62. The only supporting documents reviewed by the engagement team to +evidence the existence of the miners were several invoices purporting to show purchased +miners. Those invoices, however, did not provide sufficient and appropriate audit evidence +to demonstrate that the miners existed, that the miners were delivered to AAI, and that title +to the miners passed to AAI. + +63. Further, the engagement team did not perform and document any audit +procedures to assess the valuation and impairment of the miners. + +64. Accordingly, Hackert’s conduct with respect to the crypto asset miners +violated AS 1015, 1105, 1201, and 2501. +Goodwill Valuation +65. AAI’s balance sheet for 2018 included Goodwill of $8.5 million related to +four acquisitions. Goodwill arises when the purchase price of an acquired entity exceeds +the combined fair value of the identifiable assets and liabilities. Goodwill represents +intangible assets such as the value of brand reputation, among other things. + +66. In its audit of AAI’s 2018 financial results, Hackert’s engagement team +identified AAI’s goodwill valuation as a significant risk area. The engagement team wrote +in a work paper that in response to this risk, it “obtained third party valuation reports and +utilized [a] Marcum Valuation team to perform analysis on the company’s conclusions.” +But the work papers related to goodwill valuation show that Hackert’s team did not +conduct sufficient audit work in this significant area. +13 +67. The only goodwill analysis in the work papers was for one (of the four) AAI +acquisitions, and its goodwill was valued at $265,000 (or 3% of total goodwill). There was +no goodwill analysis in the work papers for the other three acquisitions, which accounted +for about 97% of the goodwill value. + +68. Additionally, while conducting the 2018 audit, Hackert received a third- +party valuation report via email related to another AAI acquisition (not the acquisition with +goodwill valued at $265,000). The report indicated that AAI should record a $2.5 million +impairment of goodwill, meaning that the value of goodwill related to the acquisition had +fallen by $2.5 million. However, the analysis in the third-party valuation report was not +included in the AAI work papers for 2018, and no goodwill impairment was recorded in +AAI’s financial statements for 2018. Hackert claimed that he reviewed with Marcum’s +valuation expert the report indicating that a $2.5 million impairment should be recorded, +but the work papers do not reflect Hackert’s analysis of the report or why he believed the +$2.5 million impairment was not warranted. + +69. The next year, when auditing AAI’s 2019 results, Hackert’s engagement +team did not identify goodwill valuation as a significant risk area, as it had in 2018. +Although goodwill still comprised a material amount of AAI’s total assets (about 26%), the +engagement team provided no explanation in the work papers for why the assessed risk +level was downgraded. + +70. In the 2019 AAI audit, Hackert signed off on multiple work papers citing as +audit evidence certain valuation reports prepared by third parties about AAI’s goodwill +valuations. Despite these citations, however, the work papers did not include the referenced +valuation reports. + +71. Although the valuation reports were not included in the work papers, they +purportedly were reviewed by Marcum’s valuation expert, who identified multiple issues +with these reports and their valuations of goodwill. But there is no documentation in the +work papers of whether or how these issues were addressed or resolved. For example, the +expert advised the team that they should perform a market cap reconciliation by comparing +the sum of the fair values in the reports with certain other data, and that his “back of the +envelope” calculations did “not line up.” However, there is no evidence in the work papers +that any market cap reconciliation was performed. In addition, the expert wrote in an email +on which Hackert was copied that he would rely on the audit team “to test all projected +financial information” included in the goodwill third party valuation reports. Yet there is no +evidence in the work papers that the team tested any of the projected financial information. + +72. Accordingly, Hackert’s conduct with respect to goodwill valuation violated +AS 1015, 1105, 1201, 1210, and 2501. + +Investments in Related Party + +73. In 2018, the Marcum audit team identified AAI’s transactions with related +parties as a significant and fraud risk area. AAI’s relevant related party transactions +14 +included its investment in the warrants of Avalanche, which AAI identified in its filings +with the Commission as a related party to AAI. As background, Avalanche had issued +AAI warrants to purchase 35.6 million shares of Avalanche common stock between 2017 +and 2020.9 From 2018 through 2020, AAI’s investments in Avalanche (including the +warrants, common stock, and loans) ranged from 18-22% of AAI’s total assets, +representing a material amount of AAI’s assets. + +74. GAAP that became effective for fiscal years beginning after December 15, +2017 – specifically, Accounting Standards Codification Topic 321, Investments – Equity +Securities (“ASC 321”) – eliminated an issuer’s ability to record changes in the fair value +of certain investments in equity securities (including warrants) in other comprehensive +income on the issuer’s financial statements. Instead, under the new ASC 321, such changes +had to be recorded in net income/loss on the financial statements. + +75. Although ASC 321 was effective for AAI’s fiscal year 2018, and AAI +applied that provision to certain equity investments in a private company on its Form 10-K +for 2018, AAI did not apply ASC 321 to its Avalanche warrants. The failure to apply ASC +321 to the Avalanche warrants was a material accounting error. + +76. During his audits of AAI for the fiscal years 2018 through 2020, however, +Hackert concurred with AAI’s incorrect accounting treatment of the Avalanche warrants. +Hackert knew or should have known that AAI’s accounting treatment was incorrect +because it did not apply ASC 321. + +77. Hackert’s failure to recognize or correct AAI’s improper accounting +resulted in AAI materially understating its net loss by 24.34% in 2018 and 6% in 2019, and +overstating its net loss by 10% in 2020. Because of that materially improper accounting, +AAI restated its financial results in 2023. + +78. Accordingly, Hackert’s conduct with respect to related party investments +violated AS 1010, 1015, and 1201. +Expense Testing +79. During the audit of AAI for 2019, as in other audits, Hackert’s engagement +team was required to sample and test expenses (to confirm that the expenses were +substantiated and accounted for correctly). The engagement team used an electronic +sampling program to select certain AAI expenses for testing. One of the expenses selected +was for $65,000, which purportedly was a payment to a third-party for consulting services. + +80. Email communications between a junior member of Hackert’s audit team +and AAI’s then-CFO, in or around May 2020, indicated that AAI could not locate +supporting documents for the expense, such as an executed consulting agreement, an +invoice from the consultant, or other documentation. But instead of insisting that AAI + +9 A stock warrant gives the holder the right to purchase a company’s stock at a specific price and within a +specific time frame. +15 +provide supporting documentation for the $65,000 expense, the engagement team simply +stopped seeking support for this sample item and chose another item to test. + +81. In fact, the third party provided little or no consulting services to AAI, and +certainly not services worth $65,000. Additionally, contemporaneous correspondence +between AAI’s then-CEO and the third-party indicated that AAI’s payment of $65,000 was +to satisfy a personal debt from the then-CEO to the third party. But so far as the work +papers show, neither Hackert nor anyone on the engagement team reviewed or analyzed +any documentation related to the $65,000 payment to ensure that it was evaluated properly. + +82. As a result, during the 2019 audit of AAI, Hackert failed to exercise due +professional care. Because of Hackert’s insufficient supervision, the engagement team failed +to perform appropriate procedures when they were unable to examine a sample chosen for +testing; they failed to consider the impact of the client being unable to provide sufficient +evidentiary support; and they failed to appropriately evaluate potential fraud on the part of +senior management. Additionally, so far as the work papers show, the team did not consider +whether the inability to obtain sufficient appropriate evidential matter for the potentially +fraudulent expense item constituted a scope limitation or whether the auditor’s opinion +should have been qualified or disclaimed. + +83. + Accordingly, Hackert’s conduct with respect to expense testing violated AS +1015, 1201, 2315, 2401, and 2810. + +VIOLATIONS + +84. As a result of the conduct described above, Hackert engaged in improper +professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. Section 4C(a)(2) 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. With respect to persons licensed to practice as accountants, “improper +professional conduct” includes “[r]epeated instances of unreasonable conduct, each +resulting in a violation of applicable professional standards, that indicate a lack of +competence to practice before the Commission.” Exchange Act Section 4C(b)(2)(B) and +Rule 102(e)(1)(iv)(B)(2). As discussed above, Hackert engaged in repeated instances of +unreasonable conduct, each resulting in a violation of applicable professional standards. + +85. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state +“the applicable professional standards under which the audit was conducted.” 17 C.F.R. § +210.2-02(b)(1). For audits of fiscal years 2016 and 2017, Rule 2-02(b)(1) similarly +mandated that an accountant’s report “state whether the audit was made in accordance with +accepted auditing standards….” An auditor violates Rule 2-02(b)(1) if it issues a report +stating it has conducted its audit in accordance with the PCAOB standards when it has not. +As a result of the conduct described above, Marcum violated Rule 2-02(b)(1) of Regulation +S-X and Hackert caused those violations. +16 +III. + +In view of the allegations made by the Division of Enforcement, the Commission +deems it necessary and appropriate in the public interest that public administrative and +cease-and-desist proceedings be instituted to determine: + +A. Whether the allegations set forth in Section II hereof are true and, in +connection therewith, to afford Respondent an opportunity to establish any defenses to such +allegations; + +B. What, if any, remedial action is appropriate in the public interest against +Respondent pursuant to Section 8A of the Securities Act, Section 4C(a) of the Exchange +Act, and Rule 102(e) of the Commission’s Rules of Practice; and + +C. Whether, pursuant to Section 8A of the Securities Act and Section 21C of +the Exchange Act, Respondent should be ordered to cease and desist from committing or +causing violations of and any future violations of Rule 2-02(b)(1) of Regulation S-X. + +IV. + +IT IS ORDERED that a public hearing before the Commission for the purposes of +taking evidence on the questions set forth in Section III hereof shall be convened not earlier +than 30 days and not later than 60 days from service of this Order at a time and place to be +fixed by further order of the Commission, pursuant to Rule 110 of the Commission’s Rules +of Practice, 17 C.F.R. § 201.110. + +IT IS FURTHER ORDERED that Respondent shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by +Rule 220(b) of the Commission’s Rules of Practice, 17 C.F.R. § 201.220(b). + +IT IS FURTHER ORDERED that the Division of Enforcement and Respondent +shall conduct a prehearing conference pursuant to Rule 221 of the Commission’s Rules of +Practice, 17 C.F.R. § 201.221, within fourteen (14) days of service of the Answer. The +parties may meet in person or participate by telephone or other remote means; following +the conference, they shall file a statement with the Office of the Secretary advising the +Commission of any agreements reached at said conference. If a prehearing conference was +not held, a statement shall be filed with the Office of the Secretary advising the +Commission of that fact and of the efforts made to meet and confer. + +If any Respondent fails to file the directed Answer, or fails to appear at a hearing or +conference after being duly notified, the Respondent may be deemed in default and the +proceedings may be determined against him upon consideration of this Order, the +allegations of which may be deemed to be true as provided by Rules 155(a), 220(f), 221(f) +and 310 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), +201.221(f), and 201.310. +17 +This Order shall be served forthwith upon Respondent by any means permitted by +the Commission’s Rules of Practice. + +The Commission finds that it would serve the interests of justice and not result in +prejudice to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.100(c), that notwithstanding any contrary reference in the Rules +of Practice to service of paper copies, service to the Division of Enforcement of all +opinions, orders, and decisions described in Rule 141, 17 C.F.R. § 201.141, and all papers +described in Rule 150(a), 17 C.F.R. § 201.150(a), in these proceedings shall be by email to +the attorneys who enter an appearance on behalf of the Division, and not by paper +service. + +Attention is called to Rule 151(a), (b) and (c) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.151(a), (b) and (c), providing that when, as here, a proceeding is +set before the Commission, all papers (including those listed in the following paragraph) +shall be filed electronically in administrative proceedings using the Commission’s +Electronic Filings in Administrative Proceedings (eFAP) system access through the +Commission’s website, www.sec.gov, at http://www.sec.gov/eFAP. Respondent also must +serve and accept service of documents electronically. All motions, objections, or +applications will be 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 notwithstanding any contrary reference in the Rules +of Practice to filing with or disposition by a hearing officer, all filings, including those +under Rules 210, 221, 222, 230, 231, 232, 233, and 250 of the Commission’s Rules of +Practice, 17 C.F.R. §§ 201.210, 221, 222, 230, 231, 232, 233, and 250, shall be directed to +and, as appropriate, decided by the Commission. This proceeding shall be deemed to be +one under the 120-day timeframe specified in Rule of Practice 360(a)(2)(i), 17 C.F.R. § +201.360(a)(2)(i), for the purposes of applying Rules of Practice 233 and 250, 17 C.F.R. §§ +201.233 and 250. +The Commission finds that it would serve the interests of justice and not result in +prejudice to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.100(c), that the Commission shall issue a decision on the basis of +the record in this proceeding, which shall consist of the items listed at Rule 350(a) of the +Commission’s Rules of Practice, 17 C.F.R. § 201.350(a), and any other document or item +filed with the Office of the Secretary and accepted into the record by the Commission. The +provisions of Rule 351 of the Commission’s Rules of Practice, 17 C.F.R. § 201.351, +relating to preparation and certification of a record index by the Office of the Secretary or +the hearing officer are not applicable to this proceeding. + +Th +e 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 +18 +Rules of Practice, 17 C.F.R. § 201.250, where the Commission has determined that no +public hearing is necessary; or (C) The determination that a party is deemed to be in default +under Rule 155 of the Commission’s Rules of Practice, 17 C.F.R. § 201.155, and no public +hearing is necessary. + +In the absence of an appropriate waiver, no officer or employee of the Commission +engaged in the performance of investigative or prosecuting functions in this or any factually +related proceeding will be permitted to participate or advise in the decision of this matter, +except as witness or counsel in proceedings held pursuant to notice. Since this proceeding is +not “rule making” within the meaning of Section 551 of the Administrative Procedure Act, it +is not deemed subject to the provisions of Section 553 delaying the effective date of any +final Commission action. + +By the Commission. + + +Vanessa A. Countryman +Secretary + +Appendix A + Client Name Balance +Sheet Date +Report +Release +Date +("RRD") +SEC Filing Hackert +Sign‐offs +within 45 +Days after +RRD +Hackert +Sign‐offs +more than +45 Days +after RRD +Total +Hackert +Sign‐offs +after RRD +Total +Hackert +Sign‐offs in +Audit +Percent of +Hackert +Sign‐offs +after RRD +1 Operating Co. 1 Dec‐31‐11 Apr‐16‐12 S‐1 45 0 45 104 43% +2 Operating Co. 2 Jun‐30‐12 Sep‐28‐12 10‐K 22 14 36 173 21% +3 Operating Co. 3 Dec‐31‐12 Apr‐05‐13 10‐K 0 22 22 69 32% +4 Operating Co. 4 Dec‐31‐12 Aug‐02‐13 8‐K/A 9 0 9 36 25% +5 Operating Co. 5 Dec‐31‐13 Apr‐01‐14 10‐K 39 6 45 85 53% +6 Operating Co. 6 Dec‐31‐13 May‐01‐14 S‐1 0 34 34 139 24% +7 Operating Co. 7 Dec‐31‐13 Mar‐27‐14 10‐K 0 31 31 112 28% +8 Operating Co. 8 Dec‐31‐13 Mar‐28‐14 10‐K 13 0 13 54 24% +9 Operating Co. 9 Dec‐31‐13 Mar‐31‐14 10‐K 10 0 10 46 22% +10 Operating Co. 3 Dec‐31‐13 Apr‐15‐14 10‐K 4 0 4 46 9% +11 Operating Co. 10 Dec‐31‐13 Apr‐15‐14 10‐K 3 0 3 6 50% +12 Operating Co. 5 Dec‐31‐14 Mar‐17‐15 10‐K 80 0 80 318 25% +13 Operating Co. 11 Dec‐31‐14 Mar‐31‐15 10‐K 76 0 76 119 64% +14 Operating Co. 12 Dec‐31‐14 Dec‐07‐15 10‐K 0 43 43 72 60% +15 Operating Co. 13 Dec‐31‐14 Mar‐11‐15 10‐K 41 0 41 41 100% +16 Operating Co. 1 Dec‐31‐14 Mar‐31‐15 10‐K 29 4 33 78 42% +17 Operating Co. 8 Dec‐31‐14 Apr‐15‐15 10‐K 28 0 28 76 37% +18 Operating Co. 9 Dec‐31‐14 Mar‐30‐15 10‐K 7 0 7 38 18% +19 Operating Co. 14 Dec‐31‐14 Apr‐14‐15 S‐4 3 0 3 55 5% +20 Operating Co. 15 Dec‐31‐14 Mar‐12‐15 10‐K 0 3 3 54 6% +21 Operating Co. 7 Jan‐03‐15 Mar‐19‐15 10‐K 0 7 7 57 12% +22 Operating Co. 11 Dec‐31‐15 Mar‐30‐16 10‐K 0 83 83 129 64% +23 Operating Co. 12 Dec‐31‐15 Jul‐09‐16 10‐K 36 23 59 61 97% +24 Operating Co. 1 Dec‐31‐15 Mar‐30‐16 10‐K 0 32 32 60 53% +25 Operating Co. 16 Dec‐31‐15 Feb‐18‐16 10‐K 24 0 24 69 35% +26 Operating Co. 17 Dec‐31‐15 Dec‐04‐16 8‐K 16 0 16 76 21% +27 Operating Co. 5 Dec‐31‐15 Mar‐15‐16 10‐K 0 5 5 89 6% +28 Operating Co. 14 Dec‐31‐15 Mar‐10‐16 10‐K 0 0 0 0 n/a +29 Operating Co. 7 Jan‐02‐16 Mar‐17‐16 10‐K 0 1 1 56 2% +30 Operating Co. 18 Mar‐31‐16 Jun‐21‐16 10‐K 0 0 0 0 n/a + + Client Name Balance +Sheet Date +Report +Release +Date +("RRD") +SEC Filing Hackert +Sign‐offs +within 45 +Days after +RRD +Hackert +Sign‐offs +more than +45 Days +after RRD +Total +Hackert +Sign‐offs +after RRD +Total +Hackert +Sign‐offs in +Audit +Percent of +Hackert +Sign‐offs +after RRD +31 Operating Co. 11 Dec‐31‐16 Mar‐23‐17 10‐K 78 3 81 149 54% +32 Operating Co. 19 Dec‐31‐16 Mar‐24‐17 10‐K 62 11 73 191 38% +33 Operating Co. 20 Dec‐31‐16 Mar‐28‐17 10‐K 34 0 34 136 25% +34 Operating Co. 21 Dec‐31‐16 Feb‐07‐17 10‐K 30 0 30 78 38% +35 Operating Co. 12 Dec‐31‐16 Apr‐14‐17 10‐K 13 11 24 107 22% +36 Ault Alliance, Inc. Dec‐31‐16 Apr‐10‐17 10‐K 4 4 8 108 7% +37 Operating Co. 9 Dec‐31‐16 Mar‐31‐17 10‐K 5 0 5 59 8% +38 Operating Co. 14 Dec‐31‐16 Mar‐10‐17 10‐K 4 0 4 65 6% +39 Operating Co. 38 Dec‐31‐16 Mar‐15‐17 10‐K 3 0 3 150 2% +40 Operating Co. 22 Dec‐31‐17 Apr‐02‐18 10‐K 102 4 106 274 39% +41 Ault Alliance, Inc. Dec‐31‐17 Apr‐18‐18 10‐K 0 101 101 149 68% +42 Operating Co. 12 Dec‐31‐17 Apr‐17‐18 10‐K 0 73 73 143 51% +43 Operating Co. 23 Dec‐31‐17 Apr‐10‐18 S‐4 0 71 71 127 56% +44 Operating Co. 11 Dec‐31‐17 Mar‐15‐18 10‐K 0 47 47 92 51% +45 Operating Co. 20 Dec‐31‐17 Mar‐22‐18 10‐K 7 0 7 107 7% +46 Operating Co. 24 Dec‐31‐18 Sep‐27‐19 S‐1 0 153 153 153 100% +47 Operating Co. 25 Dec‐31‐18 Sep‐27‐19 S‐1 0 80 80 299 27% +48 Operating Co. 26 Dec‐31‐18 Sep‐27‐19 S‐1 24 54 78 367 21% +49 Ault Alliance, Inc. Dec‐31‐18 Apr‐16‐19 10‐K 0 67 67 368 18% +50 Operating Co. 27 Dec‐31‐18 Sep‐27‐19 S‐1 0 64 64 245 26% +51 Operating Co. 20 Dec‐31‐18 Mar‐22‐19 10‐K 58 0 58 104 56% +52 Operating Co. 28 Dec‐31‐18 Sep‐27‐19 S‐1 0 58 58 254 23% +53 Operating Co. 23 Dec‐31‐18 Mar‐19‐19 10‐K 52 0 52 169 31% +54 Operating Co. 12 Dec‐31‐18 Apr‐01‐19 10‐K 0 37 37 137 27% +55 Operating Co. 29 Dec‐31‐18 Sep‐27‐19 S‐1 27 3 30 180 17% +56 Operating Co. 30 Dec‐31‐18 Nov‐12‐19 S‐4 0 24 24 87 28% +57 Operating Co. 31 Dec‐31‐18 Nov‐12‐19 S‐4 0 22 22 79 28% +58 Operating Co. 32 Dec‐31‐18 Nov‐12‐19 S‐4 0 20 20 79 25% +59 Operating Co. 33 Dec‐31‐18 Sep‐27‐19 S‐1 2 10 12 181 7% +60 Operating Co. 34 Mar‐31‐19 Dec‐27‐19 20‐F 37 9 46 384 12% +61 Operating Co. 35 Oct‐31‐19 Jan‐29‐20 10‐K 26 0 26 161 16% + + Client Name Balance +Sheet Date +Report +Release +Date +("RRD") +SEC Filing Hackert +Sign‐offs +within 45 +Days after +RRD +Hackert +Sign‐offs +more than +45 Days +after RRD +Total +Hackert +Sign‐offs +after RRD +Total +Hackert +Sign‐offs in +Audit +Percent of +Hackert +Sign‐offs +after RRD +62 Operating Co. 36 Dec‐19‐19 Mar‐23‐20 10‐K 5 0 5 238 2% +63 Ault Alliance, Inc. Dec‐31‐19 May‐29‐20 10‐K 1 27 28 231 12% +64 SPAC 1 Dec‐31‐19 Jan‐31‐20 S‐1 30 0 30 39 77% +65 SPAC 2 Dec‐31‐19 Mar‐06‐20 S‐1 35 0 35 35 100% +66 SPAC 3 Dec‐31‐19 Mar‐10‐20 S‐1 19 0 19 38 50% +67 SPAC 4 Dec‐31‐19 Mar‐13‐20 S‐1 0 46 46 46 100% +68 SPAC 5 Dec‐31‐19 Mar‐26‐20 S‐1 8 0 8 45 18% +69 SPAC 6 Dec‐31‐19 Apr‐08‐20 S‐1 17 0 17 40 43% +70 SPAC 7 Dec‐31‐19 Aug‐06‐20 S‐1 47 0 47 47 100% +71 SPAC 8 Dec‐31‐19 Sep‐25‐20 S‐1 61 0 61 86 71% +72 SPAC 9 Jan‐30‐20 Dec‐11‐20 S‐1 35 14 49 49 100% +73 SPAC 10 Feb‐04‐20 Feb‐12‐20 S‐1 10 0 10 31 32% +74 SPAC 11 Feb‐04‐20 Mar‐02‐20 S‐1 13 0 13 31 42% +75 SPAC 12 Mar‐03‐20 Mar‐10‐20 S‐1 31 0 31 31 100% +76 SPAC 13 Mar‐05‐20 Mar‐18‐20 S‐1 38 0 38 38 100% +77 SPAC 14 May‐01‐20 May‐08‐20 S‐1 7 5 12 34 35% +78 SPAC 15 Jun‐08‐20 Jun‐12‐20 S‐1 26 0 26 26 100% +79 SPAC 16 Jun‐20‐20 Jun‐28‐21 S‐1 0 7 7 28 25% +80 SPAC 17 Jun‐30‐20 Jul‐08‐20 S‐1 32 1 33 33 100% +81 SPAC 18 Jun‐30‐20 Jul‐17‐20 S‐1 0 47 47 47 100% +82 SPAC 19 Jul‐07‐20 Jul‐24‐20 S‐1 0 11 11 43 26% +83 SPAC 20 Jul‐15‐20 Jul‐20‐20 S‐1 4 80 84 84 100% +84 SPAC 21 Jul‐20‐20 Jul‐27‐20 S‐1 7 0 7 29 24% +85 SPAC 22 Jul‐20‐20 Jul‐28‐20 S‐1 8 0 8 31 26% +86 SPAC 23 Jul‐20‐20 Aug‐04‐20 S‐1 19 39 58 58 100% +87 SPAC 24 Aug‐03‐20 Aug‐10‐20 S‐1 14 0 14 34 41% +88 SPAC 25 Aug‐07‐20 Aug‐31‐20 S‐1 6 0 6 30 20% +89 SPAC 26 Aug‐17‐20 Sep‐04‐20 S‐1 0 12 12 38 32% +90 SPAC 27 Aug‐19‐20 Sep‐18‐20 S‐1 41 0 41 41 100% +91 SPAC 28 Aug‐20‐20 Oct‐27‐20 S‐1 21 0 21 44 48% +92 SPAC 29 Aug‐21‐20 Sep‐01‐20 S‐1 7 0 7 32 22% + + Client Name Balance +Sheet Date +Report +Release +Date +("RRD") +SEC Filing Hackert +Sign‐offs +within 45 +Days after +RRD +Hackert +Sign‐offs +more than +45 Days +after RRD +Total +Hackert +Sign‐offs +after RRD +Total +Hackert +Sign‐offs in +Audit +Percent of +Hackert +Sign‐offs +after RRD +93 SPAC 30 Aug‐24‐20 Aug‐31‐20 S‐1 26 16 42 42 100% +94 SPAC 31 Aug‐24‐20 Sep‐02‐20 S‐1 3 0 3 27 11% +95 SPAC 32 Aug‐28‐20 Oct‐02‐20 S‐1 0 10 10 43 23% +96 SPAC 33 Aug‐31‐20 Sep‐04‐20 S‐1 0 12 12 38 32% +97 SPAC 34 Sep‐03‐20 Sep‐15‐20 S‐1 8 0 8 40 20% +98 SPAC 35 Sep‐04‐20 Sep‐11‐20 S‐1 19 42 61 61 100% +99 SPAC 36 Sep‐04‐20 Sep‐18‐20 S‐1 6 0 6 33 18% +100 SPAC 37 Sep‐04‐20 Sep‐21‐20 S‐1 19 0 19 44 43% +101 SPAC 38 Sep‐08‐20 Sep‐15‐20 S‐1 25 0 25 25 100% +102 SPAC 39 Sep‐11‐20 Oct‐09‐20 S‐1 8 0 8 47 17% +103 SPAC 40 Sep‐15‐20 Sep‐21‐20 S‐1 9 15 24 55 44% +104 SPAC 41 Sep‐15‐20 Sep‐28‐20 S‐1 15 0 15 44 34% +105 SPAC 42 Sep‐17‐20 Sep‐09‐20 S‐1 0 27 27 50 54% +106 SPAC 43 Sep‐30‐20 Oct‐12‐20 S‐1 30 18 48 48 100% +107 SPAC 44 Sep‐30‐20 Oct‐13‐20 S‐1 0 46 46 46 100% +108 SPAC 45 Sep‐30‐20 Dec‐23‐20 S‐1 22 12 34 34 100% +109 SPAC 46 Oct‐02‐20 Oct‐13‐20 S‐1 0 12 12 46 26% +110 SPAC 47 Oct‐02‐20 Oct‐16‐20 S‐1 30 24 54 54 100% +111 SPAC 48 Oct‐09‐20 Oct‐22‐20 S‐1 42 0 42 42 100% +112 SPAC 49 Oct‐13‐20 Oct‐21‐20 S‐1 39 0 39 39 100% +113 SPAC 50 Oct‐13‐20 Oct‐22‐20 S‐1 43 0 43 43 100% +114 SPAC 51 Oct‐13‐20 Nov‐19‐20 S‐1 16 0 16 47 34% +115 SPAC 52 Oct‐23‐20 Nov‐19‐20 S‐1 0 36 36 36 100% +116 SPAC 53 Oct‐28‐20 Nov‐17‐20 S‐1 13 0 13 46 28% +117 SPAC 54 Oct‐30‐20 Sep‐16‐20 S‐1 41 0 41 41 100% +118 SPAC 55 Oct‐30‐20 Nov‐10‐20 S‐1 23 0 23 23 100% +119 Operating Co. 35 Oct‐31‐20 Feb‐16‐21 10‐K 1 31 32 219 15% +120 SPAC 56 Nov‐04‐20 Nov‐20‐20 S‐1 39 0 39 39 100% +121 SPAC 57 Nov‐18‐20 Nov‐30‐20 S‐1 0 13 13 48 27% +122 SPAC 58 Nov‐20‐20 Dec‐28‐20 S‐1 0 15 15 58 26% +123 SPAC 59 Nov‐21‐20 Dec‐09‐20 S‐1 0 8 8 52 15% + + Client Name Balance +Sheet Date +Report +Release +Date +("RRD") +SEC Filing Hackert +Sign‐offs +within 45 +Days after +RRD +Hackert +Sign‐offs +more than +45 Days +after RRD +Total +Hackert +Sign‐offs +after RRD +Total +Hackert +Sign‐offs in +Audit +Percent of +Hackert +Sign‐offs +after RRD +124 SPAC 60 Nov‐24‐20 Dec‐09‐20 S‐1 0 15 15 48 31% +125 SPAC 61 Nov‐30‐20 Dec‐07‐20 S‐1 0 11 11 42 26% +126 SPAC 62 Dec‐04‐20 Dec‐24‐20 S‐1 0 11 11 46 24% +127 SPAC 63 Dec‐11‐20 Dec‐24‐20 S‐1 32 0 32 32 100% +128 SPAC 64 Dec‐11‐20 Jan‐20‐21 S‐1 0 2 2 29 7% +129 SPAC 65 Dec‐17‐20 Dec‐23‐20 S‐1 0 1 1 30 3% +130 SPAC 66 Dec‐17‐20 Jan‐05‐21 S‐1 20 0 20 51 39% +131 SPAC 67 Dec‐18‐20 Dec‐23‐20 S‐1 0 9 9 37 24% +132 SPAC 68 Dec‐18‐20 Dec‐30‐20 S‐1 2 0 2 24 8% +133 SPAC 69 Dec‐19‐20 Jan‐31‐20 S‐1 9 0 9 37 24% +134 SPAC 70 Dec‐22‐20 Dec‐31‐20 S‐1 40 11 51 51 100% +135 SPAC 71 Dec‐28‐20 Jan‐08‐21 S‐1 7 10 17 44 39% +136 SPAC 18 Dec‐31‐20 Jan‐07‐20 S‐1 13 0 13 47 28% +137 SPAC 72 Dec‐31‐20 Feb‐18‐20 S‐1 0 0 0 0 n/a +138 SPAC 73 Dec‐31‐20 Jan‐07‐21 S‐1 39 7 46 46 100% +139 SPAC 74 Dec‐31‐20 Jan‐07‐21 S‐1 0 13 13 45 29% +140 SPAC 53 Dec‐31‐20 Jan‐08‐21 S‐1 30 0 30 30 100% +141 SPAC 75 Dec‐31‐20 Jan‐08‐21 S‐1 42 5 47 47 100% +142 SPAC 76 Dec‐31‐20 Jan‐08‐21 S‐1 36 10 46 46 100% +143 SPAC 27 Dec‐31‐20 Jan‐11‐21 S‐1 22 16 38 52 73% +144 SPAC 77 Dec‐31‐20 Jan‐11‐21 S‐1 37 0 37 37 100% +145 SPAC 32 Dec‐31‐20 Jan‐11‐21 S‐1 0 16 16 52 31% +146 SPAC 78 Dec‐31‐20 Jan‐14‐21 S‐1 33 12 45 45 100% +147 SPAC 79 Dec‐31‐20 Jan‐14‐21 S‐1 0 6 6 36 17% +148 SPAC 50 Dec‐31‐20 Jan‐15‐21 S‐1 0 14 14 45 31% +149 SPAC 80 Dec‐31‐20 Jan‐19‐21 S‐1 0 43 43 43 100% +150 SPAC 81 Dec‐31‐20 Jan‐21‐21 S‐1 53 15 68 68 100% +151 SPAC 82 Dec‐31‐20 Jan‐25‐21 S‐1 9 10 19 44 43% +152 SPAC 83 Dec‐31‐20 Jan‐25‐21 S‐1 4 9 13 53 25% +153 SPAC 63 Dec‐31‐20 Jan‐25‐21 S‐1 32 0 32 32 100% +154 SPAC 45 Dec‐31‐20 Jan‐26‐21 S‐1 11 8 19 44 43% + + Client Name Balance +Sheet Date +Report +Release +Date +("RRD") +SEC Filing Hackert +Sign‐offs +within 45 +Days after +RRD +Hackert +Sign‐offs +more than +45 Days +after RRD +Total +Hackert +Sign‐offs +after RRD +Total +Hackert +Sign‐offs in +Audit +Percent of +Hackert +Sign‐offs +after RRD +155 SPAC 68 Dec‐31‐20 Jan‐27‐21 S‐1 8 0 8 30 27% +156 SPAC 57 Dec‐31‐20 Feb‐05‐21 S‐1 33 15 48 48 100% +157 SPAC 84 Dec‐31‐20 Feb‐05‐21 S‐1 24 3 27 51 53% +158 SPAC 70 Dec‐31‐20 Feb‐10‐21 S‐1 13 11 24 51 47% +159 SPAC 33 Dec‐31‐20 Feb‐18‐21 S‐1 20 6 26 55 47% +160 SPAC 85 Dec‐31‐20 Feb‐24‐21 S‐1 3 0 3 35 9% +161 SPAC 3 Dec‐31‐20 Feb‐24‐21 S‐1 38 0 38 38 100% +162 SPAC 62 Dec‐31‐20 Feb‐26‐21 S‐1 0 5 5 36 14% +163 SPAC 7 Dec‐31‐20 Mar‐09‐21 S‐1 47 0 47 47 100% +164 SPAC 54 Dec‐31‐20 Mar‐25‐21 10‐K 1 0 1 57 2% +165 SPAC 86 Jan‐08‐21 Jan‐24‐21 S‐1 22 0 22 55 40% +166 SPAC 87 Jan‐15‐21 Feb‐03‐21 S‐1 0 20 20 56 36% +167 SPAC 88 Jan‐21‐21 Jan‐29‐21 S‐1 37 8 45 45 100% +168 SPAC 89 Jan‐21‐21 Jan‐29‐21 S‐1 23 21 44 44 100% +169 SPAC 90 Jan‐21‐21 Feb‐02‐21 S‐1 0 9 9 43 21% +170 SPAC 91 Jan‐25‐21 Feb‐01‐21 S‐1 43 12 55 55 100% +171 SPAC 92 Feb‐08‐21 Feb‐22‐21 S‐1 0 4 4 32 13% +172 SPAC 93 Feb‐15‐21 Feb‐16‐21 S‐1 25 21 46 46 100% +173 SPAC 94 Feb‐23‐21 Mar‐15‐21 S‐1 15 8 23 52 44% +174 SPAC 95 Feb‐23‐21 Mar‐23‐21 S‐1 30 19 49 49 100% +175 SPAC 96 Feb‐25‐21 Mar‐12‐21 S‐1 38 0 38 38 100% +176 SPAC 97 Mar‐02‐21 Mar‐29‐21 S‐1 0 5 5 47 11% +177 SPAC 98 Mar‐04‐21 Mar‐12‐21 S‐1 13 0 13 43 30% +178 SPAC 99 Mar‐04‐21 Mar‐24‐21 S‐1 36 0 36 36 100% +179 SPAC 100 Mar‐05‐21 Mar‐25‐21 S‐1 28 15 43 43 100% +180 SPAC 101 Mar‐08‐21 Mar‐18‐21 S‐1 35 11 46 46 100% +181 SPAC 84 Mar‐15‐21 Mar‐19‐21 S‐1 3 0 3 51 6% +182 SPAC 103 Mar‐15‐21 May‐25‐21 S‐1 11 0 11 36 31% +183 SPAC 104 Mar‐22‐21 Aug‐03‐21 S‐1 61 0 61 61 100% +184 SPAC 105 Mar‐31‐21 Jun‐10‐21 S‐1 7 18 25 43 58% +185 SPAC 102 Mar‐31‐21 Jun‐22‐21 S‐1 0 22 22 43 51% + + Client Name Balance +Sheet Date +Report +Release +Date +("RRD") +SEC Filing Hackert +Sign‐offs +within 45 +Days after +RRD +Hackert +Sign‐offs +more than +45 Days +after RRD +Total +Hackert +Sign‐offs +after RRD +Total +Hackert +Sign‐offs in +Audit +Percent of +Hackert +Sign‐offs +after RRD +186 SPAC 106 Mar‐31‐21 Jun‐24‐21 S‐1 15 2 17 48 35% +187 SPAC 107 Mar‐31‐21 Jul‐13‐21 S‐1 21 0 21 75 28% +188 SPAC 108 Apr‐08‐21 Jul‐13‐21 S‐1 14 1 15 45 33% +189 SPAC 109 Apr‐09‐21 Jul‐16‐21 S‐1 27 0 27 82 33% +190 SPAC 110 Apr‐19‐21 Jul‐02‐21 S‐1 0 19 19 50 38% +191 SPAC 111 Apr‐28‐21 Jul‐03‐21 S‐1 22 14 36 61 59% +192 SPAC 112 May‐17‐21 Jul‐14‐21 S‐1 10 4 14 45 31% +193 SPAC 113 May‐24‐21 Jul‐08‐21 S‐1 9 0 9 41 22% +194 SPAC 114 Jun‐10‐21 Jul‐30‐21 S‐1 12 12 24 50 48% +195 SPAC 115 Jun‐20‐21 Jul‐09‐21 S‐1 13 0 13 55 24% +196 SPAC 116 Jun‐30‐21 Sep‐09‐21 S‐1 8 0 8 36 22% +197 SPAC 117 Jun‐30‐21 Nov‐12‐21 S‐1 16 0 16 55 29% +198 SPAC 17 Jun‐30‐21 Dec‐17‐21 S‐1 16 0 16 47 34% +199 SPAC 118 Jul‐13‐21 Oct‐13‐21 S‐1 18 13 31 66 47% +200 SPAC 119 Jul‐18‐21 Oct‐04‐21 S‐1 2 9 11 41 27% +201 SPAC 120 Aug‐18‐21 Oct‐11‐21 S‐1 0 12 12 55 22% +202 SPAC 121 Oct‐21‐21 Oct‐27‐21 S‐1 32 0 32 40 80% +203 SPAC 19 Dec‐31‐21 Feb‐19‐21 S‐1 37 11 48 48 100% +204 SPAC 3 Dec‐31‐21 Mar‐31‐22 10‐K 40 0 40 85 47% + +Appendix B + Client Name Balance +Sheet Date +Report +Release +Date +("RRD") +SEC Filing Hackert +Sign‐offs +more than +45 Days +after RRD +AS 3 Memo +1 Operating Co. 2 Jun‐30‐12 Sep‐28‐12 10‐K 14 +2 Operating Co. 3 Dec‐31‐12 Apr‐05‐13 10‐K 22 +3 Operating Co. 5 Dec‐31‐13 Apr‐01‐14 10‐K 6 +4 Operating Co. 6 Dec‐31‐13 May‐01‐14 S‐1 34 X +5 Operating Co. 7 Dec‐31‐13 Mar‐27‐14 10‐K 31 +6 Operating Co. 12 Dec‐31‐14 Dec‐07‐15 10‐K 43 X +7 Operating Co. 1 Dec‐31‐14 Mar‐31‐15 10‐K 4 X +8 Operating Co. 15 Dec‐31‐14 Mar‐12‐15 10‐K 3 +9 Operating Co. 7 Jan‐03‐15 Mar‐19‐15 10‐K 7 +10 Operating Co. 11 Dec‐31‐15 Mar‐30‐16 10‐K 83 X +11 Operating Co. 12 Dec‐31‐15 Jul‐09‐16 10‐K 23 X +12 Operating Co. 1 Dec‐31‐15 Mar‐30‐16 10‐K 32 X +13 Operating Co. 5 Dec‐31‐15 Mar‐15‐16 10‐K 5 X +14 Operating Co. 9 Dec‐31‐15 Mar‐29‐16 10‐K 0 X +15 Operating Co. 7 Jan‐02‐16 Mar‐17‐16 10‐K 1 X +16 Operating Co. 11 Dec‐31‐16 Mar‐23‐17 10‐K 3 +17 Operating Co. 19 Dec‐31‐16 Mar‐24‐17 10‐K 11 X +18 Operating Co. 12 Dec‐31‐16 Apr‐14‐17 10‐K 11 +19 Ault Alliance, Inc. Dec‐31‐16 Apr‐10‐17 10‐K 4 X +20 Operating Co. 22 Dec‐31‐17 Apr‐02‐18 10‐K 4 X +21 Ault Alliance, Inc. Dec‐31‐17 Apr‐18‐18 10‐K 101 X +22 Operating Co. 12 Dec‐31‐17 Apr‐17‐18 10‐K 73 X +23 Operating Co. 23 Dec‐31‐17 Apr‐10‐18 S‐4 71 X +24 Operating Co. 11 Dec‐31‐17 Mar‐15‐18 10‐K 47 +25 Operating Co. 35 Oct‐31‐18 Jan‐29‐19 10‐K 0 X +26 Operating Co. 24 Dec‐31‐18 Sep‐27‐19 S‐1 153 X +27 Operating Co. 25 Dec‐31‐18 Sep‐27‐19 S‐1 80 X +28 Operating Co. 26 Dec‐31‐18 Sep‐27‐19 S‐1 54 X +29 Ault Alliance, Inc. Dec‐31‐18 Apr‐16‐19 10‐K 67 X +30 Operating Co. 27 Dec‐31‐18 Sep‐27‐19 S‐1 64 X + + Client Name Balance +Sheet Date +Report +Release +Date +("RRD") +SEC Filing Hackert +Sign‐offs +more than +45 Days +after RRD +AS 3 Memo +31 Operating Co. 28 Dec‐31‐18 Sep‐27‐19 S‐1 58 X +32 Operating Co. 12 Dec‐31‐18 Apr‐01‐19 10‐K 37 X +33 Operating Co. 29 Dec‐31‐18 Sep‐27‐19 S‐1 3 X +34 Operating Co. 30 Dec‐31‐18 Nov‐12‐19 S‐4 24 X +35 Operating Co. 31 Dec‐31‐18 Nov‐12‐19 S‐4 22 X +36 Operating Co. 32 Dec‐31‐18 Nov‐12‐19 S‐4 20 X +37 Operating Co. 33 Dec‐31‐18 Sep‐27‐19 S‐1 10 X +38 Operating Co. 37 Dec‐31‐18 Feb‐05‐19 F‐4 0 X +39 Operating Co. 34 Mar‐31‐19 Dec‐27‐19 20‐F 9 X +40 Operating Co. 18 Mar‐31‐19 Jul‐01‐19 10‐K 0 X +41 Operating Co. 35 Oct‐31‐19 Jan‐29‐20 10‐K 0 X +42 Ault Alliance, Inc. Dec‐31‐19 May‐29‐20 10‐K 27 X +43 SPAC 4 Dec‐31‐19 Mar‐13‐20 S‐1 46 +44 SPAC 9 Jan‐30‐20 Dec‐11‐20 S‐1 14 X +45 SPAC 14 May‐01‐20 May‐08‐20 S‐1 5 +46 SPAC 15 Jun‐08‐20 Jun‐12‐20 S‐1 0 X +47 SPAC 16 Jun‐20‐20 Jun‐28‐21 S‐1 7 X +48 SPAC 17 Jun‐30‐20 Jul‐08‐20 S‐1 1 X +49 SPAC 18 Jun‐30‐20 Jul‐17‐20 S‐1 47 +50 SPAC 19 Jul‐07‐20 Jul‐24‐20 S‐1 11 X +51 SPAC 20 Jul‐15‐20 Jul‐20‐20 S‐1 80 X +52 SPAC 23 Jul‐20‐20 Aug‐04‐20 S‐1 39 +53 SPAC 26 Aug‐17‐20 Sep‐04‐20 S‐1 12 +54 SPAC 30 Aug‐24‐20 Aug‐31‐20 S‐1 16 X +55 SPAC 32 Aug‐28‐20 Oct‐02‐20 S‐1 10 X +56 SPAC 33 Aug‐31‐20 Sep‐04‐20 S‐1 12 +57 SPAC 35 Sep‐04‐20 Sep‐11‐20 S‐1 42 +58 SPAC 40 Sep‐15‐20 Sep‐21‐20 S‐1 15 X +59 SPAC 42 Sep‐17‐20 Sep‐09‐20 S‐1 27 X +60 SPAC 43 Sep‐30‐20 Oct‐12‐20 S‐1 18 X +61 SPAC 44 Sep‐30‐20 Oct‐13‐20 S‐1 46 X + + Client Name Balance +Sheet Date +Report +Release +Date +("RRD") +SEC Filing Hackert +Sign‐offs +more than +45 Days +after RRD +AS 3 Memo +62 SPAC 45 Sep‐30‐20 Dec‐23‐20 S‐1 12 X +63 SPAC 46 Oct‐02‐20 Oct‐13‐20 S‐1 12 X +64 SPAC 47 Oct‐02‐20 Oct‐16‐20 S‐1 24 X +65 SPAC 52 Oct‐23‐20 Nov‐19‐20 S‐1 36 X +66 Operating Co. 35 Oct‐31‐20 Feb‐16‐21 10‐K 31 X +67 SPAC 57 Nov‐18‐20 Nov‐30‐20 S‐1 13 X +68 SPAC 58 Nov‐20‐20 Dec‐28‐20 S‐1 15 X +69 SPAC 59 Nov‐21‐20 Dec‐09‐20 S‐1 8 X +70 SPAC 60 Nov‐24‐20 Dec‐09‐20 S‐1 15 X +71 SPAC 61 Nov‐30‐20 Dec‐07‐20 S‐1 11 +72 SPAC 62 Dec‐04‐20 Dec‐24‐20 S‐1 11 X +73 SPAC 64 Dec‐11‐20 Jan‐20‐21 S‐1 2 X +74 SPAC 63 Dec‐11‐20 Dec‐24‐20 S‐1 0 X +75 SPAC 65 Dec‐17‐20 Dec‐23‐20 S‐1 1 X +76 SPAC 67 Dec‐18‐20 Dec‐23‐20 S‐1 9 X +77 SPAC 70 Dec‐22‐20 Dec‐31‐20 S‐1 11 X +78 SPAC 71 Dec‐28‐20 Jan‐08‐21 S‐1 10 X +79 Ault Alliance, Inc. Dec‐31‐20 Apr‐15‐21 10‐K 0 X +80 SPAC 73 Dec‐31‐20 Jan‐07‐21 S‐1 7 X +81 SPAC 74 Dec‐31‐20 Jan‐07‐21 S‐1 13 X +82 SPAC 75 Dec‐31‐20 Jan‐08‐21 S‐1 5 +83 SPAC 76 Dec‐31‐20 Jan‐08‐21 S‐1 10 X +84 SPAC 27 Dec‐31‐20 Jan‐11‐21 S‐1 16 +85 SPAC 32 Dec‐31‐20 Jan‐11‐21 S‐1 16 X +86 SPAC 78 Dec‐31‐20 Jan‐14‐21 S‐1 12 X +87 SPAC 79 Dec‐31‐20 Jan‐14‐21 S‐1 6 X +88 SPAC 50 Dec‐31‐20 Jan‐15‐21 S‐1 14 X +89 SPAC 80 Dec‐31‐20 Jan‐19‐21 S‐1 43 X +90 SPAC 81 Dec‐31‐20 Jan‐21‐21 S‐1 15 X +91 SPAC 82 Dec‐31‐20 Jan‐25‐21 S‐1 10 X +92 SPAC 83 Dec‐31‐20 Jan‐25‐21 S‐1 9 X + + Client Name Balance +Sheet Date +Report +Release +Date +("RRD") +SEC Filing Hackert +Sign‐offs +more than +45 Days +after RRD +AS 3 Memo +93 SPAC 45 Dec‐31‐20 Jan‐26‐21 S‐1 8 X +94 SPAC 57 Dec‐31‐20 Feb‐05‐21 S‐1 15 X +95 SPAC 84 Dec‐31‐20 Feb‐05‐21 S‐1 3 X +96 SPAC 70 Dec‐31‐20 Feb‐10‐21 S‐1 11 X +97 SPAC 33 Dec‐31‐20 Feb‐18‐21 S‐1 6 X +98 SPAC 62 Dec‐31‐20 Feb‐26‐21 S‐1 5 X +99 SPAC 63 Dec‐31‐20 Jan‐25‐21 S‐1 0 X +100 SPAC 3 Dec‐31‐20 Feb‐24‐21 S‐1 0 X +101 SPAC 64 Dec‐31‐20 Feb‐26‐21 S‐1 0 X +102 SPAC 87 Jan‐15‐21 Feb‐03‐21 S‐1 20 X +103 SPAC 88 Jan‐21‐21 Jan‐29‐21 S‐1 8 X +104 SPAC 89 Jan‐21‐21 Jan‐29‐21 S‐1 21 X +105 SPAC 90 Jan‐21‐21 Feb‐02‐21 S‐1 9 X +106 SPAC 91 Jan‐25‐21 Feb‐01‐21 S‐1 12 +107 SPAC 92 Feb‐08‐21 Feb‐22‐21 S‐1 4 +108 SPAC 93 Feb‐15‐21 Feb‐16‐21 S‐1 21 X +109 SPAC 94 Feb‐23‐21 Mar‐15‐21 S‐1 8 X +110 SPAC 95 Feb‐23‐21 Mar‐23‐21 S‐1 19 X +111 SPAC 97 Mar‐02‐21 Mar‐29‐21 S‐1 5 X +112 SPAC 100 Mar‐05‐21 Mar‐25‐21 S‐1 15 X +113 SPAC 101 Mar‐08‐21 Mar‐18‐21 S‐1 11 X +114 SPAC 84 Mar‐15‐21 Mar‐19‐21 S‐1 0 X +115 SPAC 105 Mar‐31‐21 Jun‐10‐21 S‐1 18 X +116 SPAC 102 Mar‐31‐21 Jun‐22‐21 S‐1 22 X +117 SPAC 106 Mar‐31‐21 Jun‐24‐21 S‐1 2 X +118 SPAC 108 Apr‐08‐21 Jul‐13‐21 S‐1 1 X +119 SPAC 110 Apr‐19‐21 Jul‐02‐21 S‐1 19 X +120 SPAC 111 Apr‐28‐21 Jul‐03‐21 S‐1 14 X +121 SPAC 112 May‐17‐21 Jul‐14‐21 S‐1 4 X +122 SPAC 114 Jun‐10‐21 Jul‐30‐21 S‐1 12 X +123 SPAC 118 Jul‐13‐21 Oct‐13‐21 S‐1 13 X + + Client Name Balance +Sheet Date +Report +Release +Date +("RRD") +SEC Filing Hackert +Sign‐offs +more than +45 Days +after RRD +AS 3 Memo +124 SPAC 119 Jul‐18‐21 Oct‐04‐21 S‐1 9 +125 SPAC 120 Aug‐18‐21 Oct‐11‐21 S‐1 12 +126 SPAC 19 Dec‐31‐20 Feb‐19‐21 S‐1 11 X + \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4484.pdf b/raw/aaer/2024/AAER-4484.pdf new file mode 100644 index 0000000000000000000000000000000000000000..eda15550b6c9e8de21bb834fb3aa4b965562c061 Binary files /dev/null and b/raw/aaer/2024/AAER-4484.pdf differ diff --git a/raw/aaer/2024/AAER-4484.txt b/raw/aaer/2024/AAER-4484.txt new file mode 100644 index 0000000000000000000000000000000000000000..180feb8f6a263e46a512ea7165400b42c1d7a566 --- /dev/null +++ b/raw/aaer/2024/AAER-4484.txt @@ -0,0 +1,100 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 99448 / January 30, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4484 / January 30, 2024 + +Admin. Proc. File No. 3-21298 + + +In the Matter of + +JIA ROGER QIAN WANG, CPA and WANG +CERTIFIED PUBLIC ACCOUNTANT, P.C. + + + +ORDER EXTENDING BRIEFING DEADLINES ON MOTION FOR SUMMARY +DISPOSITION AND POSTPONING OTHER DEADLINES + +On February 8, 2023, the Securities and Exchange Commission issued an Order +Instituting Administrative Proceedings against Jia Roger Qian Wang, CPA, and Wang Certified +Public Accountant, P.C., (together, “Respondents”), pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice.1 On +September 1, 2023, the Commission granted the Division of Enforcement’s request for leave to +file a motion for summary disposition and issued an amended scheduling order.2 On December +29, 2023, the Division filed its motion for summary disposition. According to the schedule set +by the Commission, Respondents’ opposition to the motion was due January 12, 2024. +On January25, 2024, Wang filed a motion requesting an extension of time to file an +opposition to the Division’s motion for summary disposition, asserting challenges he +encountered in obtaining the Division’s motion. The Division does not oppose the requested +extension. Under the circumstances, it appears appropriate to grant Wang’s request.3 + +1 Jia Roger Qian Wang, CPA, Exchange Act Release No. 96852, 2023 WL 1819154 (Feb. +8, 2023). +2 Jia Roger Qian Wang, CPA, Exchange Act Release No. 98275, 2023 WL 5669528 (Sept. +1, 2023). +3 See In re Pending Administrative Proceedings, Securities Act Release No. 90442, 2020 +WL 1322001 (Mar. 18, 2020), https://www.sec.gov/litigation/opinions/2020/33-1067.pdf +(providing that, pending further order of the Commission, reasonable requests for extensions of + +2 + +Accordingly, it is ORDERED that Respondents’ opposition is due by February 5, 2024, +and the Division’s reply is due by February 12, 2024. The opposition brief should precisely +specify the basis for that opposition, identify with particularity the material factual issues in +dispute, and address relevant Commission precedent.4 +Pursuant to Rule of Practice 180(c), a party’s failure to file a required brief or comply +with this order may result in the Commission’s determination of the matter at issue against that +party, entry of default, dismissal of the proceeding, or the prohibition of the introduction of +evidence or the exclusion of testimony regarding the matter at issue.5 +In its September 1, 2023 order, the Commission noted that the parties’ had consented to +any further modifications of the prehearing schedule in the event that motions for summary +disposition were filed.6 Accordingly, it is further ORDERED that all additional outstanding +deadlines established by the September 1, 2023 order shall be postponed pending the +Commission’s resolution of the Division’s motion for summary disposition.7 + +time will not be disfavored as stated in Commission Rule of Practice 161); Rule of Practice +161(a), 17 C.F.R. § 201.161(a) (requiring good cause showing for extensions). +4 See, e.g., Peter Siris, Exchange Act Release No. 71068, 2013 WL 6528874, at *11 & +n.68 (Dec. 12, 2013) (discussing appropriateness of summary disposition in follow-on +proceedings and providing citations), pet. denied, 773 F.3d 89 (D.C. Cir. 2014); Conrad P. +Seghers, Advisers Act Release No. 2656, 2007 WL 2790633, at *4-6 (Sept. 26, 2007) +(discussing unsuccessful attempt to oppose summary disposition), pet. denied, 548 F.3d 129 +(D.C. Cir. 2008). +5 17 C.F.R. § 201.180(c). +6 Jia Roger Qian Wang, 2023 WL 5669528, at *2. +7 See Rule of Practice 161(a), 17 C.F.R. § 201.161(a). A postponement of more than 21 +days under these circumstances would promote efficiency by conserving resources while a +dispositive motion is pending. See Rule of Practice 161(c), 17 C.F.R. § 201.161(c). +3 + +The parties’ attention is directed to the e-filing requirements in the Rules of Practice.8 +We also remind the parties that any document filed with the Commission must be served upon all +participants in the proceeding and be accompanied by a certificate of service.9 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + + + +8 See Rules of Practice 151, 152(a), 17 C.F.R. §§ 201.151, .152(a) (providing procedure for +filing papers with the Commission and mandating electronic filing in the form and manner +posted on the Commission’s website); Instructions for Electronic Filing and Service of +Documents in SEC Administrative Proceedings and Technical Specifications, +https://www.sec.gov/efapdocs/instructions.pdf. Parties generally also must certify that they have +redacted or omitted sensitive personal information from any filing. Rule of Practice 151(e), 17 +C.F.R. § 201.151(e). +9 See Rule of Practice 150, 17 C.F.R. § 201.150 (generally requiring parties to serve each +other with their filings); Rule of Practice 151(d), 17 C.F.R. § 201.151(d) (“Papers filed with the +Commission … shall be accompanied by a certificate stating the name of the person or persons +served, the date of service, the method of service, and the mailing address or email address to +which service was made, if not made in person.”). \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4485.txt b/raw/aaer/2024/AAER-4485.txt new file mode 100644 index 0000000000000000000000000000000000000000..c51627f195ffa6b681d859bf8941f0520a6cc2d7 --- /dev/null +++ b/raw/aaer/2024/AAER-4485.txt @@ -0,0 +1,1393 @@ + + + + + + + + + + + + + + + + SEC.gov | Karen Rosenberger and Joanna Lanni + + + + + + + + !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\/943426","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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Rosenberger et al. , Civil Action No. 1:22-cv-04736 (DLC) (S.D.N.Y. filed June 7, 2022) + + + + Court Grants Partial Summary Judgment Against CFO and Controller + + + + On January 26, 2024, the U.S. District Court for the Southern District of New York granted the SEC partial summary judgment against former Synchronoss Technologies, Inc. (“Synchronoss”) CFO, Karen Rosenberger, and Synchronoss controller, Joanna Lanni. + + According to the SEC’s complaint, Rosenberger and Lanni engaged in accounting misconduct which resulted in the overstatement of revenue by Synchronoss. The SEC alleged that Rosenberger aided and abetted Synchronoss’s public filing of materially false financial statements with respect to five transactions Synchronoss later restated and engaged in fraud with respect to three of them—two transactions with one of Synchronoss’s largest customers and one transaction in which Synchronoss acquired another business. The SEC further alleged that Rosenberger sought to cover up her and Synchronoss’s misconduct by lying to Synchronoss’s auditor in connection with those transactions, falsifying Synchronoss’s books and records, and by failing to implement or maintain, and circumventing, Synchronoss’s system of accounting controls. As to Lanni, the SEC alleged that she aided and abetted Synchronoss’s improper revenue recognition, falsified Synchronoss’s books and records, and circumvented Synchronoss’s system of accounting controls in connection with one of these five transactions, by providing a materially misleading memorandum to the auditor regarding one transaction. The Complaint alleged that impact of the improper accounting was material, and in certain instances, allowed Synchronoss to meet revenue expectations it otherwise would not have met. + + The SEC’s complaint charged Rosenberger with violating Sections 10(b), 13(a) and 13(b)(5) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2 thereunder; violating Section 304 of the Sarbanes-Oxley Act of 2002 (“SOX”); and aiding and abetting Synchronoss’s violations of Sections 10(b), 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. The SEC’s complaint charged Lanni with violating Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder; and aiding and abetting Synchronoss’s violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + + The SEC moved for summary judgment against Rosenberger on all of its claims except Rule 13a-13, with respect to one of the five charged transactions, and against Rosenberger and Lanni on its Rule 13b2-1 claim with respect to another transaction. The Court granted the SEC’s motion in its entirety, finding, among other things, Rosenberger liable for fraud and liable under SOX 304 for reimbursement of $430,741 to Synchronoss. The Court simultaneously denied in their entirety Rosenberger’s and Lanni’s cross motions for summary judgment + + The litigation against Rosenberger and Lanni is being led by Hayden Brockett, Theresa Gue, Lindsay S. Moilanen, and Richard G. Primoff under the supervision of Sheldon L. 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Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2024/AAER-4486.pdf b/raw/aaer/2024/AAER-4486.pdf new file mode 100644 index 0000000000000000000000000000000000000000..c6f1285483ea37f71f9f053dbd6270c3cb3c0fe0 Binary files /dev/null and b/raw/aaer/2024/AAER-4486.pdf differ diff --git a/raw/aaer/2024/AAER-4486.txt b/raw/aaer/2024/AAER-4486.txt new file mode 100644 index 0000000000000000000000000000000000000000..e2b41b8e8ae40230d9ec17ae90d608b941eb845b --- /dev/null +++ b/raw/aaer/2024/AAER-4486.txt @@ -0,0 +1,72 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 11268 / February 2, 2024 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 99461 / February 2, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4486 / February 2, 2024 + +Admin. Proc. File No. 3-21831 + + +In the Matter of + +EDWARD F. HACKERT, CPA + + + +ORDER REGARDING SERVICE + +On January 18, 2024, the Securities and Exchange Commission issued an order +instituting proceedings (“OIP”) against Edward F. Hackert, CPA (“Respondent”), 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.1 The service list accompanying +the OIP indicated that it was served on Respondent’s counsel via certified mail. Respondent’s +counsel entered an appearance on January 22, 2024. Rule of Practice 141(a)(2)(i) permits +service of an OIP on individuals or their authorized agents by “sending a copy of the order +addressed to the individual by U.S. Postal Service certified, registered or express mail and +obtaining a confirmation of receipt.” Although Respondent through his counsel is apparently +aware of the proceeding, there is nothing in the record confirming the receipt of the certified mail +sent to Respondent’s counsel. And there are certain statutory deadlines in the proceeding that are +triggered by the date of service.2 + +1 Edward F. Hackert, CPA, Exchange Act Release No. 99384, 2024 WL 212152 (Jan. 18, +2024). +2 See Id. at *14; 15 U.S.C. § 78u-3(b) (“The notice instituting proceedings pursuant to +subsection (a) shall fix a hearing date not earlier than 30 days nor later than 60 days after service +of the notice unless an earlier or a later date is set by the Commission with the consent of any +respondent so served.”). +2 + +Accordingly, IT IS ORDERED that the Division of Enforcement file a status report +concerning service of the OIP by February 9, 2024. +The parties’ attention is directed to the e-filing requirements in the Rules of Practice.3 +We also remind the parties that any document filed with the Commission must be served upon all +participants in the proceeding and be accompanied by a certificate of service.4 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + + + +3 See Rules of Practice 151, 152(a), 17 C.F.R. §§ 201.151, .152(a) (providing procedure for +filing papers with the Commission and mandating electronic filing in the form and manner +posted on the Commission’s website); Instructions for Electronic Filing and Service of +Documents in SEC Administrative Proceedings and Technical Specifications, +https://www.sec.gov/efapdocs/instructions.pdf. Parties generally also must certify that they have +redacted or omitted sensitive personal information from any filing. Rule of Practice 151(e), 17 +C.F.R. § 201.151(e). +4 See Rule of Practice 150, 17 C.F.R. § 201.150 (generally requiring parties to serve each +other with their filings); Rule of Practice 151(d), 17 C.F.R. § 201.151(d) (“Papers filed with the +Commission … shall be accompanied by a certificate stating the name of the person or persons +served, the date of service, the method of service, and the mailing address or email address to +which service was made, if not made in person.”). \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4487.txt b/raw/aaer/2024/AAER-4487.txt new file mode 100644 index 0000000000000000000000000000000000000000..8ab094c5caa103f452913786e4a4eca930ab36cd --- /dev/null +++ b/raw/aaer/2024/AAER-4487.txt @@ -0,0 +1,237 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 99483 / February 6, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4487 / February 6, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-21844 + + +In the Matter of + +Cloopen Group Holding +Limited, + +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 Cloopen Group Holding Limited (“Cloopen” 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 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 an accounting fraud perpetrated by the former +Operating Management Director and a former Department Head at Cloopen (the “Senior +Managers”). During Cloopen’s year-end audit for fiscal year 2021, its external auditor (the +“External Auditor”) identified potential accounting errors. Following an internal investigation, +Cloopen determined that, from May 2021 through February 2022, the two China-based Senior +Managers, who headed the department that handled Cloopen’s strategic customers, had orchestrated +a fraudulent scheme to prematurely recognize revenue on service contracts for which Cloopen had +either not completed work or, in some instances, not even started work. Cloopen also identified +additional problematic contracts in other departments that were missing or appeared to have +falsified supporting documentation. +2. As a result of this misconduct, Cloopen overstated the unaudited financial results +that it announced in its filings with the Commission for the second and third quarters of 2021. +Specifically, Cloopen’s revenue for the second quarter of 2021 was overstated by $1.8 million +(RMB 11.6 million) (approximately 4% of its total revenue) and its revenue for the third quarter +was overstated by $2.8 million (RMB 17.8 million) (approximately 6% of its total revenue).2 In +addition, Cloopen’s announced revenue guidance for the fourth quarter of 2021 was significantly +overstated. When Cloopen announced the investigation into potential accounting errors, the price of +its American depositary shares declined 12.7% from the prior day’s closing price. +3. As described in further detail below, Cloopen’s conduct violated Sections 10(b), +13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 10b-5, 12b-20, +13a-1, and 13a-16. +Respondent +4. Cloopen is a Cayman Islands corporation that is headquartered in Beijing, People’s +Republic of China (“China”) and operates in China through its variable interest entity, Beijing +Ronglian Yitong Information Technology Co. Ltd. Cloopen’s American depositary shares +(“ADSs”) were registered with the Commission pursuant to Section 12(b) of the Exchange Act and +traded on the New York Stock Exchange (“NYSE”) under the symbol “RAAS.” On October 25, +2023, the NYSE filed with the Commission a Form 25 notification of removal of Cloopen’s ADSs +from listing and registration as of November 6, 2023 based on Cloopen’s failure to file its annual +reports for the years ended December 31, 2021 and December 31, 2022, and a current report on + + +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 References to U.S. dollars throughout this Order reflect approximate conversions from Chinese +renminbi (RMB) using the exchange rate from the relevant quarter. + + + +3 +Form 6-K for the half year ended June 30, 2022. As of November 6, 2023, Cloopen’s ADSs are +registered under Section 12(g) of the Exchange Act and are quoted on the over-the-counter market. +Cloopen files periodic reports with the Commission pursuant to Section 13(a) of the Exchange Act +and related rules thereunder applicable to foreign private issuers. +Facts +5. Cloopen is a provider of cloud-based communications products and services to +enterprises of various sizes located primarily in China. Cloopen does not operate in the United +States and has no employees based in the United States. However, because Cloopen has American +depositary shares that traded on the NYSE, it was required to file periodic reports with the +Commission, including announcements of its unaudited quarterly results on Form 6-K and annual +reports on Form 20-F. +6. In early 2022, in preparation for Cloopen’s annual report for fiscal year 2021, the +External Auditor commenced an audit of the company’s financial statements. During that audit, the +External Auditor identified irregularities relating to certain customer transactions. On April 29, +2022, the External Auditor resigned. +7. On May 3, 2022, Cloopen announced that it was conducting an internal +investigation concerning the issues identified by the External Auditor. +8. During that internal investigation, Cloopen discovered the fraudulent scheme +orchestrated by the Senior Managers to improperly recognize revenue early on customer contracts +that had not been fulfilled as well as certain other accounting errors. The Senior Managers’ scheme +began in May 2021, a few months after Cloopen’s American depositary shares began trading for the +first time on the NYSE in February 2021. Shortly before its listing, Cloopen formed a new +department to manage strategic customer contracts and key accounts, and tapped the Senior +Managers to lead the department. Around the same time, Cloopen also implemented a new +performance evaluation system that set strict quarterly sales goals and imposed penalties, including +salary and bonus reductions, on executives, including the Senior Managers, whose departments fell +short of those targets. +9. Facing pressure to meet the quarterly sales goals, the Senior Managers engaged in a +scheme to fraudulently recognize revenue on contracts where services had not been completed or, in +some cases, had not been started. Between May 2021 and February 2022, the Senior Managers +directed their employees to prematurely recognize revenue on approximately 25 contracts out of a +total of 43 contracts in their department. To support this early revenue recognition, the Senior +Managers solicited and received customer acceptance reports, which purported to confirm work had +been completed, prior to the relevant projects’ actual completion and sometimes even before the +contracts had been signed. +10. In addition to the scheme orchestrated by the Senior Managers in the department +they led, Cloopen’s investigation also identified transactions in other departments that resulted in +improperly recognized revenue, by, among other things, the use of acceptance reports prior to +completion of work and the falsification or lack of supporting documentation. These errors +contributed to the overstating of Cloopen’s revenues. + + + +4 +11. Throughout the relevant period, Cloopen did not have adequate internal accounting +controls and company policies and procedures in place to provide reasonable assurance that +revenues from sales transactions were accurately recorded and reported in its financial statements in +accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). +12. On September 6, 2022, Cloopen announced the substantial completion of its +internal investigation and disclosed that it had misstated reported revenue in its unaudited financial +statements for the second and third quarters of fiscal year 2021 as well as in its guidance for the +fourth quarter of the same fiscal year. Specifically, Cloopen’s reported revenue of $42.4 million +(RMB 273.9 million) for the second quarter of 2021 was overstated by $1.8 million (RMB 11.6 +million). Cloopen’s reported revenue of $42.9 million (RMB 276.1 million) for the third quarter of +2021 was overstated by $2.8 million (RMB 17.8 million). +13. Cloopen’s internal investigation also concluded that the company had prematurely +recognized millions of dollars in revenue in the fourth quarter of 2021 as a result of the Senior +Managers’ scheme. As a result, Cloopen announced that it would fall significantly below the +revenue guidance for the fourth quarter of fiscal year 2021 that it had previously announced in +November 2021. The inaccurate internal fourth quarter figures were discovered before Cloopen +reported its financial results for the fourth quarter of 2021. +Violations +14. As a result of the conduct described above, Cloopen 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. +15. As a result of the conduct described above, Cloopen violated Section 13(a) of the +Exchange Act and Rules 12b-20, 13a-1, and 13a-16 thereunder, which require every foreign issuer +of a security registered pursuant to Section 12 of the Exchange Act to furnish the Commission with +periodic reports containing information that is accurate and not misleading. +16. As a result of the conduct described above, Cloopen violated Sections 13(b)(2)(A) +and 13(b)(2)(B) of the Exchange Act. Section 13(b)(2)(A) of the Exchange Act requires issuers +with a security registered pursuant to Section 12 of the Exchange Act to make and keep books, +records, and accounts which, in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the assets of the issuer. Section 13(b)(2)(B) of the Exchange Act requires such +issuers to, among other things, devise and maintain a system of internal accounting controls +sufficient to provide reasonable assurances that transactions are recorded as necessary to permit +preparation of financial statements in accordance with generally accepted accounting principles. + + + + +5 +Cloopen’s Cooperation and Remedial Efforts +17. In determining to accept the Offer, the Commission considered Cloopen’s prompt +self-report of accounting errors to the Commission’s staff, the cooperation provided by Cloopen +throughout the Commission’s investigation, and the remedial measures undertaken by Cloopen. +18. In early May 2022, Cloopen self-reported to the Commission’s staff the accounting +errors uncovered by the External Auditor. Cloopen made the self-report within a few days of +retaining outside counsel to conduct an internal investigation and before any significant steps had +been taken as part of that investigation. +19. Thereafter, Cloopen provided substantial cooperation to the Commission’s staff +throughout the staff’s investigation, including by providing detailed explanations of the customer +transactions at issue and their financial impact; summarizing interviews of witnesses located in +China; identifying, translating, and producing certain key documents originally written in Chinese; +and providing other relevant information to the staff. The cooperation afforded by Cloopen +substantially advanced the efficiency of the staff’s investigation and conserved Commission +resources. +20. Cloopen also undertook prompt remedial measures, including: (1) forming an +independent special committee of its Board of Directors to investigate the issues raised by the +External Auditor; (2) terminating the Senior Managers who orchestrated the early revenue +recognition misconduct and also disciplining other employees who were involved; (3) reorganizing +or removing the departments involved in the misconduct; (4) strengthening its internal accounting +controls surrounding customer contracts, payments, and revenue recognition; (5) retraining +company executives, department heads, and employees in the finance, accounting, internal audit, +and sales departments on Cloopen’s internal accounting controls and company policies and +procedures, including with respect to revenue recognition; (6) recruiting finance and accounting +personnel with expertise in U.S. GAAP; and (7) clawing back $228,000 (RMB 1.64 million) of +bonus compensation paid to Cloopen’s Chief Executive Officer and Chief Financial Officer for the +last nine months of 2021. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Cloopen’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Cloopen cease and desist +from committing or causing any violations and any future violations of Sections 10(b), 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 10b-5, 12b-20, 13a-1, +and 13a-16. + + + + + + +6 +B. Respondent acknowledges that the Commission is not imposing a civil penalty based upon +its cooperation in a Commission investigation. If at any time following the entry of the Order, the +Division of Enforcement (“Division”) obtains information indicating that Respondent knowingly +provided materially false or misleading information or materials to the Commission, or in a related +proceeding, the Division may, at its sole discretion and with prior notice to the Respondent, +petition the Commission to reopen this matter and seek an order directing that the Respondent pay +a civil money penalty. Respondent may contest by way of defense in any resulting administrative +proceeding whether it knowingly provided materially false or misleading information, but may not: +(1) contest the findings in the Order; or (2) assert any defense to liability or remedy, including, but +not limited to, any statute of limitations defense. + + By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4488.txt b/raw/aaer/2024/AAER-4488.txt new file mode 100644 index 0000000000000000000000000000000000000000..bf6a1fd0075a84a5bad5983325a32df9699e94ac --- /dev/null +++ b/raw/aaer/2024/AAER-4488.txt @@ -0,0 +1,115 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 99492 / February 8, 2024 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4488 / February 8, 2024 +ADMINISTRATIVE PROCEEDING +File No. 3-18344 + +In the Matter of +JUSTIN SAMUEL +CARY, CPA + +: +: +: +: +: +: +CORRECTED ORDER GRANTING APPLICATION +FOR REINSTATEMENT TO APPEAR AND +PRACTICE BEFORE THE COMMISSION AS AN +ACCOUNTANT RESPONSIBLE FOR THE +PREPARATION OR REVIEW OF FINANCIAL +STATEMENTS REQUIRED TO BE FILED WITH +THE COMMISSION OTHER THAN AS A MEMBER +OF AN AUDIT COMMITTEE + +On January 19, 2018, the Commission issued a consented Order Instituting Public +Administrative Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, +Making Findings and Imposing Remedial Sanctions (the “Suspension Order”) against +Respondent Justin Samuel Cary, CPA.1 The Suspension Order denied Cary the privilege of +appearing or practicing before the Commission as an accountant but permitted him, after five +years from the date of the Suspension Order and if certain conditions were met, to request that +the Commission consider his reinstatement to resume appearing or practicing before the +Commission as (1) a preparer or reviewer, or a person responsible for the preparation or review, +of financial statements that are 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”); (2) a preparer or reviewer, or a person responsible for the preparation +or review, of financial statements that are required to be 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; or (3) an +independent accountant. +This order is issued in response to Cary’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. + +1 See Accounting and Auditing Enforcement Release No. 3917, dated January 19, 2018. + + 2 + +In the Suspension Order, the Commission found that Cary had been permanently +enjoined from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. +In the underlying civil injunctive action before the United States District Court for the Central +District of California, the Commission alleged that Cary engaged in insider trading in the stock +of Adaptive Medias, Inc. in advance of the company’s February 1, 2016 announcement of an +offer from a rival advertising technology firm to acquire it in a cash-for-stock transaction at a +steep premium to Adaptive Medias’ prevailing market price. The Commission further alleged +that after Adaptive Medias issued a press release announcing the acquisition offer, Cary sold his +stock and netted a profit of $8,140.25 on his original $2,880.00 investment. + +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 which determination is necessarily +highly fact specific. + +Cary has shown good cause for reinstatement and has met the conditions set forth in the +Suspension Order to be reinstated to appear and practice before the Commission as a person +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. In his capacity as a person +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, Cary attests that he will have his +work reviewed by the independent audit committee of any company for which he works, or in +some other manner acceptable to the Commission, while practicing before the Commission in +this capacity. + +Cary is not, at this time, seeking to appear or practice before the Commission as a person +responsible for the preparation or review of financial statements required to be filed with the +Commission as a member of an audit committee or as an independent accountant. If, in the +future, Cary should wish to resume appearing and practicing before the Commission in such a +capacity, he will be required to submit an application to the Commission showing, among other +things, that he has complied and will comply with the terms of the Suspension Order. + +On the basis of information supplied, representations made, and undertakings agreed to +by Cary, and for the reasons stated immediately above, it appears that he has complied with the +terms of the Suspension Order denying him the privilege of appearing or practicing before the +Commission as an accountant. No information has come to the attention of the Commission +relating to his character, integrity, professional conduct, or qualifications to practice before the +Commission that would be a basis for adverse action against him pursuant to Rule 102(e) of the + +2 Rule 102(e)(5)(i) provides: + +“[a]n 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 +Commission's Rules of Practice. As a result, Cary 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 +Justin Samuel Cary, 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. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4489.pdf b/raw/aaer/2024/AAER-4489.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b5903a6cc9fa34b71eb3013d25c94d740867c61b Binary files /dev/null and b/raw/aaer/2024/AAER-4489.pdf differ diff --git a/raw/aaer/2024/AAER-4489.txt b/raw/aaer/2024/AAER-4489.txt new file mode 100644 index 0000000000000000000000000000000000000000..558597e2e84d66681fdcb9d1d102dc59d2557b25 --- /dev/null +++ b/raw/aaer/2024/AAER-4489.txt @@ -0,0 +1,96 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 99518 / February 12, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4489 / February 12, 2024 + +Admin. Proc. File No. 3-21298 + + +In the Matter of + +JIA ROGER QIAN WANG, CPA and WANG +CERTIFIED PUBLIC ACCOUNTANT, P.C. + + + +SECOND ORDER EXTENDING BRIEFING DEADLINES ON MOTION FOR SUMMARY +DISPOSITION + +On February 8, 2023, the Securities and Exchange Commission issued an order +instituting proceedings against Jia Roger Qian Wang, CPA, and Wang Certified Public +Accountant, P.C., (together, “Respondents”), pursuant to Sections 4C and 21C of the Securities +Exchange Act of 1934 and Commission Rule of Practice 102(e).1 On December 29, 2023, the +Division of Enforcement filed a motion for summary disposition. Wang then requested an +extension of time to file an opposition to the Division’s motion, which request was granted on +January 30, 2024.2 +On February 5, 2024, Wang requested an additional three weeks to file an opposition to +the Division’s motion, noting the voluminous exhibits accompanying the motion. Wang also +“assure[d]” the Commission of his “commitment” to adhere to the new deadline should his +request be granted. The Division opposes the requested extension. Under the circumstances, it +appears appropriate to grant Wang’s request.3 + +1 Jia Roger Qian Wang, CPA, Exchange Act Release No. 96852, 2023 WL 1819154 (Feb. +8, 2023). +2 Jia Roger Qian Wang, CPA, Exchange Act Release No. 99448, 2024 WL 360880 (Jan. +30, 2024). +3 See In re Pending Administrative Proceedings, Securities Act Release No. 90442, 2020 +WL 1322001 (Mar. 18, 2020), https://www.sec.gov/litigation/opinions/2020/33-1067.pdf +(providing that, pending further order of the Commission, reasonable requests for extensions of + +2 + +In doing so, we note that Wang’s request included suggested deadlines for events set to +occur after completion of briefing on the Division’s motion for summary disposition. The +Commission has already postponed all such additional outstanding deadlines pending the +Commission’s resolution of the Division’s motion for summary disposition.4 +Accordingly, it is ORDERED that Respondents’ opposition is due by February 29, 2024, +and the Division’s reply is due by March 7, 2024. The opposition brief should precisely specify +the basis for that opposition, identify with particularity the material factual issues in dispute, and +address relevant Commission precedent.5 +Pursuant to Rule of Practice 180(c), a party’s failure to file a required brief or comply +with this order may result in the Commission’s determination of the matter at issue against that +party, entry of default, dismissal of the proceeding, or the prohibition of the introduction of +evidence or the exclusion of testimony regarding the matter at issue.6 + + +time will not be disfavored as stated in Commission Rule of Practice 161); Rule of Practice +161(a), 17 C.F.R. § 201.161(a) (requiring good cause showing for extensions). +4 Wang, 2024 WL 360880, at *1. +5 See, e.g., Peter Siris, Exchange Act Release No. 71068, 2013 WL 6528874, at *11 & +n.68 (Dec. 12, 2013) (discussing appropriateness of summary disposition in follow-on +proceedings and providing citations), pet. denied, 773 F.3d 89 (D.C. Cir. 2014); Conrad P. +Seghers, Advisers Act Release No. 2656, 2007 WL 2790633, at *4-6 (Sept. 26, 2007) +(discussing unsuccessful attempt to oppose summary disposition), pet. denied, 548 F.3d 129 +(D.C. Cir. 2008). +6 17 C.F.R. § 201.180(c). +3 + +The parties’ attention is directed to the e-filing requirements in the Rules of Practice.7 +We also remind the parties that any document filed with the Commission must be served upon all +participants in the proceeding and be accompanied by a certificate of service.8 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + + +7 See Rules of Practice 151, 152(a), 17 C.F.R. §§ 201.151, .152(a) (providing procedure for +filing papers with the Commission and mandating electronic filing in the form and manner +posted on the Commission’s website); Instructions for Electronic Filing and Service of +Documents in SEC Administrative Proceedings and Technical Specifications, +https://www.sec.gov/efapdocs/instructions.pdf. Parties generally also must certify that they have +redacted or omitted sensitive personal information from any filing. Rule of Practice 151(e), 17 +C.F.R. § 201.151(e). +8 See Rule of Practice 150, 17 C.F.R. § 201.150 (generally requiring parties to serve each +other with their filings); Rule of Practice 151(d), 17 C.F.R. § 201.151(d) (“Papers filed with the +Commission … shall be accompanied by a certificate stating the name of the person or persons +served, the date of service, the method of service, and the mailing address or email address to +which service was made, if not made in person.”). \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4490.txt b/raw/aaer/2024/AAER-4490.txt new file mode 100644 index 0000000000000000000000000000000000000000..f12a6b35d0817d7b30595ad165494b7a4ada0f13 --- /dev/null +++ b/raw/aaer/2024/AAER-4490.txt @@ -0,0 +1,608 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11274 / February 29, 2024 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 99637 / February 29, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4490 / February 29, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-21875 + + +In the Matter of + +LORDSTOWN MOTORS +CORP., + +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 Lordstown Motors Corp. (“Lordstown” 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: + +A. SUMMARY + + These proceedings arise from misrepresentations by Lordstown and its former Chairman +and CEO, Steve Burns, about the company’s plans to develop the first full-size electric pickup +truck called the Endurance during and after the process of taking the company public. +Lordstown, founded by Burns in 2019, became publicly traded in October 2020 through a merger +with a special purpose acquisition company (“SPAC”) called DiamondPeak Holdings +Corporation (“DiamondPeak”). During and after the merger, which raised approximately $675 +million from investors, Lordstown and Burns made materially false and misleading statements +about Lordstown’s business in SEC filings and other public statements. These statements told +investors that Lordstown would be first-to-market with a viable electric pickup truck targeted for +the commercial fleet market, and Lordstown already had an established base of customer demand +evidenced by tens of thousands of “pre-orders” from commercial fleet customers. Knowing that +this first-mover advantage would be critical to the company’s success, Lordstown and Burns +misrepresented the true nature of the pre-orders for the truck, whether Lordstown had access to +the key parts it needed to make the truck, and when the company would be able to deliver the +truck to customers. + +Lordstown also filed financial statements audited by a purportedly independent +accounting firm when that firm was not in fact independent under the relevant audit standards. +As a private company, in early 2020, Lordstown engaged Clark Schaefer Hackett & Co., +(“CSH”) to audit its 2019 financial statements under Generally Accepted Auditing Standards +(“GAAS”), and to provide non-audit services by assisting management in preparing the financial +statements and performing bookkeeping services. Later in the year, CSH audited the same 2019 +financials under Public Company Accounting Oversight Board (“PCAOB”) standards. CSH +violated SEC rules and independence standards by auditing the financial statements while +providing prohibited bookkeeping services to Lordstown during the same audit and professional +engagement period. + +In connection with the above material misstatements and omissions, and failure to file +financial statements audited by an independent auditor, Lordstown violated Sections 17(a)(2) and +17(a)(3) of the Securities Act, Sections 13(a) and 14(a) of the Exchange Act and Rules 12b-20, +13a-11, and 14a-3 thereunder. + +B. RESPONDENT + + Lordstown Motors Corp., is incorporated in Delaware with its principal place of business + +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 +in Lordstown, Ohio. Lordstown was an original equipment manufacturer of electric light duty +vehicles focused on the commercial fleet market. On June 27, 2023, Lordstown filed a voluntary +petition for relief under Chapter 11 of the U.S. Bankruptcy Code. Lordstown’s Class A common +stock traded on the Nasdaq Global Stock Market under the symbol “RIDE” from October 26, 2020 +until July 7, 2023, when it began trading on the over-the-counter market under the symbol +“RIDEQ.” Lordstown’s common stock was registered with the Commission under Section 12(b) +until October 25, 2023 when the registration reverted to Section 12(g) of the Exchange Act +pursuant to a Form 25 filed by Nasdaq Global Select Market on July 27, 2023. At all relevant +times, Lordstown was required to file periodic reports with the Commission pursuant to Section +13(a) of the Exchange Act. + +C. RELEVANT INDIVIDUAL AND ENTITY + +Stephen “Steve” Scott Burns, 64, resident of Maineville, Ohio, in April 2019 founded +Lordstown as a private company, and was a director and its CEO. After Lordstown merged with +DiamondPeak in October 2020, Burns became Lordstown’s Chairman and CEO until he resigned +from both positions on June 14, 2021. +Clark Schaefer Hackett & Co. (“CSH”), an Ohio corporation headquartered in +Cincinnati, Ohio, is an accounting and advisory firm that provided accounting and audit services to +Lordstown. CSH is registered with the PCAOB. + +D. FACTS + +1. Burns founded then-private Lordstown in April 2019 for the purpose of developing +and manufacturing light duty electric trucks targeted for sale to fleet customers. Since its inception, +Lordstown had been developing its flagship vehicle, the Endurance, an electric full-size pickup +truck, for the commercial fleet market. To manufacture the Endurance, in November 2019 +Lordstown acquired from General Motors Company (“GM”) an assembly and manufacturing plant +in Lordstown, Ohio. +2. On August 3, 2020, DiamondPeak, a publicly traded SPAC, and Lordstown +announced that they had entered into a proposed business combination transaction via a merger +agreement. From August to October 2020, DiamondPeak filed proxy soliciting materials relating to +the merger, which was approved by DiamondPeak’s shareholders on October 22, 2020. +DiamondPeak and Lordstown’s merger transaction closed on October 23, 2020, and Lordstown +emerged as the publicly traded successor to DiamondPeak. In connection with the merger, +Lordstown received approximately $675 million in proceeds from DiamondPeak’s cash held in +trust and from a private investment in public equity (“PIPE”) offering to accredited investors. Also +in connection with the merger, Lordstown assumed publicly traded and private warrants previously +issued by DiamondPeak in its initial public offering in March 2019, and additional private warrants +issued for the merger. +3. On November 12, 2020, Lordstown filed a registration statement and prospectus on +Form S-1 to register its common stock, its publicly traded and private warrants, and for resale the +shares issued in the PIPE offering. The Form S-1 was declared effective on December 4, 2020. On +December 14, 2020, Lordstown issued a redemption notice for the public warrants, and on January + 4 +27, 2021 Lordstown redeemed all of the public warrants and received approximately $107 million +from investors who exercised the warrants. On December 28, 2020, Lordstown filed a registration +statement and prospectus on Form S-8 to register certain of its common stock and stock options +issued or to be issued to certain of its directors, officers, and employees under incentive +compensation plans. +4. L ordstown and Burns told investors that Lordstown’s purpose was to develop and +manufacture the Endurance, the first electric full-size pickup truck designed for the commercial +fleet market, which Lordstown defined in SEC filings as “commercial and governmental +organizations with three or more vehicles.” For this purpose, Lordstown touted in investor +presentation materials at the time of the merger announcement that it was uniquely positioned to +obtain a “first mover” advantage by becoming the first to produce and deliver the Endurance to +commercial fleet markets. Lordstown claimed, among other things, it had secured 27,000 “pre- +orders” for the Endurance from fleet customers representing $1.4 billion in potential revenue. +Lordstown also highlighted that its relationship with GM, including Lordstown’s acquisition of its +near-production-ready plant from GM, and Lordstown’s agreements with GM that provided +Lordstown access to certain GM parts to develop the Endurance, would enable Lordstown to +develop the Endurance with only a modest incremental investment compared to other companies. +Lordstown claimed to investors that these and other factors positioned Lordstown to deliver an +electric pickup truck in the second half of 2021, sooner than anyone else, and estimated it would +sell and deliver 2,200 Endurance trucks in 2021, 31,600 trucks in 2022, and 65 ,000 trucks in 2023, +generating $5.3 billion in cumulative revenue. +5. F rom August 2020 to February 2021, however, Lordstown and Burns made +numerous materially false or misleading statements about Lordstown’s business, including its “pre- +orders,” access to critical parts from GM, and the delivery timeline for the Endurance. These +misrepresentations concealed the truth about the demand for the Endurance, and about Lordstown’s +ability to be the first company to manufacture and deliver an electric full-size pickup truck to the +commercial fleet market. +Misrepresentations About Pre-Orders for the Endurance + +6. From August 3, 2020 to February 6, 2021, in SEC filings and other public statements, +Lordstown and Burns made materially false or misleading statements about Lordstown’s pre-orders +for the Endurance. +Background of Lordstown’s Pre-Orders +7. To estimate the demand for the Endurance, Lordstown’s sales team contacted +potential customers beginning in early 2020, and requested them to sign a form of a non-binding +letter of intent and reservation agreement (“LOI”) specifying the quantity of Endurance trucks the +customer wished to reserve. The LOI by its terms was a one-page, form agreement prepared by +Lordstown, and did not require payment of any kind by the customer, and the customer was under no +obligation to purchase the Endurance. +8. In SEC filings and other public statements, Lordstown described these LOIs as +“pre-orders” from or primarily from fleet operators, and generally that the pre-orders were not + 5 +binding and did not require any deposit. Lordstown further qualified that there could be no +assurance that Lordstown will successfully convert the pre-orders into binding orders or sales. +During the relevant period, Lordstown and Burns used the terms LOIs, reservations, pre-orders, and +“pre- sales” interchangeably as having the same meaning. +9. Pre-orders were an important metric for Lordstown because, as a startup company +developing a new product, Lordstown had no orders or sales to report to investors. Because +Lordstown’s business purpose was to develop and manufacture the Endurance for the commercial +fleet market, pre-orders were also important for potential fleet customers, who Lordstown believed +may be more comfortable buying a truck from a new manufacturer that their peers are also buying. +Lordstown believed that increasing numbers of pre-orders from fleets would create further demand +for the Endurance. After the merger with DiamondPeak, Burns directed Lordstown’s sales team to +obtain additional pre-orders from customers to increase the total amount because pre-orders were +“[r]eally important to the investment community and to our prospect[ive] fleet customers.” +10. Lordstown did not have any policies or procedures to evaluate pre-order +counterparties. Lordstown’s sales team, comprised mostly of individuals with no sales experience +in the automotive industry, were not given any instructions or guidance to determine whether a +customer was a commercial fleet customer. In addition, Lordstown did not have any policies or +procedures around recording, tracking, or maintaining pre-order data. +11. After Lordstown announced in August 2020 that it had secured 27,000 pre-orders +for the Endurance from fleet customers, Lordstown continued to solicit potential fleet customers to +increase the number of pre-orders to highlight to potential investors and customers. Throughout the +fall of 2020, Lordstown and Burns made numerous public statements touting increasing numbers of +pre-orders from fleet customers. On January 11, 2021, Lordstown issued a press release stating it +had received 100,000 pre-orders from commercial fleets, which Burns described as “unprecedented +in automotive history.” +12. On March 12, 2021, however, Hindenburg Research (“Hindenburg”), which had +taken a short position in Lordstown’s stock, published a report that alleged, among other things, that +Lordstown’s 100,000 pre-orders were largely fictitious and nonbinding, and from customers that +generally did not even have fleets of vehicles. Shortly after Hindenburg published its report, +Lordstown’s Board of Directors formed a Special Committee to investigate Hindenburg’s +allegations. +13. On June 14, 2021, the Special Committee issued a public statement addressing +Hindenburg’s allegations, and stated that certain statements by Lordstown concerning pre-orders +were “in certain respects, inaccurate.” The Special Committee determined that, while Lordstown +had stated on several occasions that its pre-orders were from, or “primarily” from commercial +fleets, in fact many pre-orders were obtained from (i) fleet management companies or other end +users that indicated interest in purchasing Endurance trucks, similar to commercial fleets, and (ii) +so-called “influencers” or other potential strategic partners that committed to attempt to secure pre- +orders from other entities, but did not intend to purchase Endurance trucks directly. The Special +Committee also stated that one entity that provided a large number of pre-orders did not appear to +have the resources to complete large purchases of trucks. It also found that other entities provided +commitments that appeared too vague or infirm to have been appropriately included in the total + 6 +number of pre-orders disclosed by Lordstown. +Lordstown’s Pre-Orders Were Not All From or Primarily From Fleet Customers +14. On September 21, 2020, DiamondPeak filed a preliminary proxy statement to +solicit votes for its merger with Lordstown. In the proxy statement Lordstown stated it had +“received pre-orders primarily from fleet operators to purchase over 38,000 Endurance vehicles.” In +fact, according to the Special Committee’s analysis, pre-orders from intermediaries or influencers, +and not fleets, comprised over 40% of the 38,000 amount. That amount included pre- orders for +14,000 trucks from one customer representing around $735 million in potential revenue. This +customer had no apparent resources to buy such large quantities of the Endurance, and Burns had +questioned the customer’s financial strength. The 38,000 amount also included another customer +who had submitted a pre-order for 1,000 trucks in a non-standard LOI stating that it wished to +broker the trucks, and did not intend to buy the Endurance for its own use. The 38,000 amount +further included 1,500 pre-orders from a coalition of nonprofit organizations that encouraged or +facilitated the use of clean energy, but did not intend to or have any ability to buy the Endurance. +15. On October 26, 2020, the first day of trading for Lordstown’s common stock, Burns +stated in an interview by The Detroit News that Lordstown had “pre-sold 40,000 of [the Endurance] +to fleet customers already.” On November 12, 2020, Lordstown filed a Form S-1 stating it +currently had “pre-orders primarily from fleet operators to purchase over 44,000 vehicles[.]” +According to the Special Committee’s analysis, 48% of the 40,000 amount was from intermediaries +or influencers. +16. On N ovember 16, 2020, Lordstown issued a press release stating it had “received +approximately 50,000 non-binding production reservations from commercial fleets….” On the +same date, Burns stated in a capital markets-oriented forum that Lordstown had “50,000 pre-sales +already, all from fleets.” On November 17, 2020, Burns stated in an interview by CNBC that +Lordstown had received “50,000 preorders,” sold to “fleets,” and described the pre-orders as “very +serious orders.” Lordstown’s Form S-1/A filed on December 1, 2020 stated it had “received pre- +orders primarily from fleet operators to purchase approximately 50,000 Endurance vehicles.” +According to the Special Committee’s analysis, however, 50% of the 50,000 amount was from +intermediaries or influencers. On December 2, 2020, Burns stated in an investor conference, “[w]e +have 50,000 pre-orders already, well in advance of what we thought we would have[,] … almost +$3 billion in pre-orders already.” +17. On December 21, 2020, Lordstown posted on social media and filed a Form 8-K +stating it had received “80,000 non-binding reservations for the Endurance to date.” Although the +statements did not specify whether the pre-orders were from or primarily from fleets, they implied +that the pre-orders were from or primarily from fleets, consistent with prior statements. The 80,000 +amount also included a pre-order for 5,000 trucks (representing $263 million in potential revenue) +by a customer who later canceled the pre-order due to a misunderstanding, but Lordstown’s sales +team continued to count it towards the total amount. According to the Special Committee’s analysis, +67% of the 80,000 amount at this time was from intermediaries or influencers. +18. On J anuary 11, 2021, Lordstown issued a press release stating that Lordstown “has +received more than 100,000 non-binding production reservations from commercial fleets….” The + 7 +press release quoted Burns as saying, “[r]eceiving 100,000 pre-orders from commercial fleets for a +truck like the Endurance is unprecedented in automotive history….” According to the Special +Committee’s analysis, however, by that time 71% of the 100,000 amount was from intermediaries +or influencers. The 100,000 amount also included a verbal indication of interest from a customer +who would agree to an “influencer” memorandum of understanding, which was not executed at the +time. This memorandum of understanding was not a pre-order agreement or an LOI to buy +Lordstown’s Endurance, but rather an understanding “to assist Lordstown in generating leads to +support the sale of up to 15,000 Endurance trucks by December 31, 2023.” This customer +expressly informed Lordstown that it did not have a fleet and did not intend to buy any trucks. In +interviews with a research analyst and on media outlets in January and February 2021, Burns +nevertheless stated that the 100,000 pre- orders were submitted by “fleets,” and described the pre- +orders as “sticky.” +19. Lordstown and Burns’ statements about the increasing numbers of pre-orders from +27,000 to 100,000 were false or misleading. First, the pre-orders were not all from or primarily +from fleet customers, a market Lordstown had described in SEC filings as “commercial or +governmental organizations with three or more trucks.” As the Special Committee found, 40% to +71% of the pre-orders during this period were from intermediaries or influencers who indicated they +would encourage, facilitate, or influence the purchase of the Endurance and did not intend to buy it +for their own use. Second, Burns’ statements that the pre-orders were “very serious orders” or “very +sticky” were misleading because the pre-orders were non-binding and customers were not obligated +to purchase any trucks. Third, the pre-orders included large quantities from customers who had no +apparent ability to buy such quantities of the truck. As a result, Lordstown and Burns, who knew or +should have known that certain pre-orders were not from or primarily from fleets, misrepresented +the true nature of the demand for the Endurance, which was substantially less than what they had +described to investors. +Misrepresentations About Access to GM Parts + +20. From August 2020 to January 2021, Lordstown and Burns made false and +misleading statements about Lordstown’s access to certain critical parts from GM to develop the +Endurance. +21. In DiamondPeak’s proxy statements for the merger filed beginning in August 2020, +Lordstown claimed it had entered into an agreement with GM in April 2020 purportedly providing +Lordstown with “access to certain non-customer-facing GM parts, including airbags, steering +columns, and steering wheels,” that will offer significant benefits to Lordstown’s supply chain. +Partly because of this access to GM parts, Lordstown claimed it expected “to substantially +complete sourcing [parts] for the Endurance by the end of 2020.” In the proxy statements +Lordstown also estimated approximately $120 million of capital expenditures for retooling its plant +and other investments to complete the Endurance and its supply chain. +22. Under the agreement with GM, Lordstown’s management expected to get access to +over 200 GM parts, including approximately 100 critical non-customer-facing parts necessary to +develop the Endurance, beyond the three parts mentioned in the SEC filings. These parts were +necessary for building the Endurance prototypes and testing them for compliance with federal +motor vehicle safety standards (“FMVSS”) established by the National Highway Transportation + 8 +Safety Administration before any Endurance could be sold and delivered to customers. +23. But soon after the announcement of the merger in August 2020, Lordstown’s +management realized they did not have access to the vast majority of the critical non-customer- +facing GM parts. These parts could not be purchased directly from GM because GM did not make +them; the parts were made by GM’s suppliers under GM’s authorization, which was a complex, +time-consuming process with no certainty as to whether GM would ultimately authorize +Lordstown to use the parts. For each part requested by Lordstown, Lordstown had to obtain +authorization from GM to determine whether the part could be used by Lordstown. If GM +authorized Lordstown’s use of the part, GM had to authorize the part’s supplier to conduct a +feasibility analysis to determine whether the supplier could produce the quantities of the part +requested by Lordstown. If so, then Lordstown and the supplier had to develop a product +agreement for the part for GM’s approval. After that, the supplier could then produce the part, +which could take months to do. +24. By October 2020, Lordstown still had no access to the vast majority of the +requested GM parts. A Lordstown officer alerted Burns, “so far we have GM Tooling +authorization letters for just 4 of ~90 parts completed…. The Endurance program timing is now in +jeopardy for the key parts that need [GM] approval.” Also in October, another Lordstown officer +complained to a GM officer, “we represented to the market that [Lordstown] and GM had a parts +deal…. We are not getting the necessary support from [GM] …. This delay is going to have a +serious impact if it is not addressed immediately.” +25. By the end of December 2020, Lordstown’s lack of access to the GM parts +remained unchanged, and Lordstown’s plan to produce and deliver the Endurance by the second +half of 2021 was in serious jeopardy. Lordstown had no visibility into if or when it might obtain +access to the GM parts needed to produce and certify the Endurance with FMVSS before selling +and delivering it to customers. In fact, GM informed Lordstown and Burns in December 2020 that +Lordstown’s requests for GM parts would constrain GM’s own supply chain, and advised +Lordstown to find a backup solution for the vast majority of the requested parts in case GM +ultimately rejected Lordstown’s request. +26. Nevertheless, Lordstown continued to state falsely in SEC filings in fourth-quarter +2020 that Lordstown had access to the GM parts. Lordstown’s Forms S-1 and S-1/A filed in +November and December 2020 and signed by Burns stated, like the August 2020 DiamondPeak +proxy statement, that Lordstown had access to the GM parts, and management expected to +substantially complete sourcing parts for the Endurance in the second half of 2020, when in fact +Lordstown did not have such access, and was nowhere close to sourcing the parts. +27. Further, in the November 17, 2020 CNBC interview, Burns misleadingly stated +GM “has opened up their parts bin” to Lordstown, implying that Lordstown was free to buy or take +whatever parts it wanted from GM. On December 2, 2020, in an investor conference Burns again +claimed GM “opened up its parts bin to us. The parts bin is very very valuable to us….” And on +January 11, 2021, in an interview by a research analyst, Burns stated GM “opened up their parts +bin, right? So we’re using GM parts in here and some critical parts, mostly around the safety stuff, +so we can get through the crash testing.” + 9 +28. These statements by Lordstown and Burns were false and misleading because +Lordstown did not have access to the GM parts as stated in SEC filings, and GM had not “opened +up its parts bin” in any sense. In fact, GM specifically informed Lordstown that its requests for +GM parts would constrain GM’s own supply chain, and that Lordstown should find backup plans +for the vast majority of its requested parts. As a result, Lordstown had to source from other +suppliers the necessary parts it could not access from GM, thereby increasing Lordstown’s capital +expenditure by at least an additional $150 million, on top of the $120 million estimate at the time +of the merger announcement in August 2020. +Misrepresentations About the Delivery Timeline for the Endurance + +29. In October and November 2020, Lordstown and Burns made materially false and +misleading statements about Lordstown’s ability to deliver the Endurance to the commercial fleet +market. +30. To obtain the “first mover” advantage by bringing an electric full-size pickup truck +to the market before anyone else, at the time of the merger announcement in August 2020 +Lordstown and Burns stated Lordstown planned to deliver the Endurance by the second half of +2021. At that time, Lordstown’s production and engineering teams had, with Burns’ approval, +internally targeted the production of the Endurance in September or October of 2021. Production +referred to the process of starting to build a vehicle that can be sold and delivered to a customer +after it is certified to comply with regulatory requirements, including FMVSS. Because +Lordstown’s production and engineering teams expected the testing required to certify the +Endurance with FMVSS to take at least several months to complete after production had started, it +was not possible for Lordstown to sell or deliver to a customer an Endurance at the same time +Lordstown started production without certifying that the vehicle complied with FMVSS. +31. But shortly after the August 2020 merger announcement, Lordstown was already +experiencing delays with its suppliers, including its lack of access to GM’s parts described above, +that jeopardized the production and delivery timelines for the Endurance. By October 2020, +Lordstown’s supply chain and other issues had delayed the production timeline for the Endurance +to November 2021 at the earliest, and its delivery schedule to months later, likely into 2022. +Lordstown’s production and engineering teams, who regularly updated Burns on the production +and delivery timelines, informed Burns of these delays, and he was “in line” with them. +32. Despite these worsening delays to the Endurance’s production and delivery +timelines, Lordstown and Burns made false and misleading public statements that Lordstown +would deliver (not just start production for) the Endurance to customers by September 2021. +33. On October 26, 2020, just after Lordstown’s merger with DiamondPeak had closed, +and on the first day of trading for Lordstown’s common stock, Burns stated to The Detroit News, +“[n]ext September [2021] deliveries start. We’ve pre-sold 40,000 of them to fleet customers +already, … but September it starts.” +34. On October 27, 2020, in an interview with Fox Business, in response to a question +of when someone can actually buy an Endurance, Burns stated, “[y]ou can buy one now but you +can take delivery in September [2021].” + 10 +35. On November 16, 2020, just before a series of public media appearances by Burns +and before Lordstown was scheduled to issue its first SEC filing as a public company, Burns +directed Lordstown to issue a press release claiming, “Lordstown Motors has received +approximately 50,000 non-binding production reservations [for the Endurance] from commercial +fleets …. [D]eliveries … are expected to begin in September 2021, with full production ramping +up throughout 2022.” Burns knew that Lordstown could not deliver the Endurance in September +2021, even if production could start in September 2021. He nevertheless directed the press release +to state “September 2021” for the expected delivery date because he “did not want [Lordstown’s] +internal [production and engineering] team to think they have extra time.” +36. These statements were materially false and misleading at the time they were made +because Lordstown could not, and had no plans to, sell and deliver the Endurance to a customer by +September 2021 without certifying that the Endurance complied with regulatory requirements. +Failure to File Financial Statements Audited by Independent Public Accountant + +37. In January 2020, Lordstown, then a private company, engaged CSH to audit +Lordstown’s 2019 financial statements under GAAS applicable to private companies, and to provide +financial statement preparation services. Lordstown’s then-CFO also asked CSH to calculate +Lordstown’s stock compensation expense and prepare notes to the financial statements. +38. At the conclusion of the audit, in May 2020, CSH issued an audit report containing an +opinion under GAAS for Lordstown’s 2019 financial statements. +39. In July 2020, in anticipation of Lordstown’s merger transaction with DiamondPeak, +CSH and Lordstown entered into a new engagement letter to audit Lordstown’s 2019 financial +statements under PCAOB standards applicable to audits of public companies. During the course of +that audit, Lordstown identified and corrected errors in the financial statements, including a +$271,103 understatement of stock compensation expense that was previously both prepared and +audited by CSH during its previous GAAS audit. +40. On August 24, 2020, CSH issued an audit report under PCAOB standards containing +an opinion on Lordstown’s revised 2019 financial statements. DiamondPeak’s August 24, 2020 +proxy statement, filed with the Commission, included this audit opinion. +41. From 2020 through 2023, CSH’s August 24, 2020 audit opinion on Lordstown’s +2019 financial statements was filed in Lordstown’s registration statements, and periodic filings +incorporated by reference therein, filed with the Commission. +42. Th e facts and circumstances in which an auditor will— and will not—be deemed +independent are set forth in Rule 2-01 of Regulation S-X. Rule 2-01(c) provides a non-exclusive list +of specific relationships that render an accountant not independent. Rule 2-01(c)(4) states that an +auditor will not be considered independent if it provides certain bookkeeping services for its audit +client or if it prepares financial statements “that are filed with the Commission or that form the basis +of financial statements filed with the Commission.” Further, PCAOB Rule 3520, Auditor +Independence, requires that an auditor be independent of its client throughout the audit and +professional engagement period, and an auditor to comply with independence criteria established by + 11 +the rules and regulations of the Commission. When CSH performed the audit of Legacy +Lordstown’s 2019 financial statements under PCAOB standards, CSH audited its own work and +consequently lacked independence. CSH’s audit report contained an unqualified opinion in which +it represented that it had conducted an audit in accordance with PCAOB standards. By violating +PCAOB independence standards, that representation was inaccurate. +Subsequent Developments + +43. During the relevant period, Lordstown offered and sold securities, including the +offer and sale of common stock, the issuance of warrants to purchase common stock, the offer of +shares to employees in employee benefit plans, and the award of stock and stock options to +employees as incentive compensation. Lordstown received money and property from the offer and +sale of securities throughout the relevant period. +44. Following the company’s response to the Hindenburg report, Burns resigned as +Lordstown’s Chairman and CEO. The company failed to develop and sell a material number of the +Endurance, and in June 2023, the company, and certain affiliates, each filed a voluntary petition +for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the +District of Delaware, Case No. 23-10831 (MFW) (Bankr. D. Del.) (jointly administered) (the +“Delaware Bankruptcy”). +45. Lordstown and DiamondPeak, as well as Burns and other defendants, were +subsequently named as defendants in a series of private class action and stockholder derivative +lawsuits, alleging similar misconduct to the findings described above. At the time of its bankruptcy +filing, Lordstown, Burns and other individuals were defendants in a consolidated securities fraud +class action that was pending in the U.S. District Court for the Northern District of Ohio, captioned +In re Lordstown Motors Corp. Sec. Litig. No. 4:21-cv-616-DAR (N.D. Ohio) (the “Ohio Securities +Class Action”). In addition, a separate consolidated stockholder class action was filed prior to the +bankruptcy in the Delaware Court of Chancery against DiamondPeak Sponsor LLC (an entity that +was involved in the merger with Lordstown) and certain individuals, in a case captioned In re +Lordstown Motors Corp. Stockholders Litig., C.A. No. 2021-1066-LWW (Del. Ch.) (“Delaware +Shareholder Class Action”). Derivative lawsuits were also filed in federal courts in Ohio and +Delaware, and in the Delaware Court of Chancery. +Violations + +46. As a result of the conduct described above, Lordstown violated Section 17(a)(2) of +the Securities Act which proscribes, in the offer or sale of a security, obtaining “money or property +by means of any untrue statement of a material fact or any omission to state a material fact +necessary in order to make the statements made, in light of the circumstances under which they +were made, not misleading.” In addition, Lordstown also violated Section 17(a)(3) of the Securities +Act which proscribes, in the offer or sale of a security, engaging “in any transaction, practice, or +course of business which operates or would operate as a fraud or deceit upon the purchaser.” A +violation of these provisions does not require scienter and may rest on a finding of negligence. See +Aaron v. SEC, 446 U.S. 680, 685 & 701-02 (1980). +47. As a result of the conduct described above, Lordstown violated Section 13(a) of the + 12 +Exchange Act and Rule 13a-1 thereunder which require issuers with securities registered under +Section 12 of the Exchange Act to file annual reports with the Commission. Annual Reports on +Form 10-K must include financial statements meeting the requirements of Regulation S-X. The +General Instructions as to Financial Statements in Regulation S-X state that financial statements +shall be audited, unless otherwise indicated. The obligation to file such reports embodies the +requirement that they be true and complete. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, +1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). +48. As a result of the conduct described above, Lordstown violated Section 13(a) of the +Exchange Act, which requires issuers to file such periodic and other reports as the Commission may +prescribe and in conformity with such rules as the Commission may promulgate. Exchange Act +Rule 13a-11 requires issuers with securities registered under Section 12 of the Exchange Act to file +current reports. The obligation to file such reports embodies the requirement that they be true and +correct. See, e.g., Savoy Indus., 587 F.2d at 1165. In addition to the information expressly required +to be included in such reports, Rule 12b-20 of the Exchange Act requires issuers to add such further +material information, if any, as may be necessary to make the required statements, in the light of the +circumstances under which they are made, not misleading. A violation of these reporting +provisions does not require scienter. See SEC v. Wills, 472 F. Supp. 1250, 1268 (D.D.C. 1978). +49. As a r esult of the conduct described above, Lordstown violated Section 14(a) of the +Exchange Act and Rules 14a-3 and 14a-9 thereunder, which set forth the information to be provided +by issuers of securities registered pursuant to Section 12 of the Exchange Act in proxy solicitations, +and make it unlawful for any person to solicit any proxy in respect of any security by means of a +proxy statement or other communication containing a materially false or misleading statement, +respectively. Item 13 of Exchange Act Rule 14a-101 requires that financial statements meeting the +requirements of Regulation S-X be furnished with Schedule 14. + Proxy material disclosure is +required to be accurate and complete. Lichtenberg v. Besicorp, 43 F. Supp. 2d 376, 393 (S.D.N.Y. +1999). +Disgorgement + +50. The disgorgement ordered in Section IV.B. below is consistent with equitable +principles and does not exceed Lordstown’s net profits from its violations. + +Lordstown’s Remedial Efforts and Cooperation + +51. In determining to accept the Offer, the Commission considered remedial acts +undertaken by Respondent and cooperation afforded the Commission staff. +Undertakings + +52. Lordstown (including its post-bankruptcy successor or representative, officers, +directors, and employees, and third-party consultants within Lordstown’s control) shall continue to +cooperate fully with the Commission with respect to this action and to any related judicial +proceeding, administrative proceeding, or investigation commenced by the Commission or to +which the Commission is a party, subject to compliance with applicable law. Lordstown agrees +that such cooperation shall include, but is not limited to: + 13 +a. Production of Information: at the Commission’s request, upon reasonable +notice, and without subpoena, Lordstown shall truthfully and completely disclose all +information in its possession reasonably requested by the Commission staff in connection +with this action or any related investigation, litigation, or other proceeding commenced by +the Commission or to which the Commission is a party. +b. P roduction of Documents: at the Commission’s request, upon reasonable +notice, and without subpoena, Lordstown shall provide any document, record or other +tangible evidence in its possession reasonably requested by the Commission staff in +connection with this action or any related investigation, litigation, or other proceeding +commenced by the Commission or to which the Commission is a party. Further, +Lordstown shall produce to the Commission any documents produced to any party in the +litigation identified above in paragraph 45. +c. P roduction of Cooperative Personnel: at the Commission’s request, upon +reasonable notice, and without subpoena, Lordstown shall secure the attendance and +truthful statements, deposition, or testimony of any Lordstown officer, director, or +employee or third-party consultant within Lordstown’s control, excluding any person who +is a party to any related litigated judicial or administrative proceeding, at any meeting, +interview, testimony, deposition, trial, or other legal proceeding commenced by the +Commission or to which the Commission is a party. At the Commission’s request, +Lordstown shall also use its best efforts to secure the attendance and truthful statements, +deposition, or testimony of any former Lordstown officer, director, or employee, excluding +any person who is a party to any related litigated judicial or administrative proceeding, at any +meeting, interview, testimony, deposition, trial, or other legal proceeding commenced by +the Commission or to which the Commission is a party. +The foregoing obligations are subject to Lordstown’s reservation of rights: (i) to +claim that documents or information requested is subject to attorney-client privilege, or +attorney work-product protection; and (ii) to seek entry of a confidentiality order as to: +sensitive business documents or information; sensitive personnel documents or +information; or confidential information pertaining to parties other than Lordstown; and +d. Service and Personal Jurisdiction Consents: Lordstown further agrees that, +with respect to this action and any related judicial proceeding, administrative proceeding, or +investigation commenced by the Commission or to which the Commission is a party, it +will: (i) accept service by email, mail, or facsimile transmission of notices, requests, or +subpoenas issued by the Commission for documents or testimony at depositions, hearings, +or trials, or in connection with any related investigation by the Commission staff +(“Commission Service”); (ii) appoint Lordstown’s counsel as agent to receive Commission +Service; (iii) with respect to Commission Service, waive the territorial limits upon service +contained in Rule 45 for the Federal Rules of Civil Procedure and any applicable local +rules, provided that the party requesting the testimony reimburses Lordstown’s travel, +lodging, and subsistence expenses at the then-prevailing U.S. Government per diem rates; +and (iv) consent to personal jurisdiction over Lordstown in any United States District Court +for purposes of enforcing any Commission Service. + 14 +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 Lordstown’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 Lordstown 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 Sections13(a), and +14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 14a-3, and 14a-9 thereunder. + + B. Lordstown shall be liable to pay disgorgement in the amount of $25.5 million, +which amount shall be deemed fully satisfied upon the occurrence of both of the following: (i) +entry in the Delaware Bankruptcy of an order confirming the company’s Joint Chapter 11 Plan, +which provides for Lordstown to fund no less than $3.0 million, and up to $10.0 million, to resolve +claims asserted or that could have been asserted by the class in the Ohio Securities Class Action, and +such Plan having gone effective, and (ii) execution of a binding term sheet providing for the +payment of no less than $15.5 million to resolve claims asserted or that could have been asserted +by the class in the Delaware Shareholder Class Action. The Commission agrees that upon +satisfaction of this disgorgement requirement, the Commission will promptly (and, in any event, no +later than within 3 business days following satisfaction of such requirement), file a notice in the +Delaware Bankruptcy withdrawing any proofs of claim filed in the Delaware Bankruptcy. + + By the Commission. + + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4491.txt b/raw/aaer/2024/AAER-4491.txt new file mode 100644 index 0000000000000000000000000000000000000000..f03e296fe71e7055956b2245b86cabf56e3adbea --- /dev/null +++ b/raw/aaer/2024/AAER-4491.txt @@ -0,0 +1,398 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 99638 / February 29, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4491 / February 29, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-21876 + + +In the Matter of + + Clark Schaefer Hackett & Co., + +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 +Clark Schaefer Hackett & Co., (“Respondent” or “CSH”) pursuant to Sections 4C1 and 21C of +the Securities Exchange Act of 1934 (“Exchange Act”), and Rule 102(e)(1)(ii) 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 +Commission’s Rules of Practice.2 + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting +Public Administrative And Cease-and-Desist Proceedings Pursuant To Sections 4C And 21C of +the Securities Exchange Act Of 1934 and Rule 102(e) of the Commission’s Rules Of Practice, +Making Findings, and Imposing Remedial Sanctions and a Cease-And-Desist Order (“Order”), +as set forth below. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds +3 that: + +A. SUMMARY + +These proceedings arise from violations of the Commission’s auditor independence rules +by CSH, a public accounting firm. In early 2020, when Lordstown Motors Corp. (“Lordstown”) +was a private company, CSH audited Lordstown’s 2019 financial statements under Generally +Accepted Audit Standards (“GAAS”), and during the same engagement, provided the company +with non-audit services by assisting management in preparing the financial statements and +performing bookkeeping services. Later in 2020, in connection with Lordstown’s anticipated +merger with DiamondPeak Holdings Corp. (“DiamondPeak”), CSH conducted an audit of the +same 2019 financial statements under PCAOB standards. CSH represented that it was +“independent” in the auditor’s report it issued to Lordstown under PCAOB standards, and the +report was included in public filings with the Commission by DiamondPeak, and later, +Lordstown. + +Rule 2-01 of Regulation S-X requires that auditors be independent of their audit clients +both in fact and appearance. Rule 2-01(c) of Regulation S-X provides that an auditor is not +independent if, at any point during the audit and professional engagement period, the audit firm +provides certain non-audit services to the client. CSH however, violated those independence + +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 Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. +3 +standards because it audited and prepared the financial statements and provided bookkeeping +services to Lordstown during the audit and professional engagement period. By doing so, CSH +violated Rule 2-02(b) of Regulation S-X and caused Lordstown’s violations of Sections 13(a) +and 14(a) of the Exchange Act, and Rules 13a-1 and 14a-3 thereunder. CSH’s conduct also +constituted improper professional conduct pursuant to Section 4C of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. + +B. RESPONDENT + +CSH, headquartered in Cincinnati, Ohio, is an accounting and advisory firm. CSH is +registered with the Public Company Accounting Oversight Board (“PCAOB”). + +C. RELEVANT ENTITY + +Lordstown Motors Corp. is a Delaware corporation with its principal place of business in +Lordstown, Ohio. Lordstown’s common stock was registered with the Commission under +Exchange Act Section 12(b), and at all relevant times it was required to file periodic reports with +the Commission pursuant to Section 13(a). + +D. FACTS + +1. On January 17, 2020, Lordstown, then a private company, engaged CSH to audit +Lordstown’s 2019 financial statements under GAAS and to provide financial statement +preparation services. During the course of the work that took place from January 17 to May 14, +2020, CSH also calculated Lordstown’s stock compensation expense and prepared notes to the +financial statements. + +2. At the conclusion of the audit, on May 14, 2020, CSH issued an audit report +containing an opinion under GAAS for Lordstown’s 2019 financial statements. + +3. On July 1, 2020, in connection with Lordstown’s anticipated merger transaction +with DiamondPeak, CSH and Lordstown entered into a new engagement letter to audit +Lordstown’s 2019 financial statements under PCAOB standards. During the course of the +PCAOB audit, Lordstown identified and corrected errors in the financial statements, including a +$271,103 understatement of stock compensation expense that was previously both prepared and +audited by CSH during the GAAS audit. + +4. On August 24, 2020, CSH issued an audit report containing an opinion on the +revised 2019 financial statements under PCAOB standards . DiamondPeak’s August 24, 2020 +proxy statement included CSH’s August 24, 2020 audit opinion. + +5. From 2020 through 2023, CSH consented for its August 24, 2020 audit opinion of +Lordstown’s 2019 financial statements to be used in connection with Lordstown’s registration +statements and periodic reports filed with the Commission. + +6. The facts and circumstances in which an auditor will—and will not —be deemed +independent are set forth in Rule 2-01 of Regulation S-X. Rule 2-01(c) provides a non-exclusive +4 +list of specific relationships that render an accountant not independent. Rule 2-01(c)(4) states +that an auditor will not be considered independent if it provides certain bookkeeping services for +its audit client or if it prepares financial statements “that are filed with the Commission or that +form the basis of financial statements filed with the Commission.” Further, PCAOB Rule 3520, +Auditor Independence, requires an auditor to be independent of its client throughout the audit +and professional engagement period and to comply with independence criteria established by the +rules and regulations of the Commission. When CSH performed the audit of Lordstown’s 2019 +financial statements under PCAOB standards, CSH audited its own work and consequently +lacked independence. + +7. CSH’s audit report contained an unqualified opinion in which it represented that it +had conducted an audit in accordance with PCAOB standards. By violating PCAOB +independence standards, that representation was inaccurate. + +Violations + +8. Rule 2-02(b) of Regulation S-X prohibits auditors from falsely certifying that an +audit report was conducted in accordance with PCAOB standards. PCAOB Rule 3520 requires +that an auditor be independent of its client throughout the audit and professional engagement +period and that an auditor comply with independence criteria established by the rules and +regulations of the Commission. + +9. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require issuers with +securities registered under Section 12 of the Exchange Act to file annual reports with the +Commission. Annual Reports on Form 10-K must include financial statements meeting the +requirements of Regulation S-X, which require an audit of the financial statements by an +independent accountant in accordance with PCAOB standards. See Rule 1-02(d) of Regulation +S-X. The obligation to file such reports embodies the requirement that they be true and +complete. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. +denied, 440 U.S. 913 (1979). + +10. Section 14(a) of the Exchange Act and Rule 14a-3 set forth the information to be +provided by issuers of securities registered pursuant to Section 12 of the Exchange Act in proxy +solicitations. Item 13 of Exchange Act Rule 14a-101 requires that financial statements meeting +the requirements of Regulation S-X be furnished with Schedule 14. Proxy material disclosure is +required to be accurate and complete. Lichtenberg v. Besicorp, 43 F. Supp. 2d 376, 393 +(S.D.N.Y. 1999). + +Findings + +11. Based on the foregoing, the Commission finds that CSH 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. + +12. Based on the foregoing, the Commission finds that CSH committed violations of +Rule 2-02(b) of Regulation S-X. + +5 +13. Based on the foregoing, the Commission finds that CSH caused Lordstown’s +violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, and Section 14(a) of +the Exchange Act and Rule 14a-3 thereunder. + +Disgorgement + +The disgorgement and prejudgment interest ordered in paragraph IV.D. are consistent +with equitable principles, do not exceed CSH’s net profits from its violations, and returning the +money to Respondent would be inconsistent with equitable principles. Therefore, in these +circumstances, distributing disgorged funds to the United States Treasury is the most equitable +alternative. The disgorgement and prejudgment interest ordered in paragraph IV.D shall be +transferred to the general fund of the United States Treasury, subject to Section 21F(g)(3) of the +Exchange Act. + +Undertakings + +CSH has undertaken to: + +14. Retain, at its own expense, an independent consultant (the “Independent +Consultant”), not unacceptable to the staff of the Commission, within 120 days after the entry of +this Order. Within the time periods specified below, the Independent Consultant will review and +evaluate (the “Review”) CSH’s audit, review, and quality control policies and procedures as to, +among other aspects, their sufficiency, adequacy, design, implementation, and effectiveness +applicable to the subjects set forth below. The Independent Consultant’s purpose for this Review +will be to make recommendations for improvements to policies and procedures relating to the +sufficiency, adequacy, design, implementation, and effectiveness of CSH’s current quality +controls (“CSH’s Policies”) relating to educating and monitoring for compliance by its personnel +with the independence requirements under PCAOB standards and Commission rules that prohibit +the performance of certain non-audit services by CSH or its associated entities to CSH audit +clients or their affiliates. + +15. The Review shall be completed within 120 days of the retention of the +Independent Consultant, and shall assess the following areas to determine whether the +sufficiency, adequacy, design, implementation, and effectiveness of CSH’s Policies provide +reasonable assurance of compliance with PCAOB and SEC independence rules concerning the +provision of prohibited non-audit services by CSH or its associated entities to CSH audit clients +or their affiliates: + +(a) personnel and expertise within CSH, including with respect to +independence issues; + +(b) CSH’s independence quality controls to prevent and detect prohibited non- +audit services, including monitoring systems designed to check conflicts and preventively +consider independence issues across all CSH engagements; + +6 +(c) CSH’s independence guidance and training of personnel, including +education regarding independence issues related all CSH clients; and + +(d) CSH’s policies, procedures, and controls regarding the issuance of consent +letters to registrants for use of CSH’s audit opinions in SEC filings. + +16. Require the Independent Consultant to make recommendations for any necessary +changes or improvements to CSH’s Policies. + +17. Provide a copy of the engagement letter within 14 days of the date of retention of +the Independent Consultant detailing the Independent Consultant’s responsibilities to the +Commission staff. + +18. Cooperate fully with the Independent Consultant and provide the Independent +Consultant with access to its own files, books, records, and personnel as reasonably requested for +the Review. CSH shall require the Independent Consultant to report to the Commission staff on +their activities as the staff may request. + +19. Require that the Independent Consultant issue a report (the “Report”), within 60 +days of completing the Review, summarizing the Review and reporting on the findings and any +recommendations regarding CSH’s Policies. Simultaneously with providing the Report to CSH, +the Independent Consultant shall transmit a copy to Jeff Leasure, Assistant Director, Division of +Enforcement, Securities and Exchange Commission, 100 F Street N.E., Washington, DC 20549. + +20. CSH will adopt all recommendations in the Report within 120 days from the date +the Report is issued; however, within 30 days after the Independent Consultant serves the Report, +CSH shall advise the Independent Consultant and the Commission, in writing of any +recommendations that it considers unnecessary, unduly burdensome, impractical, or unjustifiably +costly. With respect to any recommendation that CSH considers unnecessary, unduly +burdensome, impractical, or unjustifiably costly, CSH need not adopt that recommendation at +that time but shall propose in writing an alternative policy, procedure, or system designed to +achieve the same objective or purpose. As to any recommendation on which CSH and the +Independent Consultant do not agree, such parties shall attempt in good faith to reach an +agreement within 30 days after CSH serves the written advice. In the event that CSH and the +Independent Consultant are unable to agree on an alternative proposal, CSH will either abide by +the determinations of the Independent Consultant or seek approval from the Commission staff +pursuant to paragraph 24 below to engage, at CSH’s expense, a qualified third party acceptable +to the Commission staff to promptly resolve the issue(s). + +21. For the period of engagement and for a period of two years from completion of +the engagement, CSH shall not (i) retain the Independent Consultant for any other professional +services outside of the services described in this Order; (ii) enter into any other professional +relationship with the Independent Consultant, including any employment, consultant, attorney- +client, auditing, or other professional relationship; or (iii) enter, without prior written consent of +the Commission staff, into any such professional relationship with any of the Independent +Consultant’s present or former affiliates, employers, directors, officers, employees, or agents +7 +acting in their capacity as such. + +22. To ensure the independence of the Independent Consultant, CSH: (1) shall not +have the authority to terminate the Independent Consultant or substitute another independent +consultant for the initial Independent Consultant without the prior written approval of the +Commission staff; and (2) shall compensate the Independent Consultant and persons engaged to +assist the Independent Consultant for services rendered pursuant to this Order at their reasonable +and customary rates. + +23. CSH shall certify, in writing, compliance with the undertaking(s) set forth above. +The certification shall identify the undertaking(s), provide written evidence of compliance in the +form of a narrative, and be supported by exhibits sufficient to demonstrate compliance. The +Commission staff may make reasonable requests for further evidence of compliance, and CSH +agrees to provide such evidence. The certification and supporting material shall be submitted to +Jeff Leasure, Assistant Director, Division of Enforcement at the address provided above, with a +copy to the Office of Chief Counsel of the Division of Enforcement, no later than sixty (60) days +from the date of the completion of the undertakings. + +24. The reports by the Independent Consultant 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 objectives of the reporting requirement. For these reasons, among others, the +reports and the contents thereof are intended to remain and shall remain non-public, except (1) +pursuant to court order, (2) as agreed to by the parties in writing, (3) to the extent that the +Commission determines in its sole discretion that disclosure would be in furtherance of the +Commission’s discharge of its duties and responsibilities, or (4) as otherwise required by law. + +25. For good cause shown, the Commission staff may extend any of the dates set +forth above. Deadlines for dates shall be counted in calendar days, except if the last day falls on +a weekend or federal holiday, the next business day shall be considered the last day. + +26. CSH agrees that if the Division of Enforcement believes that CSH has not +satisfied these undertakings, it may petition the Commission to reopen the matter to determine +whether additional sanctions are appropriate. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent CSH’s Offer. + +Accordingly, it is hereby ORDERED that: + +A. CSH is censured. + +B. CSH shall cease and desist from committing or causing any violations and any +future violations of Rule 2-02(b) of Regulation S-X, Section 13(a) of the Exchange Act and Rule +13a-1 thereunder; and Section 14(a) of the Exchange Act and Rule 14a-3 thereunder. +8 + +C. CSH shall comply with the undertakings enumerated in paragraphs 14-26 above. + +D. CSH shall, within ten (10) days of the entry of this Order, pay disgorgement of +$27,822 and prejudgment interest of $3,059 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. + +E. CSH shall, within ten (10) days of the entry of this Order, pay a civil money +penalty, in the amount of $50,000.00, to the Securities and Exchange Commission for transfer to +the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov through +the SEC website at http://www.sec.gov/about/offices/ofm.htm; + or + +(3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission and +hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +CSH 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 D. Mark Cave, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., N.E., Washington, +DC 20549-6011. + +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 +9 +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/2024/AAER-4492.txt b/raw/aaer/2024/AAER-4492.txt new file mode 100644 index 0000000000000000000000000000000000000000..b98a6d51cbc7ff3d5c2af20451d083a3f241a0b0 --- /dev/null +++ b/raw/aaer/2024/AAER-4492.txt @@ -0,0 +1,1439 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 11276 / March 12, 2024 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 99716 / March 12, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4492 / March 12, 2024 + +Admin. Proc. File No. 3-21831 + + +In the Matter of + +EDWARD F. HACKERT, CPA + + + +ORDER GRANTING MOTION TO AMEND THE ORDER INSTITUTING PROCEEDINGS + +On January 18, 2024, the Securities and Exchange Commission issued an order +instituting proceedings (“OIP”) against Edward F. Hackert, CPA, pursuant to Section 8A of the +Securities Act of 1933, Sections 4C and 21C of the Securities Exchange Act of 1934, and +Commission Rule of Practice 102(e).1 +On February 5, 2024, the Division filed a motion to amend the OIP to correct certain +factual errors. In its motion, the Division explained that, shortly after issuance of the OIP, +Division staff discovered errors in how the staff had calculated the number of times that Hackert +allegedly failed to sign-off on audit work papers and document his review by the audit report +release date. The Division stated that the errors were inadvertent and due to miscommunication +between staff members. Upon discovering these errors, the Division explained, the staff +reviewed and double-checked Hackert’s sign-off and balance sheet and report release date +information for the audits at issue in the case. +Based on the errors it discovered, the Division seeks to amend the OIP to: (1) reduce the +number of audits for which Hackert allegedly failed to sign-off on audit work papers and +document his review by the report release date (from 204 audits to 187 audits); and (2) reduce + +1 Edward F. Hackert, CPA, Exchange Act Release No. 99384, 2024 WL 212152 (Jan. 18, +2024). +2 + +the number of audits for which Hackert allegedly failed to assemble complete and final audit +documentation by the audit completion date (from 126 audits to 123 audits). +Hackert filed a response to the Division’s motion, noting that while he “takes no position +on the Division’s motion,” he maintains that both the original and amended OIP “lack[] merit.” +Hackert also expressly reserves “his right to challenge the sufficiency of the operative OIP,” as +well as the legality and constitutionality of this proceeding. +Rule of Practice 200(d)(1) provides that, “[u]pon motion by a party, the Commission +may, at any time, amend an order instituting proceedings to include new matters of fact or law.”2 +Such amendments to OIPs, including amendments that correct errors in an OIP,3 “should be +freely granted, subject only to the consideration that other parties should not be surprised nor +their rights prejudiced.”4 +Amending the OIP to correct factual errors about the number of Hackert’s alleged +auditing failures should not surprise or prejudice him. The proposed amendments narrow the +scope of the allegations against Hackert, and because this proceeding is still in its earliest stages, +he will be able to file an answer to the amended OIP and challenge its allegations.5 +Accordingly, IT IS ORDERED that the Division’s motion to amend the OIP is granted. +The amended OIP is attached to this order. Service of this order and the amended OIP shall be +made consistent with Rule of Practice 141(a).6 After the service of the amended OIP, the +Division shall promptly file with the Office of the Secretary a record of service consistent with +Rule of Practice 141(a)(3).7 Hackert shall file an answer to the allegations contained in the +amended OIP within 20 days of service of the amended OIP. + +2 17 C.F.R. § 201.200(d)(1). +3 See Steven Wise, Exchange Act Release No. 48850, 2003 WL 22827675, at *1 (Nov. 26, +2003) (explaining that the Commission has authority to amend an OIP “where an amendment is +intended to correct an error and is within the scope of the original order”). +4 Robert David Beauchene, Exchange Act Release No. 68974, 2013 WL 661619, at *2 +(Feb. 25, 2013)). +5 See James S. Tagliaferri, Exchange Act Release No. 75820, 2015 WL 5139389, at *2 +(Sept. 2, 2015) (“The OIP does not establish facts, it alleges them; [the respondent] will have an +opportunity to contest these allegations and their legal effect.”); Wise, 2003 WL 22827675, at *1 +(holding that amending factual errors in the OIP at an early stage of the proceeding when “no +hearing ha[d] been set” would “not result in surprise or prejudice to other parties”). +6 17 C.F.R. § 201.141(a). +7 17 C.F.R. § 201.141(a)(3). +3 + +The parties’ attention is directed to the e-filing requirements in the Rules of Practice.8 +By the Commission. + + + Vanessa A. Countryman + Secretary + +8 See Rules of Practice 151, 152(a), 17 C.F.R. §§ 201.151, .152(a) (providing procedure for +filing papers with the Commission and mandating electronic filing in the form and manner +posted on the Commission’s website); Instructions for Electronic Filing and Service of +Documents in SEC Administrative Proceedings and Technical Specifications, +https://www.sec.gov/efapdocs/instructions.pdf. Parties generally also must certify that they have +redacted or omitted sensitive personal information from any filing. Rule of Practice 151(e), 17 +C.F.R. § 201.151(e). +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +ADMINISTRATIVE PROCEEDING +File No. 3-21831 +In the Matter of +Ed +ward F. Hackert, CPA, +Re +spondent. +AMENDED ORDER INSTITUTING +ADMINISTRATIVE AND CEASE- +AND-DESIST PROCEEDINGS +PURSUANT TO SECTION 8A OF +THE SECURITIES ACT OF 1933, +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF +1934, AND RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE, AND NOTICE OF +HEARING +I. +The + Securities and Exchange Commission (“Commission”) deems it appropriate +and in the public interest that public administrative and cease-and-desist proceedings be, +and hereby are, instituted pursuant Section 8A of the Securities Act of 1933 (“Securities +Act”), Sections 4C +1 and 21C 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 Practice2 against Edward F. Hackert +(“Respondent” or “Hackert”). +II. +A +fter an investigation, the Division of Enforcement alleges the following: +SUMMARY +1. E +dward F. Hackert, a certified public accountant (“CPA”), engaged in +improper professional conduct, within the meaning of Section 4C of the Exchange Act +and Rule 102(e) of the Commission’s Rules of Practice, due to his numerous violations of +the Public Company Accounting Oversight Board’s (“PCAOB”) auditing standards +relating to, among other things, audit supervision and audit documentation. +2. F +rom approximately July 2006 to the present, Hackert worked as an +engagement partner at the public accounting firm Marcum LLP (“Marcum”). As an +engagement partner, Hackert was responsible for the Marcum audit engagements to +which he was assigned, including proper supervision of the engagement team and +compliance with PCAOB auditing standards. During his time as an engagement partner, +Hackert was responsible for hundreds of audits. +3. Under PCAOB auditing standards, the date on which an audit firm grants +permission to use its audit report in connection with the issuance of its client’s financial +statements is called the “report release date.” Before releasing the audit report (on the +report release date), the auditor must perform necessary audit procedures and conclude +that sufficient evidence has been obtained to support the representations in the audit +report. Then, once the audit report is released, the auditor’s client includes the audit +report in its filing(s) with the Commission and those filings become public and available +to investors. +4. F +rom 2012 through 2022 (the “relevant period”), Hackert failed to +properly supervise numerous audit engagements and to ensure that the engagements were +performed in compliance with PCAOB auditing standards. Among other things, Hackert +repeatedly failed to review the work of the engagement team members and to document +that review prior to the report release date. +5. D +uring the relevant period, Hackert served as the engagement partner for +at least 239 audits of public companies, and he approved the release of Marcum’s audit +reports for those audits. Those audits included 88 audits of operating public companies +and 151 audits of special purpose acquisition companies (“SPACs”). For 187 of those +audit engagements (or approximately 78%), Hackert failed to supervise the work of the +engagement team as shown by, among other things, Hackert’s failure to review the work +2 Rule 102(e)(1)(ii) provides, in relevant part, that “the Commission may . . . deny, temporarily or +permanently, the privilege of appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct.” +3 +of the engagement team and to document his review by the report release date. +6. U +nder PCAOB auditing standards, the auditor should assemble a complete +and final set of audit documentation for retention by 45 days after the report release date, +which is called the “documentation completion date.” +7. D +uring the relevant period, Hackert repeatedly failed to assemble +complete and final audit documentation by the documentation completion date. For 123 +of the audit engagements during the relevant period (or approximately 51%), Hackert +failed to ensure that a complete and final set of audit documentation was assembled by +the documentation completion date. +8. P +roper audit documentation in accordance with the PCAOB auditing +standards is not merely a technical requirement. It is essential to demonstrate that the +required audit work was performed and reviewed by the report release date, and to +support the conclusions reached by the auditor and the representations contained in the +audit report. As Marcum’s internal training slides instructed its auditors in August 2021: +“If you didn’t document it, you didn’t do it!” +3 +9. H +ackert’s failure to properly supervise audit engagements and to review +the work of his engagement team members resulted in multiple deficient audits. As +explained below, those failures independently violated PCAOB auditing standards. +10. T +hrough his conduct described herein, Hackert engaged in improper +professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice by engaging in repeated +instances of unreasonable conduct, each resulting in violation of applicable professional +standards. In connection with each of the audit engagements described herein on which +Hackert failed to comply with applicable PCAOB auditing standards, he acted +negligently, unreasonably, and without due professional care. +11. I +n October 2021, in a video presentation for Marcum personnel, Hackert +admitted that Marcum’s audit work fell short of the PCAOB auditing standards, stating: +“the standard of how we carry out our work, and document it, according to the auditing +standards, . . . we’re still coming up short.” (Emphasis added.) +H +ackert’s conduct also caused Marcum to repeatedly violate Rule 2-02(b)(1) of +Regulation S-X.4 In connection with each of the audits described herein, Marcum issued +an audit report stating that the audit was performed in accordance with PCAOB auditing +standards. In fact, due to Hackert’s actions, those audits were not performed in +3 Similarly, the PCAOB has stated that “if audit documentation does not exist for a particular procedure or +conclusion related to a significant matter, its absence casts doubt as to whether the necessary work was +done.” Audit Documentation and Amendment to Interim Auditing Standards, PCAOB Release No. 2004- +006 at 3 (June 9, 2004). +4 Marcum is not a respondent in this proceeding. The Commission brought a separate proceeding against +Marcum. See infra ¶ 14. +4 +accordance with PCAOB standards. Marcum therefore violated Rule 2-02(b)(1) of +Regulation S-X. Hackert caused Marcum’s violations of Rule 2-02(b)(1) because his +actions as the engagement partner contributed to Marcum’s violations and Hackert knew +or should have known that his conduct would contribute to a violation. +RESPONDENT +13. H +ackert, age 62, resides in East Meadow, New York. From approximately +July 2006 to the present, Hackert has been an engagement partner at Marcum. From June +2004 through July 2006, Hackert was a senior manager at Marcum. Hackert is licensed as +a CPA in the State of New York. +OTHER RELEVANT ENTITIES +14. M +arcum, a New York limited liability partnership headquartered in New +York, New York, is a public accounting firm in the United States. Marcum has more than 40 +offices in cities across the United States and additional offices in other countries. Marcum +has been registered with the PCAOB since October 2003. In June 2023, the Commission +charged Marcum with systemic quality control failures and violations of audit standards in +connection with audit work for hundreds of SPAC clients. See In the Matter of Marcum +LLP, Exchange Act Rel. No. 97773 (June 21, 2023). +15. A +ult Alliance, Inc. (“AAI”) is a Delaware corporation with its principal +place of business in Las Vegas, Nevada.5 AAI is a holding company that, since 2016, has +engaged in operating businesses that include, among others, power products and systems, +digital asset mining of Bitcoin, the manufacture and sale of textile technology machinery, +and commercial lending. AAI’s stock is registered under Section 12(b) of the Exchange +Act, and its common stock trades on NYSE American. Marcum issued audit reports for +AAI from 2016 to the present. Hackert served as the engagement partner on audits of AAI +from 2016 through 2020. In August 2023, the Commission charged AAI for financial +disclosure failures, improper accounting, and reporting, internal controls, and books and +records violations from 2017 through 2023. See In the Matter of Ault Alliance, Inc., et al., +Exchange Act Rel. No. 98131 (August 15, 2023). +16. A +valanche International Corp. (“Avalanche”), a holding company, is a +Nevada corporation with its principal place of business in Las Vegas, Nevada. AAI has +disclosed Avalanche as a related party since 2017. AAI invested over $17 million in +Avalanche from 2016 to 2021. In June 2022, AAI acquired over 90% of Avalanche’s stock +and began consolidating Avalanche’s financial results with AAI’s results. Avalanche’s +common stock was publicly traded until September 2021. +5 AAI has had several different names: AAI (from January 3, 2023, to present); BitNile Holdings, Inc. +(from December 13, 2021, to January 2, 2023); Ault Global Holdings, Inc. (January 19, 2021, to December +12, 2021); DPW Holdings, Inc. (September 19, 2017, to January 18, 2021); and Digital Power Corporation +(prior to September 19, 2017). +5 +FACTS +R +elevant PCAOB Auditing Standards +17. T +he PCAOB was created as part of the Sarbanes-Oxley Act of 2002. The +PCAOB oversees audits of public companies that are subject to the securities laws in order +to protect the interests of investors and further the public interest in the preparation of +informative, accurate, and independent audit reports. The PCAOB established Auditing +Standards (“AS”) for registered public accounting firms to follow in the preparation of +audit reports for public companies, other issuers, and broker-dealers. Certain of the +standards relevant to this proceeding are summarized below.6 +D +ue Professional Care +18. D +ue professional care is to be exercised in the planning and performance of +an audit and preparation of the audit report. AS 1015.01. Due professional care requires an +auditor to exercise “professional skepticism,” which includes “a questioning mind and a +critical assessment of audit evidence.” AS 1015.07. Negligent conduct by an auditor violates +the duty of due care. See AS 1015.03. +19. T +he engagement partner should know, at a minimum, the relevant +professional accounting and auditing standards and should be knowledgeable about the +client. The engagement partner is responsible for the assignment of tasks to, and supervision +of, members of the engagement team. AS 1015.06. +Supe +rvision of the Audit +20. The + audit engagement partner is responsible for the audit engagement and its +performance. The engagement partner is thus responsible for, among other things, proper +supervision of the work of the engagement team and compliance with PCAOB standards, +including standards regarding using the work of specialists. AS 1201.03. +21. I +n supervising an audit, the engagement partner should, among other things, +(a) inform engagement team members of their responsibilities; (b) direct engagement team +members to bring significant accounting and auditing issues to the attention of the +engagement partner or other supervisors; and (c) review the work of the engagement team +members. AS 1201.05. The engagement partner should review the work of the engagement +team to evaluate whether (1) the work was performed and documented; (2) the objectives of +the procedures were achieved; and (3) the results of the work support the conclusions +reached. AS 1201.05.c. +6 PCAOB Rule 3101 discusses the meaning of certain terms used in the PCAOB auditing standards. The +rule provides that the words “must,” “shall,” and “is required” indicate unconditional responsibilities. The +word “should” indicates responsibilities that are presumptively mandatory. Additionally, under Rule +3101(a)(2) the “[f]ailure to discharge a presumptively mandatory responsibility is a violation of the relevant +standard . . . unless the auditor demonstrates that, in the circumstances, compliance with the specified +responsibility was not necessary to achieve the objectives of the standard.” +6 +22. Wh +ile the engagement partner may seek assistance from appropriate +engagement team members, the engagement partner’s supervision of the audit work cannot +be eliminated and “higher risk areas of the audit require more supervisory attention from +the engagement partner.” Auditing Standards Related to the Auditor’s Assessment of and +Response to Risk and Related Amendments to PCAOB Standards, PCAOB Release No. +2010-004 at A10-17 to A10-18 (Aug. 5, 2010). +Audit Documentation +23. Audi +t documentation (the “work papers”) provides the written record of the +basis for the auditor’s conclusions. Audit documentation also facilitates the planning, +performance, and supervision of the audit engagement. AS 1215.02. +24. An a +uditor must prepare audit documentation in connection with each audit +engagement conducted pursuant to PCAOB auditing standards. AS 1215.04. The audit +documentation should demonstrate, among other things, that the engagement complied with +the standards of the PCAOB. AS 1215.05.a. +25. “Audi +t documentation must clearly demonstrate that the work was in fact +performed.” AS 1215.06. Further, “[a]udit documentation must contain sufficient +information to enable an experienced auditor, having no previous connection with the +engagement” to determine (1) who performed the work, (2) the date such work was +completed, (3) who reviewed the work, and (4) the date of such review. AS 1215.06.b. +26. “O +ral explanation alone does not constitute persuasive other evidence, but it +may be used to clarify other written evidence.” AS 1215.09. +27. B +efore the report release date, the auditor must complete all necessary audit +procedures and obtain sufficient evidence to support the representations in the auditor’s +report. AS 1215.15. Additionally, a “complete and final set of audit documentation should +be assembled for retention as of a date not more than 45 days after the report release date” – +i.e., by the documentation completion date. Id. +28. Audi +t documentation must not be deleted or discarded after the +documentation completion date. AS 1215.16. Any documentation added after the +documentation completion date must indicate (1) the date the information was added, (2) the +name of the person who prepared the additional documentation, and (3) the reason for +adding it. Id. +29. “ +Documentation added to the working papers well after completion of the +audit or other engagement is likely to be of a lesser quality than that produced +contemporaneously when the procedures were performed. It is very difficult to reconstruct +and recall specific activities related to gathering audit evidence months, and perhaps years, +after the work was actually performed.” PCAOB Release No. 2004-006 at 7. +7 +Training and Proficiency +30. A +n auditor must study, understand, and apply new pronouncements on +accounting principles and auditing procedures as they are developed by authoritative bodies +within the accounting profession. AS 1010.04. +A +udit Evidence +31. An + auditor must plan and perform audit procedures to obtain sufficient +appropriate audit evidence to provide a reasonable basis for the auditor’s opinion. AS +1105.04. And appropriate audit evidence “must be both relevant and reliable in providing +support for the conclusions on which the auditor’s opinion is based.” AS 1105.06. +32. W +hen using information produced by an audited company as audit evidence, +an auditor should evaluate whether the information is sufficient and appropriate for purposes +of the audit by performing procedures to: “[t]est the accuracy and completeness of the +information, or test the controls over the accuracy and completeness of that information; +and [e]valuate whether the information is sufficiently precise and detailed for purposes of +the audit.” AS 1105.10. +E +valuating Audit Results +33. W +hen evaluating the results of the audit, the auditor should evaluate whether +the accumulated results of auditing procedures and other observations affect the assessment +of the fraud risks made throughout the audit and whether the audit procedures need to be +modified to respond to those risks. AS 2810.28. +A +udit Sampling +34. Wh +en an auditor is unable to examine samples that have been chosen for +testing, the auditor “should evaluate whether the reasons for his or her inability to examine +the items have (a) implications in relation to his or her risk assessments (including the +assessment of fraud risk), (b) implications regarding the integrity of management or +employees, and (c) possible effects on other aspects of the audit.” AS 2315.25. +C +onsideration of Fraud +35. An au +ditor must exercise professional skepticism when considering fraud +risks and “conduct the engagement with a mindset that recognizes the possibility that a +material misstatement due to fraud could be present, regardless of any past experience with +the entity and regardless of the auditor’s belief about management's honesty and integrity +…. In exercising professional skepticism in gathering and evaluating evidence, the auditor +should not be satisfied with less-than-persuasive evidence because of a belief that +management is honest.” AS 2401.13. +8 +36. Further, “[w]henever the auditor has determined that there is evidence that +fraud may exist, that matter should be brought to the attention of an appropriate level of +management. This is appropriate even if the matter might be considered inconsequential.” +AS 2401.79. Fraud involving senior management should be reported directly to the audit +committee in a timely manner and prior to issuance of the auditor’s report. Id. +U +se of Specialists +37. I +f using a specialist engaged by the auditor’s firm, 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. AS 1210.12. +Auditing Estimates +38. In evaluating reasonableness, the auditor should obtain an understanding of +how management developed an estimate. Based on that understanding, the auditor should +use one or a combination of the following approaches: (a) review and test the process used +by management to develop the estimate; (b) develop an independent expectation of the +estimate to corroborate the reasonableness of management's estimate; and/or (c) review +subsequent events or transactions occurring prior to the date of the auditor's report. AS +2501.10. +Hackert Failed to Properly Supervise and Document Audits +39. I +n the accounting industry, the generally accepted method for engagement +partners to document their supervision of an audit in compliance with the PCAOB auditing +standards, and their review of the work performed by engagement team members, is by +signing and dating (or “signing off”) on work papers when they perform or review work. +Historically, sign offs occurred on hard copies of work papers but, in recent years, many +audit firms, including Marcum, moved to electronic sign offs. Whether a sign off occurs in +hard copy or electronic form, it provides evidence of who performed or reviewed audit +work and the date on which such work or review occurred. By signing off on work papers, +an engagement partner documents his or her supervision of the audit. +40. During the relevant period, Hackert failed to appropriately supervise audits +for which he was the engagement partner by (a) failing to review the work of the +engagement team members and to document that review prior to the report release date, +and/or (b) failing to ensure that audit documentation was assembled for retention by the +documentation completion date. Hackert’s conduct demonstrated a lack of due professional +care and resulted in deficiencies in some of the audit work performed. +41. A +s noted above, during the relevant period, Hackert served as the +engagement partner for at least 239 audits, which included 88 audits of operating public +companies and 151 audits of SPACs. +9 +42. As the engagement partner, Hackert was responsible for sending (or +authorizing a member of the engagement team to send) an email authorizing Marcum’s +audit report to be filed with the Commission by the relevant issuer. The email authorizations +contained a representation that the audits were conducted in accordance with PCAOB +standards. But because of his actions on the audits, Hackert knew or should have known that +those representations were not accurate. +43. M +arcum issued audit reports in connection with each of the audits referenced +herein, and each of the audit reports stated that the audits were performed in accordance +with PCAOB auditing standards. In fact, because of Hackert’s actions, the audits were not +performed in accordance with PCAOB standards. Nevertheless, Marcum’s clients included +Marcum’s audit reports in their filings with the Commission, including, among others, +Forms 10-K and S-1. +44. H +ackert repeatedly failed to review the work of the engagement team +members and to document that review prior to the report release date. In 187 of the 239 +audits on which Hackert was the engagement partner during the relevant period (or about +78%), Hackert did not review significant portions of the audit work performed or +conclusions reached prior to the report release date. +45. Fo +r two audit engagements, the audit of Operating Company 14 for 2015 +and the audit of Operating Company 18 for 2016, Hackert did not review and sign off on +any work papers containing substantive audit work by the engagement team.7 +46. I +n 2017, in response to findings made by the PCAOB after an inspection, +Marcum changed its policy to require engagement partners and engagement quality review +(“EQR”) partners to sign off on certain specific work papers in every audit binder, as well +as work papers related to other significant risk areas. This policy became effective for +audits with fiscal years ended December 31, 2016, or later. +47. B +ut even after Marcum’s policy changed, Hackert’s review and sign off +practices did not improve. In at least 14 audit engagements to which this policy applied, +Hackert failed to review the work of the engagement team on significant audit areas and key +work papers and to evidence his review before the report release date. +48. F +or example, in the audit of Operating Company 12 for 2017, the +engagement team identified related party transactions as an area of the audit that had +significant and fraud risks. Nevertheless, for the related party section of the audit, Hackert +did not review the work of the engagement team and evidence his review prior to the report +release date. +49. L +ikewise, in the audit of Operating Company 22 for 2017, Hackert did not +review the work of the engagement team and evidence his review prior to the report release +date on the Risk Assessment Summary Form, a key document requiring an engagement +7 Except for AAI, the relevant issuers that Hackert and Marcum audited – both operating companies and +SPACs – have been anonymized herein and in the attached Appendices A and B. +10 +partner signature under Marcum policy. Hackert also failed to review the work of the +engagement team and evidence his review prior to the report release date on significant risk +areas in the audit identified by the engagement team, including accounts receivable and +sales and inventory and cost of sales. In the same engagement, Hackert did not review the +work of the engagement team and evidence his review on the Summary of Unadjusted +Misstatements (“SUAM”), a key audit document that requires an engagement partner sign +off under Marcum policy and that should be included as part of the auditor’s evaluation of +audit results in accordance with PCAOB auditing standards. +50. I +n the AAI 2018 audit engagement, Hackert failed to review the work of the +engagement team and evidence his review of work papers in significant areas of the audit, as +identified by the engagement team, including areas involving crypto asset miners and +goodwill or intangibles valuation. He also failed to review the work of the engagement team +and evidence his review of certain key documents before the report release date, including +the summary memorandum, work papers related to communications with the audit +committee, and the SUAM. +51. I +n the AAI 2019 audit engagement, Hackert never reviewed the work of the +engagement team and evidenced his review on certain key documents that required an +engagement partner to sign off under Marcum policy, including the work papers related to +planning the audit, engagement team discussion and risk identification, and the auditor’s +report. Hackert also did not review the work of the engagement team and evidence his +review before the report release date on work papers related to communications to the audit +committee and the summary memorandum, which were key documents for the audit under +Marcum policy and PCAOB auditing standards. +52. I +n 2020, Hackert’s practice shifted mostly to auditing SPACs. Between 2020 +and 2022, Hackert served as the engagement partner for at least 151 audits of SPACs. In 122 +of those audits, Hackert did not review the work of the engagement team and document his +review of at least some of the audit documentation prior to the report release date. In one of +the SPAC audits, Hackert did not review the substantive work of the engagement team and +document his review of any work papers before or after the report release date. +53. B +eginning with audits for the fiscal year that ended on December 31, 2016, +and continuing to the present, Marcum policy required Hackert to sign a “routing slip” +work paper before the report release date for every audit on which he was the engagement +partner. At Marcum, a routing slip is the work paper that engagement partners, engagement +managers, and EQR partners sign to attest and document that their procedures and review +are complete, and that they authorize release of the audit report. +54. H +ackert sometimes failed to sign the required routing slips prior to the +report release date and then backdated his signature to make it appear that the routing slip +had been timely signed. For example, on the audit of Operating Company 14 for 2015, the +2016 and 2017 audits of AAI, and the audit of Operating Company 22 for 2017, Hackert +dated his signature as of the report release date, but the electronic metadata in the routing +slip indicates that the document was not created until weeks after the purported date of +11 +Hackert’s signature. Hackert knew or should have known that backdating documentation +violates, at a minimum, his duties under AS 1015, 1201, and 1215. +55. O +n at least 37 of the SPAC audits, Hackert failed to sign the routing slips, +which were important audit documentation, prior to the report release date. +56. H +ackert’s supervision failures extended to the PCAOB requirement to +assemble a “complete and final set of audit documentation” within 45 days after the report +release date (i.e., by the documentation completion date), as required by AS 1215.15. +Marcum’s policies referred to this requirement as “Finalizing and Locking Engagement +Binders.” During the relevant period, on 123 of the audit engagements for which Hackert +was the engagement partner, he failed to ensure that a complete and final set of audit +documentation was assembled for retention by the documentation completion date. +57. M +arcum required engagement teams to prepare a so-called “AS 3 memo” +for any engagement where documentation was added to the work papers after the +documentation completion date. The AS 3 memo was a quality control document +ostensibly intended to meet the requirements of AS 1215.16 that any audit documentation +added after the report release date “must indicate the date the information was added, the +name of the person who prepared the additional documentation, and the reason for adding +it.” But for 21 audits on which Hackert was the engagement partner, he added sign offs to +the work papers after the documentation completion date and the required documentation +under AS 1215.16 was not added, whether through an AS 3 memo or otherwise. +58. Ac +cordingly, Hackert violated AS 1015, 1201, and 1215 in connection with +at least 193 audits. Attached hereto and incorporated herein are Appendix A, which +summarizes Hackert’s failures to evidence his supervision by the report release date, and +Appendix B, which summarizes Hackert’s failures to assemble a complete and final set of +audit documentation by the documentation completion date.8 Additionally, in connection +with the audits listed on Appendices A and B, Hackert caused Marcum to violate Rule 2- +02(b)(1) of Regulation S-X. +A +dditional Deficiencies in Hackert’s Audits of AAI +59. H +ackert’s conduct also demonstrated a lack of due professional care and +violated PCAOB auditing standards in connection with multiple audits of AAI, from 2018 +through 2020, on which Hackert was the engagement partner. +C +rypto Asset Miners +60. I +n 2018, AAI purchased approximately $9 million worth of computer +equipment known as crypto asset miners. During Marcum’s audit of AAI for 2018, +8 Appendix A shows 187 audits on which Hackert failed to evidence his supervision by the report release +date. Additionally, for 6 of the audits shown on Appendix B (and not on Appendix A), Hackert signed off +by the report release date, but he failed to ensure that complete documentation was assembled by the +documentation completion date. +12 +Hackert’s engagement team identified the existence and valuation of the crypto asset +mining equipment as a significant risk area. Because the value of the miners was material +to AAI’s balance sheet (approximately 15% of total assets), the engagement team identified +this as a significant audit area along with risks that the equipment (a) did not exist due to +accounting error or misappropriation, (b) did not belong to the company, (c) was recorded +at “incorrect values,” and/or (d) was impaired and not adjusted to net realizable value. +61. D +espite identifying the foregoing risks related to the existence and valuation +of the miners, the only work paper that contained evidence of Hackert’s review in this +section of the audit binder was the “Audit Program for Property,” which listed audit +procedures performed and referenced the work papers documenting those procedures. The +audit program indicated that all the procedures were performed by, and the underlying +work papers were prepared by, a junior member of Hackert’s team. Hackert, however, did +not review and document his review of any underlying work papers to determine whether +the audit work in this significant area was appropriate and complete. +62. Th +e only supporting documents reviewed by the engagement team to +evidence the existence of the miners were several invoices purporting to show purchased +miners. Those invoices, however, did not provide sufficient and appropriate audit evidence +to demonstrate that the miners existed, that the miners were delivered to AAI, and that title +to the miners passed to AAI. +63. F +urther, the engagement team did not perform and document any audit +procedures to assess the valuation and impairment of the miners. +64. A +ccordingly, Hackert’s conduct with respect to the crypto asset miners +violated AS 1015, 1105, 1201, and 2501. +G +oodwill Valuation +65. A +AI’s balance sheet for 2018 included Goodwill of $8.5 million related to +four acquisitions. Goodwill arises when the purchase price of an acquired entity exceeds +the combined fair value of the identifiable assets and liabilities. Goodwill represents +intangible assets such as the value of brand reputation, among other things. +66. I +n its audit of AAI’s 2018 financial results, Hackert’s engagement team +identified AAI’s goodwill valuation as a significant risk area. The engagement team wrote +in a work paper that in response to this risk, it “obtained third party valuation reports and +utilized [a] Marcum Valuation team to perform analysis on the company’s conclusions.” +But the work papers related to goodwill valuation show that Hackert’s team did not +conduct sufficient audit work in this significant area. +67. T +he only goodwill analysis in the work papers was for one (of the four) AAI +acquisitions, and its goodwill was valued at $265,000 (or 3% of total goodwill). There was +no goodwill analysis in the work papers for the other three acquisitions, which accounted +for about 97% of the goodwill value. +13 +68. A +dditionally, while conducting the 2018 audit, Hackert received a third- +party valuation report via email related to another AAI acquisition (not the acquisition with +goodwill valued at $265,000). The report indicated that AAI should record a $2.5 million +impairment of goodwill, meaning that the value of goodwill related to the acquisition had +fallen by $2.5 million. However, the analysis in the third-party valuation report was not +included in the AAI work papers for 2018, and no goodwill impairment was recorded in +AAI’s financial statements for 2018. Hackert claimed that he reviewed with Marcum’s +valuation expert the report indicating that a $2.5 million impairment should be recorded, +but the work papers do not reflect Hackert’s analysis of the report or why he believed the +$2.5 million impairment was not warranted. +69. T +he next year, when auditing AAI’s 2019 results, Hackert’s engagement +team did not identify goodwill valuation as a significant risk area, as it had in 2018. +Although goodwill still comprised a material amount of AAI’s total assets (about 26%), the +engagement team provided no explanation in the work papers for why the assessed risk +level was downgraded. +70. I +n the 2019 AAI audit, Hackert signed off on multiple work papers citing as +audit evidence certain valuation reports prepared by third parties about AAI’s goodwill +valuations. Despite these citations, however, the work papers did not include the referenced +valuation reports. +71. A +lthough the valuation reports were not included in the work papers, they +purportedly were reviewed by Marcum’s valuation expert, who identified multiple issues +with these reports and their valuations of goodwill. But there is no documentation in the +work papers of whether or how these issues were addressed or resolved. For example, the +expert advised the team that they should perform a market cap reconciliation by comparing +the sum of the fair values in the reports with certain other data, and that his “back of the +envelope” calculations did “not line up.” However, there is no evidence in the work papers +that any market cap reconciliation was performed. In addition, the expert wrote in an email +on which Hackert was copied that he would rely on the audit team “to test all projected +financial information” included in the goodwill third party valuation reports. Yet there is no +evidence in the work papers that the team tested any of the projected financial information. +72. A +ccordingly, Hackert’s conduct with respect to goodwill valuation violated +AS 1015, 1105, 1201, 1210, and 2501. +I +nvestments in Related Party +73. In + 2018, the Marcum audit team identified AAI’s transactions with related +parties as a significant and fraud risk area. AAI’s relevant related party transactions +included its investment in the warrants of Avalanche, which AAI identified in its filings +with the Commission as a related party to AAI. As background, Avalanche had issued +AAI warrants to purchase 35.6 million shares of Avalanche common stock between 2017 +14 +and 2020.9 From 2018 through 2020, AAI’s investments in Avalanche (including the +warrants, common stock, and loans) ranged from 18-22% of AAI’s total assets, +representing a material amount of AAI’s assets. +74. GAAP + that became effective for fiscal years beginning after December 15, +2017 – specifically, Accounting Standards Codification Topic 321, Investments – Equity +Securities (“ASC 321”) – eliminated an issuer’s ability to record changes in the fair value +of certain investments in equity securities (including warrants) in other comprehensive +income on the issuer’s financial statements. Instead, under the new ASC 321, such changes +had to be recorded in net income/loss on the financial statements. +75. A +lthough ASC 321 was effective for AAI’s fiscal year 2018, and AAI +applied that provision to certain equity investments in a private company on its Form 10-K +for 2018, AAI did not apply ASC 321 to its Avalanche warrants. The failure to apply ASC +321 to the Avalanche warrants was a material accounting error. +76. D +uring his audits of AAI for the fiscal years 2018 through 2020, however, +Hackert concurred with AAI’s incorrect accounting treatment of the Avalanche warrants. +Hackert knew or should have known that AAI’s accounting treatment was incorrect +because it did not apply ASC 321. +77. H +ackert’s failure to recognize or correct AAI’s improper accounting +resulted in AAI materially understating its net loss by 24.34% in 2018 and 6% in 2019, and +overstating its net loss by 10% in 2020. Because of that materially improper accounting, +AAI restated its financial results in 2023. +78. A +ccordingly, Hackert’s conduct with respect to related party investments +violated AS 1010, 1015, and 1201. +E +xpense Testing +79. D +uring the audit of AAI for 2019, as in other audits, Hackert’s engagement +team was required to sample and test expenses (to confirm that the expenses were +substantiated and accounted for correctly). The engagement team used an electronic +sampling program to select certain AAI expenses for testing. One of the expenses selected +was for $65,000, which purportedly was a payment to a third-party for consulting services. +80. E +mail communications between a junior member of Hackert’s audit team +and AAI’s then-CFO, in or around May 2020, indicated that AAI could not locate +supporting documents for the expense, such as an executed consulting agreement, an +invoice from the consultant, or other documentation. But instead of insisting that AAI +provide supporting documentation for the $65,000 expense, the engagement team simply +stopped seeking support for this sample item and chose another item to test. +9 A stock warrant gives the holder the right to purchase a company’s stock at a specific price and within a +specific time frame. +15 +81. In fact, the third party provided little or no consulting services to AAI, and +certainly not services worth $65,000. Additionally, contemporaneous correspondence +between AAI’s then-CEO and the third-party indicated that AAI’s payment of $65,000 was +to satisfy a personal debt from the then-CEO to the third party. But so far as the work +papers show, neither Hackert nor anyone on the engagement team reviewed or analyzed +any documentation related to the $65,000 payment to ensure that it was evaluated properly. +82. A +s a result, during the 2019 audit of AAI, Hackert failed to exercise due +professional care. Because of Hackert’s insufficient supervision, the engagement team failed +to perform appropriate procedures when they were unable to examine a sample chosen for +testing; they failed to consider the impact of the client being unable to provide sufficient +evidentiary support; and they failed to appropriately evaluate potential fraud on the part of +senior management. Additionally, so far as the work papers show, the team did not consider +whether the inability to obtain sufficient appropriate evidential matter for the potentially +fraudulent expense item constituted a scope limitation or whether the auditor’s opinion +should have been qualified or disclaimed. +83. A +ccordingly, Hackert’s conduct with respect to expense testing violated AS +1015, 1201, 2315, 2401, and 2810. +VIOLATIONS +84. A +s a result of the conduct described above, Hackert engaged in improper +professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. Section 4C(a)(2) 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. With respect to persons licensed to practice as accountants, “improper +professional conduct” includes “[r]epeated instances of unreasonable conduct, each +resulting in a violation of applicable professional standards, that indicate a lack of +competence to practice before the Commission.” Exchange Act Section 4C(b)(2)(B) and +Rule 102(e)(1)(iv)(B)(2). As discussed above, Hackert engaged in repeated instances of +unreasonable conduct, each resulting in a violation of applicable professional standards. +85. R +ule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state +“the applicable professional standards under which the audit was conducted.” 17 C.F.R. § +210.2-02(b)(1). For audits of fiscal years 2016 and 2017, Rule 2-02(b)(1) similarly +mandated that an accountant’s report “state whether the audit was made in accordance with +accepted auditing standards….” An auditor violates Rule 2-02(b)(1) if it issues a report +stating it has conducted its audit in accordance with the PCAOB standards when it has not. +As a result of the conduct described above, Marcum violated Rule 2-02(b)(1) of Regulation +S-X and Hackert caused those violations. +III. +16 +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. Wh +ether the allegations set forth in Section II hereof are true and, in +connection therewith, to afford Respondent an opportunity to establish any defenses to such +allegations; +B. W +hat, if any, remedial action is appropriate in the public interest against +Respondent pursuant to Section 8A of the Securities Act, Section 4C(a) of the Exchange +Act, and Rule 102(e) of the Commission’s Rules of Practice; and +C. W +hether, pursuant to Section 8A of the Securities Act and Section 21C of +the Exchange Act, Respondent should be ordered to cease and desist from committing or +causing violations of and any future violations of Rule 2-02(b)(1) of Regulation S-X. +I +V. +IT + IS ORDERED that a public hearing before the Commission for the purposes of +taking evidence on the questions set forth in Section III hereof shall be convened not earlier +than 30 days and not later than 60 days from service of this Order at a time and place to be +fixed by further order of the Commission, pursuant to Rule 110 of the Commission’s Rules +of Practice, 17 C.F.R. § 201.110. +I +T IS FURTHER ORDERED that Respondent shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by +Rule 220(b) of the Commission’s Rules of Practice, 17 C.F.R. § 201.220(b). +I +T IS FURTHER ORDERED that the Division of Enforcement and Respondent +shall conduct a prehearing conference pursuant to Rule 221 of the Commission’s Rules of +Practice, 17 C.F.R. § 201.221, within fourteen (14) days of service of the Answer. The +parties may meet in person or participate by telephone or other remote means; following +the conference, they shall file a statement with the Office of the Secretary advising the +Commission of any agreements reached at said conference. If a prehearing conference was +not held, a statement shall be filed with the Office of the Secretary advising the +Commission of that fact and of the efforts made to meet and confer. +I +f any Respondent fails to file the directed Answer, or fails to appear at a hearing or +conference after being duly notified, the Respondent may be deemed in default and the +proceedings may be determined against him upon consideration of this Order, the +allegations of which may be deemed to be true as provided by Rules 155(a), 220(f), 221(f) +and 310 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), +201.221(f), and 201.310. +T +his Order shall be served forthwith upon Respondent by any means permitted by +the Commission’s Rules of Practice. +17 +T +he Commission finds that it would serve the interests of justice and not result in +prejudice to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.100(c), that notwithstanding any contrary reference in the Rules +of Practice to service of paper copies, service to the Division of Enforcement of all +opinions, orders, and decisions described in Rule 141, 17 C.F.R. § 201.141, and all papers +described in Rule 150(a), 17 C.F.R. § 201.150(a), in these proceedings shall be by email to +the attorneys who enter an appearance on behalf of the Division, and not by paper +service. +A +ttention is called to Rule 151(a), (b) and (c) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.151(a), (b) and (c), providing that when, as here, a proceeding is +set before the Commission, all papers (including those listed in the following paragraph) +shall be filed electronically in administrative proceedings using the Commission’s +Electronic Filings in Administrative Proceedings (eFAP) system access through the +Commission’s website, www.sec.gov, at http://www.sec.gov/eFAP. Respondent also must +serve and accept service of documents electronically. All motions, objections, or +applications will be decided by the Commission. +T +he Commission finds that it would serve the interests of justice and not result in +prejudice to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.100(c), that notwithstanding any contrary reference in the Rules +of Practice to filing with or disposition by a hearing officer, all filings, including those +under Rules 210, 221, 222, 230, 231, 232, 233, and 250 of the Commission’s Rules of +Practice, 17 C.F.R. §§ 201.210, 221, 222, 230, 231, 232, 233, and 250, shall be directed to +and, as appropriate, decided by the Commission. This proceeding shall be deemed to be +one under the 120-day timeframe specified in Rule of Practice 360(a)(2)(i), 17 C.F.R. § +201.360(a)(2)(i), for the purposes of applying Rules of Practice 233 and 250, 17 C.F.R. §§ +201.233 and 250. +T +he 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. +T +he 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 +18 +under Rule 155 of the Commission’s Rules of Practice, 17 C.F.R. § 201.155, and no public +hearing is necessary. +I +n 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. +Client Name  Balance  +Sheet Date +Report  +Release  +Date  +("RRD") +SEC Filing  Hackert  +Sign‐offs   +within 45  +Days after  +RRD + Hackert  +Sign‐offs  +more than  +45 Days  +after RRD + Total  +Hackert  +Sign‐offs  +after RRD + Total  +Hackert  +Sign‐offs in  +Audit +Percent of  +Hackert  +Sign‐offs  +after RRD +1 Operating Co.  1 Dec‐31‐11 Apr ‐16‐12 S‐1 45 0 45 104 43% +2 Operating Co.  2 Jun‐30‐12 Sep‐28‐12 10 ‐K 22 14 36 173 21% +3 Operating Co.  3 Dec‐31‐12 Apr ‐05‐13 10 ‐K 0 22 22 69 32% +4 Operating Co.  4 Dec‐31‐12 Aug ‐02‐13 8 ‐K/A 9 0 9 36 25% +5 Operating Co.  5 Dec‐31‐13 Apr ‐01‐14 10 ‐K 39 6 45 85 53% +6 Operating Co.  6 Dec‐31‐13 May ‐01‐14 S‐1 0 34 34 139 24% +7 Operating Co.  7 Dec‐28‐13 Mar ‐27‐14 10 ‐K 0 31 31 112 28% +8 Operating Co.  8 Dec‐31‐13 Mar ‐28‐14 10 ‐K 13 0 13 54 24% +9 Operating Co.  9 Dec‐31‐13 Mar ‐31‐14 10 ‐K 10 0 10 46 22% +10 Operating Co.  3 Dec‐31‐13 Apr ‐15‐14 10 ‐K 4 0 4 46 9% +11 Operating Co.  10 Dec‐31‐13 Apr ‐15‐14 10 ‐K 3036 5 0% +12 Operating Co.  5 Dec‐31‐14 Mar ‐17‐15 10 ‐K 80 0 80 318 25% +13 Operating Co.  11 Dec‐31‐14 Mar ‐31‐15 10 ‐K 76 0 76 119 64% +14 Operating Co.  12 Dec‐31‐14 Dec ‐07‐15 10 ‐K 0 43 43 72 60% +15 Operating Co.  13 Dec‐31‐14 Mar ‐11‐15 10 ‐K 41 0 41 41 100% +16 Operating Co.  1 Dec‐31‐14 Mar ‐31‐15 10 ‐K 29 4 33 78 42% +17 Operating Co.  8 Dec‐31‐14 Apr ‐15‐15 10 ‐K 28 0 28 76 37% +18 Operating Co.  9 Dec‐31‐14 Mar ‐30‐15 10 ‐K 7 0 7 38 18% +19 Operating Co.  14 Dec‐31‐14 Apr ‐14‐15 S‐4 3 0 3 55 5% +20 Operating Co.  15 Dec‐31‐14 Mar ‐12‐15 10 ‐K 0 3 3 57 5% +21 Operating Co.  7 Jan‐03‐15 Mar ‐19‐15 10 ‐K 0 7 7 62 11% +22 +Operating Co. 11 Dec‐31‐15 Mar ‐30‐16 10 ‐K 0 83 83 129 64% +23 Operating Co.  12 Dec‐31‐15 Jul‐29‐16 10 ‐K 19 4 23 61 38% +24 Operating Co.  1 Dec‐31‐15 Mar ‐30‐16 10 ‐K 0 32 32 60 53% +25 Operating Co.  16 Dec‐31‐15 Feb‐18‐16 10 ‐K 24 0 24 74 32% +26 Operating Co.  17 Dec‐31‐15 Dec ‐04‐16 8 ‐K 16 0 16 76 21% +27 Operating Co.  5 Dec‐31‐15 Mar ‐15‐16 10 ‐K 0 5 5 103 5% +28 Operating Co.  14 Dec‐31‐15 Mar ‐10‐16 10 ‐K 0000 n /a +29 Operating Co.  7 Jan‐02‐16 Mar ‐17‐16 10 ‐K 0 1 1 59 2% +30 Operating Co.  18 Mar‐31‐16 Jun‐21‐16 10 ‐K 0000 n /a +Appendix A +Client Name  Balance  +Sheet Date +Report  +Release  +Date  +("RRD") +SEC Filing  Hackert  +Sign‐offs   +within 45  +Days after  +RRD + Hackert  +Sign‐offs  +more than  +45 Days  +after RRD + Total  +Hackert  +Sign‐offs  +after RRD + Total  +Hackert  +Sign‐offs in  +Audit +Percent of  +Hackert  +Sign‐offs  +after RRD +31 Operating Co.  11 Dec‐31‐16 Mar ‐23‐17 10 ‐K 83 3 86 149 58% +32 Operating Co.  19 Dec‐31‐16 Mar ‐24‐17 10 ‐K 63 11 74 191 39% +33 Operating Co.  20 Dec‐31‐16 Mar ‐28‐17 10 ‐K 39 0 39 136 29% +34 Operating Co.  21 Dec‐31‐16 Feb‐07‐17 10 ‐K 30 0 30 78 38% +35 Operating Co.  12 Dec‐31‐16 Apr ‐14‐17 10 ‐K 13 11 24 107 22% +36 Ault Alliance, Inc. Dec‐31‐16 Apr ‐10‐17 10 ‐K 4 4 8 108 7% +37 Operating Co.  9 Dec‐31‐16 Mar ‐31‐17 10 ‐K 5 0 5 59 8% +38 Operating Co.  14 Dec‐31‐16 Mar ‐10‐17 10 ‐K 4 0 4 65 6% +39 Operating Co.  38 Dec‐31‐16 Mar ‐15‐17 10 ‐K 3 0 3 150 2% +40 Operating Co.  22 Dec‐31‐17 Apr ‐02‐18 10 ‐K 102 4 106 274 39% +41 Ault Alliance, Inc. Dec‐31‐17 Apr ‐18‐18 10 ‐K 0 101 101 149 68% +42 Operating Co.  12 Dec‐31‐17 Apr ‐17‐18 10 ‐K 0 73 73 143 51% +43 Operating Co.  23 Dec‐31‐17 Apr ‐10‐18 S‐4 0 71 71 127 56% +44 Operating Co.  11 Dec‐31‐17 Mar ‐15‐18 10 ‐K 0 47 47 118 40% +45 Operating Co.  20 Dec‐31‐17 Mar ‐22‐18 10 ‐K 7 0 7 107 7% +46 Operating Co.  24 Dec‐31‐18 Sep‐27‐19 S‐1 0 153 153 153 100% +47 Operating Co.  25 Dec‐31‐18 Sep‐27‐19 S‐1 8 75 83 299 27% +48 Operating Co.  26 Dec‐31‐18 Sep‐27‐19 S‐1 24 54 78 367 21% +49 Ault Alliance, Inc. Dec‐31‐18 Apr ‐16‐19 10 ‐K 0 68 68 369 18% +50 Operating Co.  27 Dec‐31‐18 Sep‐27‐19 S‐1 1 63 64 245 26% +51 Operating Co.  20 Dec‐31‐18 Mar ‐22‐19 10 ‐K 58 0 58 104 56% +52 Operating Co.  28 Dec‐31‐18 Sep‐27‐19 S‐1 0 58 58 254 23% +53 Operating Co.  23 Dec‐31‐18 Mar ‐19‐19 10 ‐K 52 0 52 169 31% +54 Operating Co.  12 Dec‐31‐18 Apr ‐01‐19 10 ‐K 0 37 37 137 27% +55 Operating Co.  29 Dec‐31‐18 Sep‐27‐19 S‐1 28 3 31 180 17% +56 Operating Co.  30 Dec‐31‐18 Nov ‐12‐19 S‐4 0 24 24 87 28% +57 Operating Co.  31 Dec‐31‐18 Nov ‐12‐19 S‐ 4 0 22 22 79 28% +58 +Operating Co. 32 Dec‐31‐18 Nov ‐12‐19 S‐4 0 20 20 79 25% +59 Operating Co.  33 Dec‐31‐18 Sep‐27‐19 S‐1 2 10 12 181 7% +60 Operating Co.  34 Mar‐31‐19 Dec ‐27‐19 20 ‐F 37 9 46 384 12% +61 Operating Co.  35 Oct‐31‐19 Jan‐29‐20 10 ‐K 26 0 26 161 16% +Client Name  Balance  +Sheet Date +Report  +Release  +Date  +("RRD") +SEC Filing  Hackert  +Sign‐offs   +within 45  +Days after  +RRD + Hackert  +Sign‐offs  +more than  +45 Days  +after RRD + Total  +Hackert  +Sign‐offs  +after RRD + Total  +Hackert  +Sign‐offs in  +Audit +Percent of  +Hackert  +Sign‐offs  +after RRD +62 Operating Co.  36 Dec‐31‐19 Mar ‐23‐20 10 ‐K 5 0 5 238 2% +63 Ault Alliance, Inc. Dec‐31‐19 May ‐29‐20 10 ‐K 1 27 28 231 12% +64 SPAC 1 Dec‐31‐19 Jan‐31‐20 S‐1 15 0 15 39 38% +65 SPAC 2 Dec‐31‐19 Mar ‐06‐20 S‐1 13 0 13 35 37% +66 SPAC 3 Dec‐31‐19 Mar ‐10‐20 S‐1 11 0 11 38 29% +67 SPAC 4 Dec‐31‐19 Mar ‐13‐20 S‐1 8 0 8 28 29% +68 SPAC 5 Dec‐31‐19 Mar ‐26‐20 10 ‐K 8 0 8 45 18% +69 SPAC 6 Dec‐31‐19 Apr ‐08‐20 S‐1 17 0 17 40 43% +70 SPAC 7 Dec‐31‐19 Aug ‐06‐20 S‐1 12 0 12 47 26% +71 SPAC 8 Dec‐31‐19 Sep‐25‐20 S‐1 16 0 16 86 19% +72 SPAC 9 Nov‐30‐20 Dec ‐11‐20 S‐1 7 14 21 49 43% +73 SPAC 10 Feb‐04‐20 Feb‐12‐20 S‐1 10 0 10 31 32% +74 SPAC 11 Feb‐14‐20 Mar ‐02‐20 S‐1 13 0 13 31 42% +75 SPAC 12 Mar‐03‐20 Mar ‐10‐20 S‐1 12 0 12 31 39% +76 SPAC 13 Mar‐05‐20 Mar ‐18‐20 S‐1 13 0 13 38 34% +77 SPAC 14 May‐01‐20 May ‐08‐20 S‐1 0 5 5 34 15% +78 SPAC 16 Jun‐01‐20 Jun‐08‐20 S‐1 0 7 7 28 25% +79 SPAC 17 Jun‐30‐20 Jul‐08‐20 S‐1 0 1 1 33 3% +80 SPAC 18 Jun‐30‐20 Jul‐17‐20 S‐1 5 0 5 32 16% +81 SPAC 19 Jul‐07‐20 Jul‐24‐20 S‐1 0 11 11 43 26% +82 SPAC 20 Jul‐15‐20 Jul‐20‐20 S‐1 4 80 84 84 100% +83 SPAC 21 Jul‐20‐20 Jul‐27‐20 S‐1 7 0 7 29 24% +84 SPAC 22 Jul‐20‐20 Jul‐27‐20 S‐1 8 0 8 31 26% +85 SPAC 23 Jul‐20‐20 Aug ‐04‐20 S‐1 19 39 58 58 100% +86 SPAC 24 Aug‐03‐20 Aug ‐10‐20 S‐1 14 0 14 34 41% +87 SPAC 26 Aug‐17‐20 Sep‐04‐20 S‐1 0 12 12 38 32% +88 SPAC 27 Aug‐19‐20 Sep‐18‐20 S‐ 1 9 0 9 41 22% +89 SPAC 28 Aug‐20‐20 +Oct‐27‐20 S‐1 21 0 21 44 48% +90 SPAC 30 Aug‐24‐20 Aug ‐31‐20 S‐1 0 16 16 42 38% +91 SPAC 32 Aug‐28‐20 Oct‐02‐20 S‐1 0 10 10 43 23% +92 SPAC 33 Aug‐31‐20 Sep‐04‐20 S‐1 0 12 12 38 32% +Client Name  Balance  +Sheet Date +Report  +Release  +Date  +("RRD") +SEC Filing  Hackert  +Sign‐offs   +within 45  +Days after  +RRD + Hackert  +Sign‐offs  +more than  +45 Days  +after RRD + Total  +Hackert  +Sign‐offs  +after RRD + Total  +Hackert  +Sign‐offs in  +Audit +Percent of  +Hackert  +Sign‐offs  +after RRD +93 SPAC 34 Sep‐03‐20 Sep‐15‐20 S‐1 8 0 8 40 20% +94 SPAC 35 Sep‐04‐20 Sep‐11‐20 S‐1 19 42 61 61 100% +95 SPAC 37 Sep‐04‐20 Sep‐21‐20 S‐1 12 0 12 44 27% +96 SPAC 39 Sep‐11‐20 Oct‐09‐20 S‐1 8 0 8 47 17% +97 SPAC 40 Sep‐15‐20 Sep‐21‐20 S‐1 8 15 23 55 42% +98 SPAC 41 Sep‐15‐20 Sep‐28‐20 S‐1 4 0 4 44 9% +99 SPAC 42 Aug‐17‐20 Sep‐10 ‐20 S‐1 0 27 27 50 54% +100 SPAC 43 Sep‐30‐20 Oct‐14‐20 S‐1 0 18 18 48 38% +101 SPAC 44 Sep‐30‐20 Oct‐13‐20 S‐1 0 46 46 46 100% +102 SPAC 45 Sep‐30‐20 Dec ‐23‐20 S‐1 0 12 12 34 35% +103 SPAC 46 Oct‐02‐20 Oct ‐13‐20 S‐1 0 12 12 46 26% +104 SPAC 47 Oct‐02‐20 Oct ‐16‐20 S‐1 0 24 24 54 44% +105 SPAC 48 Oct‐09‐20 Oct ‐22‐20 S‐1 11 0 11 42 26% +106 SPAC 49 Oct‐13‐20 Oct ‐21‐20 S‐1 10 0 10 39 26% +107 SPAC 50 Oct‐13‐20 Oct ‐22‐20 S‐1 11 0 11 43 26% +108 SPAC 51 Oct‐31‐20 Nov ‐19‐20 S‐1 16 0 16 47 34% +109 SPAC 52 Oct‐23‐20 Nov ‐19‐20 S‐1 0 36 36 36 100% +110 SPAC 53 Oct‐28‐20 Nov ‐17‐20 S‐1 5 0 5 46 11% +111 Operating Co.  35 Oct‐31‐20 Feb‐16‐21 10 ‐K 1 31 32 219 15% +112 SPAC 56 Nov‐04‐20 Nov ‐20‐20 S‐1 11 0 11 39 28% +113 SPAC 57 Nov‐18‐20 Nov‐30‐20 S‐1 0 13 13 48 27% +114 SPAC 58 Nov‐20‐20 Dec ‐28‐20 S‐1 0 15 15 58 26% +115 SPAC 59 Nov‐21‐20 Dec ‐09‐20 S‐1 0 8 8 52 15% +116 SPAC 60 Nov‐24‐20 Dec‐09‐20 S‐1 0 15 15 48 31% +117 SPAC 61 Nov‐20‐20 Dec ‐07‐20 S‐1 0 11 11 42 26% +118 SPAC 62 Dec‐04‐20 Dec ‐18‐20 S‐1 0 11 11 46 24% +119 SPAC 63 Dec‐11‐20 Dec ‐23‐20 S‐1 0 14 14 47 30% +120 SPAC 64 Dec‐11‐20 Jan‐13‐21 S‐1 0 2 2 29 7% +121 SPAC 65 Dec‐17‐20 Dec ‐23‐20 S‐1 0 1 1 30 3% +122 SPAC 66 Dec‐17‐20 Dec ‐30‐20 S‐1 20 0 20 51 39% +123 SPAC 67 Dec‐18‐20 Dec ‐23‐20 S‐1 0 9 9 37 24% +Client Name  Balance  +Sheet Date +Report  +Release  +Date  +("RRD") +SEC Filing  Hackert  +Sign‐offs   +within 45  +Days after  +RRD + Hackert  +Sign‐offs  +more than  +45 Days  +after RRD + Total  +Hackert  +Sign‐offs  +after RRD + Total  +Hackert  +Sign‐offs in  +Audit +Percent of  +Hackert  +Sign‐offs  +after RRD +124 SPAC 69 Dec‐31‐19 Jan‐31‐20 S‐1 9 0 9 37 24% +125 SPAC 70 Dec‐22‐20 Dec ‐31‐20 S‐1 0 15 15 42 36% +126 SPAC 71 Dec‐28‐20 Jan‐08‐21 S‐1 7 10 17 44 39% +127 SPAC 18 Dec‐31‐20 Jan‐07‐21 S‐1 5 0 5 47 28% +128 SPAC 72 Dec‐31‐19 Feb‐18‐20 S‐1 0000 n /a +129 SPAC 73 Dec‐31‐20 Jan‐07‐21 S‐1 0 7 7 46 15% +130 SPAC 74 Dec‐31‐20 Jan‐07 ‐21 S‐1 0 13 13 45 29% +131 SPAC 75 Dec‐31‐20 Jan‐08‐21 S‐1 11 5 16 47 34% +132 SPAC 76 Dec‐31‐20 Jan‐08‐21 S‐1 2 10 12 46 26% +133 SPAC 27 Dec‐31‐20 Jan‐11‐21 S‐1 0 16 16 52 31% +134 SPAC 32 Dec‐31‐20 Jan‐11‐21 S‐1 0 16 16 52 31% +135 SPAC 78 Dec‐31‐20 Jan‐14‐21 S‐1 0 12 12 45 27% +136 SPAC 79 Dec‐31‐20 Jan‐14‐21 S‐1 0 6 6 36 17% +137 SPAC 50 Dec‐31‐20 Jan‐15‐21 S‐1 0 14 14 45 31% +138 SPAC 80 Dec‐31‐20 Jan‐19‐21 S‐1 0 43 43 43 100% +139 SPAC 81 Dec‐31‐20 Jan‐21‐21 S‐1 3 15 18 68 26% +140 SPAC 82 Dec‐31‐20 Jan‐25‐21 S‐1 0 10 10 44 23% +141 SPAC 83 Dec‐31‐20 Jan‐25‐21 S‐1 4 9 13 53 25% +142 SPAC 45 Dec‐31‐20 Jan‐26‐21 S‐1 0 8 8 44 18% +143 SPAC 68 Dec‐31‐20 Jan‐27‐21 S‐1 8 0 8 30 27% +144 SPAC 57 Dec‐31‐20 Feb‐05‐21 S‐1 0 15 15 48 31% +145 SPAC 84 Dec‐31‐20 Feb‐05‐21 S‐1 0 3 3 51 6% +146 SPAC 70 Dec‐31‐20 Feb‐10‐21 S‐1 0 11 11 51 22% +147 SPAC 33 Dec‐31‐20 Feb‐19‐21 S‐1 0 6 6 55 11% +148 SPAC 3 Dec‐31‐20 Feb‐25‐21 S‐1 0 9 9 47 19% +149 SPAC 62 Dec‐31‐20 Feb‐25‐21 S‐1 0 5 5 36 14% +150 SPAC 7 Dec‐31‐20 Mar ‐09‐21 S‐ 1 13 0 13 47 28% +151 SPAC 54 Dec‐31‐20 +Mar‐25‐21 10 ‐K 1 0 1 57 2% +152 SPAC 86 Jan‐08‐21 Jan‐20‐21 S‐1 0 22 22 55 40% +153 SPAC 87 Jan‐15‐21 Feb‐03‐21 S‐1 0 20 20 56 36% +154 SPAC 88 Jan‐21‐21 Jan‐29‐21 S‐1 0 8 8 45 18% +Client Name  Balance  +Sheet Date +Report  +Release  +Date  +("RRD") +SEC Filing  Hackert  +Sign‐offs   +within 45  +Days after  +RRD + Hackert  +Sign‐offs  +more than  +45 Days  +after RRD + Total  +Hackert  +Sign‐offs  +after RRD + Total  +Hackert  +Sign‐offs in  +Audit +Percent of  +Hackert  +Sign‐offs  +after RRD +155 SPAC 89 Jan‐21‐21 Jan‐29‐21 S‐1 0 21 21 44 48% +156 SPAC 90 Jan‐21‐21 Jan‐29‐21 S‐1 0 9 9 43 21% +157 SPAC 91 Jan‐25‐21 Feb‐01‐21 S‐1 9 12 21 55 38% +158 SPAC 92 Feb‐08‐21 Feb‐22‐21 S‐1 4 0 4 32 13% +159 SPAC 93 Feb‐15‐21 Feb‐16‐21 S‐1 25 21 46 46 100% +160 SPAC 94 Feb‐23‐21 Mar ‐15‐21 S‐1 0 8 8 52 15% +161 SPAC 95 Feb‐23‐21 Mar ‐24‐21 S‐1 0 19 19 49 39% +162 SPAC 96 Feb‐25‐21 Mar ‐12‐21 S‐1 3 0 3 38 8% +163 SPAC 97 Mar‐02‐21 Mar ‐29‐21 S‐1 5 0 5 47 11% +164 SPAC 98 Mar‐04‐21 Mar ‐15‐21 S‐1 5 0 5 43 12% +165 SPAC 100 Mar‐05‐21 Mar ‐25‐21 S‐1 0 15 15 43 35% +166 SPAC 101 Mar‐08‐21 Mar ‐18‐21 S‐1 1 11 12 46 26% +167 SPAC 103 Mar‐15‐21 May ‐25‐21 S‐1 11 0 11 36 31% +168 SPAC 104 Mar‐22‐21 Aug ‐03‐21 S‐1 16 0 16 61 26% +169 SPAC 105 Mar‐31‐21 Jun‐10‐21 S‐1 0 18 18 43 42% +170 SPAC 102 Mar‐31‐21 Jun‐22‐21 S‐1 0 22 22 43 51% +171 SPAC 106 Mar‐31‐21 Jun‐24‐21 S‐1 1 1 2 48 4% +172 SPAC 107 Mar‐31‐21 Jul‐14‐21 S‐1 21 0 21 75 28% +173 SPAC 108 Apr‐08‐21 Jul‐13‐21 S‐1 14 1 15 45 33% +174 SPAC 109 Apr‐09‐21 Jul‐19‐21 S‐1 16 0 16 82 20% +175 SPAC 110 Apr‐19‐21 Jul‐02‐21 S‐1 0 19 19 50 38% +176 SPAC 111 May‐28‐21 Jul‐02‐21 S‐1 2 21 43 66 1 5 9 % +177 SPAC 112 May‐17‐21 Jul‐14‐21 S‐1 0 4 4 45 9% +178 SPAC 114 Jun‐10‐21 Jul‐30‐21 S‐1 1 21 22 45 0 4 8 % +179 SPAC 115 Jun‐20‐21 Jul‐09‐21 S‐1 13 0 13 55 24% 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Evoqua Water Technologies Corp. and Imran Parekh, No. 1:23-cv-MSM-PAS (D.R.I. filed Mar. 13, 2023) + + + + SEC Obtains Final Judgment Against Defendant Imran Parekh for Accounting Violations + + + + On March 15, 2024, the U.S. District Court for the District of Rhode Island entered a final judgment against Evoqua Water Technologies Corp.'s former division-level finance director, Imran Parekh, in a case the Commission previously filed alleging improper accounting practices. Evoqua is based in Pennsylvania and has a major division located in Rhode Island. Parekh is a resident of Massachusetts. + + According to the SEC's complaint , filed on March 13, 2023, from at least the fourth quarter of 2016 through August 2018, Parekh, as the Finance Director of Evoqua's division based in Rhode Island, engaged in fraudulent accounting practices that resulted in Evoqua improperly reporting materially false revenue amounts in its financial statements filed with the Commission. + + The final judgment, entered by consent, orders Parekh to pay a civil money penalty of $40,000, orders disgorgement of $5,489 plus prejudgment interest of $1,342, and bars Parekh for ten years from serving as an officer or director of a public company. + + On July 10, 2023, the court previously entered a partial judgment by consent against Parekh that permanently enjoined him from violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10(b)-5 thereunder; from aiding and abetting any violation of the periodic reporting provisions of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-l, 13a-11, and 13a-13 thereunder; from aiding and abetting any violation of the books and records and internal accounting controls provisions of Sections 13(b)(2)(A) and (B) of the Exchange Act; from knowingly circumventing an issuer's system of accounting controls or knowingly falsifying an issuer's books and records in violation of Section 13(b)(5) of the Exchange Act; and from violating Rule 13b2-1 of the Exchange Act by falsifying or causing to be falsified any books, records, or internal accounts. On July 10, 2023, the court also entered a final judgment by consent against Evoqua. + + The case was handled by Kerry Vasta, Jonathan Allen, Peter Moores, David London, and Amy Gwiazda of the Boston Regional Office. + + + Final Judgment - Evoqua Water Technologies + Final Judgment - Imran Parekh + Partial Judgment - Imran Parekh + + + + + + + + + + + Resources + + + + + Final Judgment - Evoqua Water Technologies + + + + + Final Judgment - Imran Parekh + + + + + Partial Judgment - Imran Parekh + + + + + + + + + + + + + + + + + + + + + + + + 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/2024/AAER-4495.pdf b/raw/aaer/2024/AAER-4495.pdf new file mode 100644 index 0000000000000000000000000000000000000000..28dbf0337ef0307f8e5e2da14578612732806686 Binary files /dev/null and b/raw/aaer/2024/AAER-4495.pdf differ diff --git a/raw/aaer/2024/AAER-4495.txt b/raw/aaer/2024/AAER-4495.txt new file mode 100644 index 0000000000000000000000000000000000000000..b27ea62c39de5449f3dfc3877ced925f27fc3751 --- /dev/null +++ b/raw/aaer/2024/AAER-4495.txt @@ -0,0 +1,77 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 11279 / March 22, 2024 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 99835 / March 22, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4495 / March 22, 2024 + +Admin. Proc. File No. 3-21831 + + +In the Matter of + +EDWARD F. HACKERT, CPA + + + +ORDER REGARDING HEARING DATE + +On January 18, 2024, the Securities and Exchange Commission issued an order +instituting proceedings (“OIP”) against Edward F. Hackert, CPA, pursuant to Section 8A of the +Securities Act of 1933, Sections 4C and 21C of the Securities Exchange Act of 1934, and +Commission Rule of Practice 102(e). +1 On February 5, 2024, the Division filed a motion to +amend the OIP to correct certain factual errors. The Commission granted the Division’s motion +and issued the amended OIP on March 12, 2024.2 Hackert was served with the amended OIP the +same day.3 +In compliance with the statutory provision governing cease-and-desist proceedings, the +amended OIP specified that a “public hearing before the Commission for the purpose of taking +evidence . . . shall be convened not earlier than 30 days and not later than 60 days” from service + +1 Edward F. Hackert, CPA, Exchange Act Release No. 99384, 2024 WL 212152 (Jan. 18, +2024). +2 Edward F. Hackert, CPA, Exchange Act Release No. 99716, 2024 WL 1091204 (Mar. +12, 2024). +3 The Division sent a copy of the amended OIP to Hackert’s counsel by e-mail on March +12, 2024, and inquired whether Hackert would waive formal service under Commission Rule of +Practice 141(a)(4). Hackert’s counsel affirmed by e-mail on March 12, 2024, that Hackert +waives formal service of the amended OIP. +2 + +of the amended OIP.4 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.”5 +Accordingly, in the absence of Hackert’s consent to a later hearing date, a public hearing +will be set for a date on or before May 13, 2024.6 To facilitate the orderly and expeditious +resolution of this matter, it is ORDERED that the parties shall file a statement advising the +Commission of any agreement to a later hearing date (or a statement that no agreement could be +reached) by April 3, 2024. In the event the parties do not reach an agreement by that date, this +order does not preclude the parties from reaching such an agreement subsequently. The +Commission will specify further proceedings by subsequent order. +The parties’ attention is directed to the e-filing requirements in the Rules of Practice. +7 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + Vanessa A. Countryman + Secretary + + + + +4 Hackert, 2024 WL 1091204 at *15. +5 15 U.S.C. § 78u-3(b). +6 May 11, 2024, is a Saturday. +7 See Rules of Practice 151, 152(a), 17 C.F.R. §§ 201.151, .152(a) (providing procedure for +filing papers with the Commission and mandating electronic filing in the form and manner +posted on the Commission’s website); Instructions for Electronic Filing and Service of +Documents in SEC Administrative Proceedings and Technical Specifications, +https://www.sec.gov/efapdocs/instructions.pdf. Parties generally also must certify that they have +redacted or omitted sensitive personal information from any filing. Rule of Practice 151(e), 17 +C.F.R. § 201.151(e). \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4496.txt b/raw/aaer/2024/AAER-4496.txt new file mode 100644 index 0000000000000000000000000000000000000000..676fcfde349b355cecab72d0b1294d2777f1a02b --- /dev/null +++ b/raw/aaer/2024/AAER-4496.txt @@ -0,0 +1,1370 @@ + + + + + + + + + + + + + + + + SEC.gov | Rosenberger 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\/951536","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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Rosenberger et al. , Civil Action No. 1:22-cv-4736 (DLC) (S.D.N.Y. filed June 7, 2022) + + + + SEC Obtains Final Judgment Against Synchronoss Controller for Role in Alleged Accounting Misconduct + + + + On April 8, 2024, the U.S. District Court for the Southern District of New York entered a final judgment against Joanna Lanni, imposing an injunction and ordering her to pay civil monetary penalties. + + According to the SEC’s complaint , Lanni falsified Synchronoss’s books and records in connection with a 2016 transaction that resulted in the material overstatement of revenue by Synchronoss.    + + The SEC’s complaint charged Lanni with violating Section 13(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 13b2-1 thereunder; and aiding and abetting Synchronoss’s violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. On January 26, 2024, the Court granted the SEC’s motion for partial summary judgment against Lanni, finding that Lanni violated Rule 13b2-1. Without admitting or denying the allegations of the complaint, Lanni consented to a final judgment in which she agreed to be permanently enjoined from violations of Rule 13b2-1 and agreed to pay $20,000 in civil monetary penalties. On April 8, 2024, the Court entered the final judgment. + + The litigation is being led by Hayden Brockett, Theresa Gue, Lindsay S. Moilanen, and Richard G. Primoff under the supervision of Sheldon L. Pollock and Preethi Krishnamurthy. + + + + + + + + + + + + + + + + + + + + + + + + + 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/2024/AAER-4497.txt b/raw/aaer/2024/AAER-4497.txt new file mode 100644 index 0000000000000000000000000000000000000000..e95328966c2d8224e2dd54801252daf9ef1fd3ee --- /dev/null +++ b/raw/aaer/2024/AAER-4497.txt @@ -0,0 +1,258 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 99930 / April 10, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4497 / April 10, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-21905 + +In the Matter of +GIL FRIEDMAN, +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 Gil +Friedman (“Respondent” or “Friedman”) 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.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. + +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. At the time relevant to this Order, Friedman, age 51, provided consulting +services to private equity firms, including Francisco Partners Management, L.P. (“Francisco +Partners”). Previously, Friedman served as the CFO of two Francisco Partners portfolio companies. +Friedman is an inactive member of the Institute of Certified Public Accountants in Israel. + + 2. On April 5, 2024, a final judgment was entered against Friedman, +permanently enjoining him from future violations of 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. Kevin A. Van de Grift and Gil Friedman, Civil Action Number 1:23-cv- +01491, in the United States District Court for the Southern District of New York. Friedman was +also ordered to pay a $298,000 civil money penalty. Friedman was further ordered to be barred for +a period of five years from serving as an officer or director of any issuer required to register +securities with the Commission pursuant to Section 12(b) or 12(g) [15 U.S.C. §78l(b), 78l(g)], or to +file reports with the Commission pursuant to Section 15(d) [15 U.S.C. §78o(d)], of the Exchange +Act. + + 3. The Commission’s complaint alleges, among other things, that Friedman +engaged in insider trading by tipping his close friend, Kevin A. Van de Grift with material, +nonpublic information concerning Verifone Systems Inc.’s (“Verifone’s”) acquisition by Francisco +Partners. The complaint alleges that Friedman tipped Van de Grift in advance of Verifone’s April +9, 2018 public announcement of this information, which caused Verifone’s stock price to increase +approximately 52% from its open market price. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Friedman’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 five years from the date of the Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the attention of +the Office of the Chief Accountant. + +C. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member + 3 +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Respondent +shall submit a written statement attesting to an undertaking to have Respondent’s work reviewed +by the independent audit committee of any public company for which Respondent works or in +some other manner acceptable to the Commission, as long as Respondent practices before the +Commission in this capacity and will comply with any Commission or other requirements related +to the appearance and practice before the Commission as an accountant. + +D. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Exchange Act, as a preparer or reviewer, or as a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission, Respondent shall +submit a statement prepared by the audit committee(s) with which Respondent will be associated, +including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Respondent will be associated; + +2. A description of Respondent’s role on the specific audit committee(s) with +which Respondent will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Respondent’s service on the specific +audit committee; and + +5. A statement noting whether Respondent will be able to act unilaterally on behalf +of the Audit Committee as a whole. + +E. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Respondent must be +associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (the “PCAOB”) and Respondent shall submit the following additional +information: + +1. A statement from the public accounting firm (the “Firm”) with which +Respondent is associated, stating that the firm is registered with the PCAOB in +accordance with the Sarbanes-Oxley Act of 2002; + +2. A statement from the Firm with which the Respondent is associated that the +Firm has been inspected by the PCAOB and that the PCAOB did not identify +any criticisms of or potential defects in the Firm’s quality control system that +would indicate that Respondent will not receive appropriate supervision; and + + 4 +3. A statement from Respondent indicating that the PCAOB has taken no +disciplinary actions against Respondent since seven (7) years prior to the date of +the Order other than for the conduct that was the basis for the Order. + +F. If Respondent is licensed as a certified public accountant (“CPA”), then in support +of any application for reinstatement, Respondent shall provide documentation showing that +Respondent’s license is current and that Respondent has resolved all other disciplinary issues with +any applicable boards of accountancy. If Respondent’s CPA licensure is dependent upon +reinstatement by the Commission, then Respondent shall provide documents reflecting this +requirement. If Respondent has never been licensed as a CPA, then Respondent shall submit a +signed affidavit truthfully stating under penalty of perjury that Respondent has never been licensed +as a CPA. + +G. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders in SEC v. +Van de Grift, et al., 1:23-cv-01491 (S.D.N.Y.), or any related Commission +proceedings, including any orders requiring payment of disgorgement or +penalties; + +2. That Respondent undertakes to notify the Commission immediately in +writing if any information submitted in support of the application for +reinstatement becomes materially false or misleading or otherwise changes +in any material way while the application is pending; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a +basis for a forthwith suspension from appearing or practicing before the +Commission pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +a. has not been charged with a felony or a misdemeanor involving moral +turpitude as set forth in Rule 102(e)(2) of the Commission’s Rules of +Practice, except for any charge concerning the conduct that was the +basis for the Order; + +b. has not been found by the Commission or a court of the United States to +have committed a violation of the federal securities laws, and has not +been enjoined from violating the federal securities laws, except for any +finding or injunction concerning the conduct that was the basis for the +Order; + + 5 +c. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge concerning +the conduct that was the basis for the Order; + +d. has not been found by a court of the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, or any bar thereof to have committed an offense (civil or +criminal) involving moral turpitude, except for any finding concerning +the conduct that was the basis for the Order; and + +e. has not been charged by the United States (or any agency of the United +States) or any state, territory, district, commonwealth, or possession, +civilly or criminally, with having committed an act of moral turpitude, +except for any charge concerning the conduct that was the basis for the +Order. + +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis +for the Order. + +6. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by any State Board of Accountancy, or other regulatory body. +H. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Respondent reported for +such work; and + +2. Respondent’s plans for any future appearance or practice before the +Commission. + + I. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +J. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s + 6 +affidavit, and the Commission discovers no information, including under Paragraph I, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +K. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph I, the burden shall be on the Respondent to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + +L. If the Commission declines to reinstate Respondent pursuant to Paragraphs J and K, +it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an accountant. + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4498.txt b/raw/aaer/2024/AAER-4498.txt new file mode 100644 index 0000000000000000000000000000000000000000..78d96e87e50bb459b7661e50ad71baa795a09303 --- /dev/null +++ b/raw/aaer/2024/AAER-4498.txt @@ -0,0 +1,273 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 100007 / April 22, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4498 / April 22, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-21920 + +In the Matter of +MARK KORB, CA +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 Mark +Korb, CA (“Respondent” or “Korb”) 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. + 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. Korb, age 55, is a Chartered Accountant in South Africa and served as +Petroteq Energy, Inc.’s (“Petroteq”) Chief Financial Officer (“CFO”) from August 2014 until he +resigned on October 31, 2021. He has served as the CFO for several companies, including at least +two publicly held companies. + + 2. Petroteq is a Canadian corporation with its principal executive offices in +Sherman Oaks, California. Petroteq is engaged in the business of developing proprietary tar-sands +mining and processing technology. At all relevant times, Petroteq’s common stock has traded on +the OTC Pink Market, OTCQX International Market, the TSX Venture Exchange in Canada, and +the Frankfurt Stock Exchange in Germany. Petroteq’s common stock has been registered with the +Commission under Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”) since +July 2019. Petroteq has filed reports on Canada’s System for Electronic Document Analysis and +Retrievals (“SEDAR”) since May 2008. + + 3. On April 10, 2024, in Securities and Exchange Commission v. Mark Korb, +Civil Action No. 2:22-cv-04031, in the United States District Court for the Central District of +California, a final judgment was entered against Korb by consent, permanently enjoining him from +future (i) violations of Section 17(a)(3) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. +§ 77q(a)(3)], and Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)] and Rules 13a-14 +and 13b2-1 thereunder [17 C.F.R. §§ 240.13a-14 and 240.13b2-1], and (ii) aiding and abetting +violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) [15 U.S.C. §§ 78m(a), +(b)(2)(A), and (b)(2)(B))] and Rules 12b-20, 13a-1, 13a-13, and 13a-15(a) thereunder [17 C.F.R. +§§ 240.12b-20, 240.13a-1, 240.13a-13, and 240.13a-15(a)]. Korb was also ordered to pay a +$60,000 civil money penalty. + + 4. The Commission’s complaint alleged, among other things, that Korb’s +negligent execution of his duties as CFO caused Petroteq to fail to fully disclose its precarious +financial condition as well as vulnerabilities to key company assets. The complaint alleged that +during Korb’s tenure, Petroteq’s Executive Chairman misused and misappropriated funds from +the company by taking significant unreported compensation and by making undisclosed payments +to a family member and his romantic partner. The complaint also alleged that, while serving as +Petroteq’s CFO, Korb disregarded critical Generally Accepted Accounting Principles (“GAAP”) +in preparing financial statements that failed to inform investors about significant vulnerabilities to +key assets acquired by Petroteq. The net result was that Petroteq’s 2019 and 2020 Forms 10-K, +which Korb signed and certified, contained materially misleading 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 Korb’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 two years from the date of the Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the attention of +the Office of the Chief Accountant. + +C. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Respondent +shall submit a written statement attesting to an undertaking to have Respondent’s work reviewed +by the independent audit committee of any public company for which Respondent works or in +some other manner acceptable to the Commission, as long as Respondent practices before the +Commission in this capacity and will comply with any Commission or other requirements related +to the appearance and practice before the Commission as an accountant. + +D. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Exchange Act, as a preparer or reviewer, or as a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission, Respondent shall +submit a statement prepared by the audit committee(s) with which Respondent will be associated, +including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Respondent will be associated; + +2. A description of Respondent’s role on the specific audit committee(s) with +which Respondent will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Respondent’s service on the specific +audit committee; and + +5. A statement noting whether Respondent will be able to act unilaterally on behalf +of the Audit Committee as a whole. + 4 + +E. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Respondent must be +associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (the “PCAOB”) and Respondent shall submit the following additional +information: + +1. A statement from the public accounting firm (the “Firm”) with which +Respondent is associated, stating that the firm is registered with the PCAOB in +accordance with the Sarbanes-Oxley Act of 2002; + +2. A statement from the Firm with which the Respondent is associated that the +Firm has been inspected by the PCAOB and that the PCAOB did not identify +any criticisms of or potential defects in the Firm’s quality control system that +would indicate that Respondent will not receive appropriate supervision; and + +3. A statement from Respondent indicating that the PCAOB has taken no +disciplinary actions against Respondent since seven (7) years prior to the date of +the Order other than for the conduct that was the basis for the Order. + +F. In support of any application for reinstatement, Respondent shall provide +documentation showing that Respondent is currently licensed as a Chartered Accountant (“CA”) +and that Respondent has resolved all other disciplinary issues with any applicable state boards of +accountancy. If Respondent is not currently licensed as a CA, Respondent shall provide +documentation showing that Respondent’s licensure is dependent upon reinstatement by the +Commission. + +G. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders in Securities +and Exchange Commission v. Mark Korb, Civil Action No. 2:22-cv-04031, +in the United States District Court for the Central District of California, or +any related Commission proceedings, including any orders requiring +payment of disgorgement or penalties; + +2. That Respondent undertakes to notify the Commission immediately in +writing if any information submitted in support of the application for +reinstatement becomes materially false or misleading or otherwise changes +in any material way while the application is pending; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a + 5 +basis for a forthwith suspension from appearing or practicing before the +Commission pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +a. has not been charged with a felony or a misdemeanor involving moral +turpitude as set forth in Rule 102(e)(2) of the Commission’s Rules of +Practice, except for any charge concerning the conduct that was the +basis for the Order; + +b. has not been found by the Commission or a court of the United States to +have committed a violation of the federal securities laws, and has not +been enjoined from violating the federal securities laws, except for any +finding or injunction concerning the conduct that was the basis for the +Order; + +c. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge concerning +the conduct that was the basis for the Order; + +d. has not been found by a court of the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, or any bar thereof to have committed an offense (civil or +criminal) involving moral turpitude, except for any finding concerning +the conduct that was the basis for the Order; and + +e. has not been charged by the United States (or any agency of the United +States) or any state, territory, district, commonwealth, or possession, +civilly or criminally, with having committed an act of moral turpitude, +except for any charge concerning the conduct that was the basis for the +Order. + +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis +for the Order. + +6. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by any State Board of Accountancy, or other regulatory body. +H. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + 6 + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Respondent reported for +such work; and + +2. Respondent’s plans for any future appearance or practice before the +Commission. + + I. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +J. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under Paragraph I, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +K. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph I, the burden shall be on the Respondent to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + +L. If the Commission declines to reinstate Respondent pursuant to Paragraphs J and K, +it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an accountant. + + By the Commission. + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4499.pdf b/raw/aaer/2024/AAER-4499.pdf new file mode 100644 index 0000000000000000000000000000000000000000..8a00c0a1e5f5b023b303ab0bc138b19d1960cae8 Binary files /dev/null and b/raw/aaer/2024/AAER-4499.pdf differ diff --git a/raw/aaer/2024/AAER-4499.txt b/raw/aaer/2024/AAER-4499.txt new file mode 100644 index 0000000000000000000000000000000000000000..5db386b3b03a921c0d876ddc899df0c85e306934 --- /dev/null +++ b/raw/aaer/2024/AAER-4499.txt @@ -0,0 +1,91 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 11282 / April 26, 2024 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 100035 / April 26, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4499 / April 26, 2024 + +Admin. Proc. File No. 3-21831 + + +In the Matter of + +EDWARD F. HACKERT, CPA + + + +ORDER POSTPONING PROCEEDING + +On January 18, 2024, the Securities and Exchange Commission issued an order +instituting proceedings (“OIP”) against Edward F. Hackert, CPA, pursuant to Section 8A of the +Securities Act of 1933, Sections 4C and 21C of the Securities Exchange Act of 1934, and +Commission Rule of Practice 102(e).1 On February 27, 2024, Hackert filed an action in the U.S. +District Court for the Southern District of New York, seeking to enjoin the Commission from +continuing this proceeding.2 +On April 11, 2024, the parties filed a joint motion before the Commission to stay this +proceeding. The parties’ motion notes that, at a conference in the district court action on April 4, +2024, the court, without prejudging the merits of the case, “expressed its view that the +Commission should voluntarily stay the administrative proceeding against Hackert until the +Supreme Court decides SEC v. Jarkesy.”3 In the district court’s view, Jarkesy could “impact +administrative proceedings before the Commission, including, potentially, the proceeding against +Hackert.” Accordingly, the parties’ motion “respectfully request[s] that the Commission stay + +1 Edward F. Hackert, CPA, Exchange Act Release No. 99384, 2024 WL 212152 (Jan. 18, +2024); see also Edward F. Hackert, CPA, Exchange Act Release No. 99716, 2024 WL 1091204 +(Mar. 12, 2024) (amending OIP). +2 Hackert v. SEC, No. 1:24-cv-01477-NRB (S.D.N.Y.). +3 No. 22-859, 2023 WL 4278448 (June 30, 2023) (cert. granted). +2 + +this administrative proceeding until 30 days after the Supreme Court issues its opinion in +Jarkesy.” +We construe the joint motion to stay as a request for postponement under Commission +Rule of Practice 161.4 Under the circumstances presented here, we have determined to postpone +this proceeding. A federal district court has expressed the view that the Commission should +voluntarily stay this specific proceeding. Furthermore, unlike other recent administrative +proceedings in which the Commission has denied requests to stay the proceedings pending a +decision in Jarkesy,5 this proceeding was instituted under Section 8A of the Securities Act, +which authorizes the Commission to impose civil penalties upon a finding that such relief is +appropriate in the public interest.6 And the first question presented in Jarkesy asks “[w]hether +statutory provisions that empower the [Commission] to initiate and adjudicate administrative +enforcement proceedings seeking civil penalties violate the Seventh Amendment.” For the same +reasons, we also find that a postponement of more than 21 days is necessary.7 +Accordingly, it is ORDERED that the proceeding is postponed until 30 days after the +Supreme Court issues its decision in Jarkesy, and that, when the proceeding resumes, the parties + + +4 17 C.F.R. § 201.161; see Francis V. Lorenzo, Exchange Act Release No. 10460, 2018 +WL 994316, at *1 (Feb. 21, 2018) (construing motion for stay as request for postponement under +Rule of Practice 161). Under Rule 161, the Commission considers, among other things, the +length of the proceeding to date; the number of postponements, adjournments, or extensions +already granted; the stage of the proceedings at the time of the request; and any other such +matters as justice may require. +5 See Michael Sztrom, Advisers Act Release No. 6518, 2023 WL 9022662 (Dec. 28, 2023); +Eric Christopher Cannon, Exchange Act Release No. 99249, 2023 WL 9022659 (Dec. 28, +2023). +6 Hackert, 2024 WL 1091204, at *15; see also 15 U.S.C. § 77h-1(g) (granting the +Commission authority to impose civil penalties in cease-and-desist proceedings under certain +conditions). +7 See Rule of Practice 161(c)(1), 17 C.F.R. § 201.161(c)(1) (“Postponements . . . shall not +exceed 21 days unless the Commission . . . sets forth in a written order the reasons why a longer +period of time is necessary.”). +3 + +shall promptly file a status report discussing the impact of that decision on this proceeding, if +any, and any other relevant matters. +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + +Vanessa A. Countryman + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4500.txt b/raw/aaer/2024/AAER-4500.txt new file mode 100644 index 0000000000000000000000000000000000000000..80ab7b50a6952a31a8587db1abad1357c096d365 --- /dev/null +++ b/raw/aaer/2024/AAER-4500.txt @@ -0,0 +1,606 @@ + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11283 / May 3, 2024 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 100053 / May 3, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4500 / May 3, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-21926 + + + + +In the Matter of + +BF BORGERS CPA PC, +and BENJAMIN F. +BORGERS, CPA, + +Respondents. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT OF +1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 AND +RULE 102(e) OF THE COMMISSION’S RULES +OF PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against BF Borgers +CPA PC (“BF Borgers”) and Benjamin F. Borgers, CPA (“Borgers”) (collectively “Respondents”) +pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”), Sections 4C1 and 21C of + +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 + +2 +the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice (“CRP”).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 Section 8A of the Securities Act of 1933, Sections 4C and 21C of the Securities +Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making Findings, +and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +A. SUMMARY + +1. This matter involves the deliberate and systematic failure to audit and review public +company and SEC-registered broker-dealer clients’ financial statements in accordance with Public +Company Accounting Oversight Board (“PCAOB”) standards by PCAOB-registered auditing firm +BF Borgers, and its owner and managing member, certified public accountant Borgers, and their +fraudulent issuance of audit reports falsely representing that they had done so from at least January +2021 through at least June 2023. + +2. Investors regularly rely on the financial statements of public companies when +making investment decisions. This reliance is based on important safeguards built into the system, +including the requirement that a PCAOB-registered accounting firm audit those financial + +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. + +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 +statements annually and review them on a quarterly basis in accordance with PCAOB standards. +Further, SEC-registered broker-dealers are required to file annually with the Commission financial +statements audited by a PCAOB-registered accounting firm in accordance with PCAOB standards. + +3. Among other things, PCAOB Auditing Standard 1220: Engagement Quality Review +(“AS 1220”) requires audits and reviews of interim financial information to be approved by an +engagement quality reviewer (“EQR”). Despite this clear requirement, Respondents failed to +obtain an EQR to provide a concurring review and approval on audits and reviews of financial +statements incorporated in at least 1,625 public filings and disclosures from January 2021 +through June 2023, including over 336 SEC issuer annual filings, 1,039 SEC issuer quarterly +filings, 180 SEC registration statements, 45 SEC-registered broker-dealer annual filings, and 25 +OTC company annual report disclosures, representing at least 75% of their clients’ public filings +and disclosures incorporating such audits and reviews. + +4. Respondents also violated PCAOB Auditing Standards 1201: Supervision of the +Audit Engagement (“AS 1201”) and 1215: Audit Documentation (“AS 1215”) by failing both to +adequately supervise and review the work of the engagement teams and to ensure that the +workpapers properly documented that work on many of these engagements. Among other things, +as engagement partner, Borgers failed to conduct or participate in audit planning meetings and to +review important workpapers for many audits, including workpapers relating to his purported +supervision and review of the engagement team’s work and conclusions. Borgers also authorized +BF Borgers audit staff and contractors to copy audit workpapers from previous audits as the final +workpapers for new audit engagements. As a result, BF Borgers’ workpapers falsely documented +the performance of audit and review procedures and approvals that had not occurred, including +falsely representing that both Borgers, as the engagement partner, and an EQR reviewed and +approved audits and reviews of interim financial information. + +5. Despite the failures above, Respondents falsely represented in engagement letters +to their clients that the audits and quarterly reviews of their financial statements would be +conducted in accordance with PCAOB standards, and, with respect to the audits, issued reports +falsely certifying that the audits were completed in accordance with those standards. + +6. As a result of the above, BF Borgers engaged in improper professional conduct +within the meaning of Section 4C(a)(2) of the Exchange Act and CRP Rule 102(e)(1)(ii), violated +Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, +and Rules 2-02(b)(1) and 2-06 of Regulation S-X, and caused violations of Sections 13(a), 15(d), +17(a), and 17(e) of the Exchange Act and Rules 13a-1, 13a-13, 15d-1, 15d-13, and 17a-5 +thereunder, and Borgers engaged in improper professional conduct within the meaning of Section +4C(a)(2) of the Exchange Act and CRP Rule 102(e)(1)(ii), violated Section 17(a) of the Securities +Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Rule 2-06 of Regulation S- +X, and caused violations of Sections 13(a), 15(d), 17(a), and 17(e) of the Exchange Act and Rules +13a-1, 13a-13, 15d-1, 15d-13, and 17a-5 thereunder, and Rule 2-02(b)(1) of Regulation S-X in +connection with their audits and/or quarterly reviews of hundreds of public companies and broker- +dealers registered with the Commission. + +4 +B. RESPONDENTS + +7. BF Borgers is a Colorado professional corporation registered with the PCAOB and +located in Lakewood, Colorado. + +8. Borgers is the managing partner and 100% owner of BF Borgers and is a certified +public accountant licensed in the state of Colorado. + +C. FACTS + +9. From January 2021 through June 2023, BF Borgers had 350 clients who were +required under the Commission’s rules and regulations to have their financial statements audited +and/or reviewed by a PCAOB-registered accounting firm in accordance with PCAOB standards +and to incorporate those financial statements into filings made with the Commission. +10. Borgers served as the engagement partner for the audit and review services BF +Borgers performed for the overwhelming majority of these clients. +11. Respondents represented in engagement letters to these clients that the audits and +quarterly reviews of their financial statements would be conducted in accordance with PCAOB +standards. +12. Contrary to these representations, Respondents failed to conduct audits and/or +quarterly reviews for these clients in accordance with PCAOB standards, and, with respect to the +audits, issued reports falsely certifying that the audits were completed in accordance with those +standards. +13. Respondents knew that the BF Borgers audit reports containing the false +certifications were required to be and would be included in the clients’ required filings with the +Commission which, for issuers, would be publicly available to investors. Respondents also knew +that (i) certain other BF Borgers clients made public disclosures via the website maintained by +OTC Markets, (ii) those disclosures would include BF Borgers audit reports containing false +certifications, and (iii) those disclosures would be publicly available to investors. +Respondents Failed To Properly Prepare and Retain Audit Documentation +14. Pursuant to PCAOB Auditing Standard 1215: Audit Documentation (“AS 1215”), +audit documentation (the “workpapers”) provides the written record of the basis for the auditor’s +conclusions. Audit documentation also facilitates the planning, performance, and supervision of the +audit engagement. AS 1215.02. +15. AS 1215 requires detailed and accurate written audit and review documentation and +further provides that the auditor must document the procedures performed, evidence obtained, and +conclusions reached with respect to relevant financial statement assertions. Under this standard, the +documentation must clearly demonstrate that the work was in fact performed and must contain + +5 +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, and 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 1215.06. +16. Borgers instructed BF Borgers audit staff and contractors to copy workpapers from +previous engagements as the final workpapers for new engagements. Specifically, audit staff +updated the balance sheet date and date of completion on the workpapers, but all of the other +information indicating the substantive work done on the engagement was simply copied from the +corresponding workpaper from the previous audit or quarterly review. As a result, BF Borgers’ +workpapers falsely documented the performance of audit and review procedures and approvals that +had not occurred, including falsely representing that both Borgers, as the engagement partner, and +an EQR reviewed and approved the workpapers. +17. For example, each engagement had a workpaper called “Engagement Team +Discussion” which purported to document a planning meeting held by the engagement team at the +beginning of the engagement. The planning meeting serves an important purpose. Pursuant to +PCAOB Auditing Standards, the engagement team – including the engagement partner who is +ultimately responsible – should discuss the client’s business and consider any potential risk areas +for material misstatement due to error or fraud for that particular client. See PCAOB Auditing +Standard 2110: Identifying and Assessing Risk of Material Misstatement. But, at BF Borgers, those +planning meetings did not occur. Instead, the staff level auditor simply rolled forward the +Engagement Team Discussion workpaper from the prior year or quarter, updating the balance sheet +date information on the document and inserting a new (and false) date of a planning meeting that +never happened. +18. Another example of the workpapers falsely documenting non-existent work was the +“Supervision Review and Approval” workpaper. This workpaper was divided into four sections: +(1) Detailed Review; (2) Engagement Partner Review; (3) Engagement Quality Review; and +(4) Partner Signing Auditor Report. The first three sections enumerate the specific work items to be +done by the staff level auditor, the engagement partner, and the EQR, and the form requires each +work item to be checked yes, no, or N/A. When completing this document, the staff level auditor +updated the balance sheet date on the first page and then copied the check marks from the same +workpaper for the previous audit or review. Additionally, the staff level auditor typed in the name +of the EQR and engagement partner on the signature lines for their respective sections. This +process created the false appearance that each specific work item checked “yes” was completed +and that the engagement partner and EQR reviewed and approved in the completion of this +workpaper, and had done so on the date typed next to their signature lines. +19. In the auditing industry, the generally accepted method for engagement partners to +document their supervision of an engagement in compliance with PCAOB standards, and their +review of the work performed by engagement team members, is by signing and dating (or “signing +off”) on workpapers when they perform or review work. Such sign offs provide evidence of who +performed or reviewed audit work and the date on which such work or review occurred. + +6 +20. BF Borgers had audit management software which permitted individuals to +electronically “sign off” on workpapers. But Borgers did not use that software to sign off on +workpapers. Instead, Borgers instructed a staff member to electronically sign off on all workpapers +for each engagement within the firm’s audit management software. Borgers provided that staff +member with usernames to create the false appearance of separate sign offs by the staff auditor, the +engagement partner, and the EQR on individual workpapers. In reality, all of those sign offs were +done by the same staff person within seconds of each other. +21. According to Borgers, his emails were the only written records evidencing the work +he performed as engagement partner on BF Borgers engagements. However, Respondents did not +include any of those emails as part of the workpapers retained by BF Borgers. They also failed to +preserve the vast majority of Borgers’ emails that pre-dated March 2023 by permitting those emails +to be auto-deleted due to purported storage-size limitations on the firm’s computer systems. To the +extent that Borgers had emails that documented his participation in certain audits and reviews, +Respondents did not preserve those emails or include them in the workpapers as required by AS +1215, nor were they retained for seven years as required by AS 1215.14 and Rule 2-06 of +Regulation S-X. +Borgers Failed To Supervise and Review The Work Of The Engagement Team +22. PCAOB Auditing Standard 1201: Supervision of the Audit Engagement (“AS +1201”) sets forth the engagement partner’s responsibility for supervising the audit engagement, +including the work of the engagement team members. Specifically, the engagement partner is +responsible for informing the team members as to the objectives, nature, timing, and extent of the +auditing procedures they are to perform as well as relevant information regarding the particular +client that could affect those procedures. AS 1201.05(a). +23. Additionally, the engagement partner is required to review the work of the +engagement team to ensure that work was performed and properly documented, all of the +objectives of the auditing procedures were achieved, the work performed by the team support the +conclusions reached and complied with PCAOB standards. AS 1201.03 and 1201.05(c). +24. Borgers, as the engagement partner, did not adequately review or supervise the +audit engagements. As discussed above, there were no audit planning meetings held in relation to +any of BF Borgers’ audit engagements. In addition, Borgers rarely interacted with the staff level +auditors. Borgers failed to inform the team members as to the objectives, nature, timing, and extent +of the auditing procedures they were to perform as well as relevant information regarding the +particular client that could affect those procedures as required by AS 1201; see also AS +1201.06(d) (requiring the audit partner to consider the knowledge, skill, and ability of each team +member to determine the extent of supervision necessary). +25. As the engagement partner, Borgers also failed both to review the work of the +engagement team and to ensure that the workpapers properly and accurately documented the work +performed on the audits. Specifically, Borgers failed to review important workpapers for many + +7 +audits, including workpapers relating to his purported supervision and review of the engagement +team’s work and conclusions. +Respondents Failed To Obtain Engagement Quality Reviews +26. PCAOB Auditing Standard 1220: Engagement Quality Review (“AS 1220”) +requires audits and reviews of interim financial information to be approved by an engagement +quality reviewer (previously defined as “EQR”). The purpose of this requirement is to have an +independent and objective review of all of the significant judgments and related conclusions by the +engagement team. If the EQR agrees with the engagement team’s conclusions and is not aware of +any significant engagement deficiency, then he/she provides a concurring approval of issuance +(hereinafter a “concurring approval”). With respect to audits, “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 1220.12 and 1220.13. +27. Despite this clear requirement, Respondents failed to engage an EQR to provide a +concurring review and approval on audits and reviews of financial statements incorporated in at +least 1,625 Public Filings and Disclosures from January 2021 through June 2023, including 336 +SEC issuer annual filings, 1,039 SEC issuer quarterly filings, 180 SEC registration statements, 45 +SEC-registered broker-dealer annual filings, and 25 OTC company annual reports. Put another +way, Respondents failed to engage an EQR to provide a concurring approval for at least 75% of +their clients’ Public Filings and Disclosures incorporating such audits and reviews: +SEC Filing Type No. of Clients Total Filings No EQR +SEC Issuer Annual Filings +330 +506 336 +SEC Issuer Quarterly Filings 1186 1039 +SEC Registration Statements 405 180 +SEC Registered Broker-Dealer Annual Filings 20 45 45 +TOTAL SEC FILINGS 350 2142 1600 +OTC Company Annual Reports 19 33 25 +TOTAL SEC FILINGS AND OTC DISCLOSURES +(“Public Filings and Disclosures”) 369 2175 1625 + +D. VIOLATIONS + +Rule 102(e) and Section 4C of the Exchange Act + +28. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) provide, in 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 by the Commission to have engaged +in improper professional conduct. With respect to persons licensed to practice as accountants (Rule +102(e)(1)(iv), or any registered public accounting firm or associated person (Exchange Act Section +4C(b)), “improper professional conduct” includes intentional or knowing conduct, including + +8 +reckless conduct, that results in a violation of applicable professional standards, or either of the +following two types of negligent conduct: (i) a single instance of highly unreasonable conduct that +results in a violation of applicable professional standards in circumstances in which an +accountant knows, or should know, that heightened scrutiny is warranted; or (ii) repeated +instances of unreasonable conduct, each resulting in a violation of applicable professional +standards, that indicate a lack of competence to practice before the Commission. Exchange Act +Section 4C(b); Rule 102(e)(1)(iv). As a result of the conduct described above, Respondents +engaged in “improper professional conduct” within the meaning of Exchange Act Section +4C(a)(2) and Rule 102(e)(1)(ii). +AS 1215: Audit Documentation +29. AS 1215 provides the “requirements for documentation the auditor should prepare +and retain in connection with engagements conducted pursuant to [PCAOB] standards.” AS +1215.01. The documentation must be clear and sufficiently detailed. AS 1215.04. +30. “The auditor must document the procedures performed, evidence obtained, and +conclusions reached with respect to relevant financial statement assertions.” AS 1215.06. Under +this standard, “[a]udit documentation must clearly demonstrate that the work was in fact +performed” and “must contain sufficient information to enable an experienced auditor, having no +previous connection with the engagement [t]o understand the nature, timing, extent, and results of +the procedures performed, evidence obtained, and conclusions reached, and [t]o 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.” Id. +31. As a result of the above-described conduct, Respondents violated these standards +with respect to numerous engagements. +AS 1201: Supervision of the Audit Engagement +32. AS 1201 sets forth the engagement partner’s responsibility “to supervise the audit +engagement, including supervising the work of the engagement team members so that the work is +performed as directed and supports the conclusions reached.” AS 1201.02. The engagement partner +is also responsible for ensuring compliance with PCAOB standards. AS 1201.03. +33. Specifically, the engagement partner is responsible for “[i]nform[ing] engagement +team members [as to] [t]he objectives… nature, timing, and extent of procedures they are to +perform” as well as relevant information regarding the particular client “that could affect the +procedures to be performed or the evaluation of the results of those procedures.” AS 1201.05(a). +34. Additionally, the engagement partner is required to “[r]eview the work of +engagement team members to evaluate whether [t]he work was performed and documented, [t]he +objectives of the procedures were achieved, and [t]he results of the work support the conclusions +reached.” AS 1201.05(c). + +9 +35. As a result of the above-described conduct, Respondents violated these standards +with respect to numerous engagements. +AS 1220: Engagement Quality Review +36. “An engagement quality review and concurring approval of issuance are required for +the following engagements conducted pursuant to [PCAOB] standards: (a) an audit engagement; (b) +a review of interim financial information; and (c) an attestation engagement performed pursuant to +[one of two relevant attestation standards].” AS 1220.01. The purpose of this requirement is to have +an independent and objective “evaluation of the significant judgments made by the engagement +team and the related conclusions reached in forming the overall conclusion on the engagement and +in preparing the engagement report, if a report is to be issued, in order to determine whether to +provide concurring approval of issuance.” AS 1220.02; see also AS 1220.06 (independence) and +AS 1220.07 (objectivity). +37. With respect to audits, “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 1220.13. +38. As a result of the above-described conduct, Respondents violated these standards +with respect to numerous engagements. +Respondents Violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange +Act and Rule 10b-5 Thereunder +39. Section 17(a) of the Securities Act prohibits any person, in the offer or sale of +securities, from (1) “employ[ing] any device, scheme or artifice to defraud;” (2) “obtain[ing] +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 (3) “engag[ing] in any transaction, practice, or course +of business which operates or would operate as a fraud or deceit upon the purchaser.” +40. Section 10(b) of the Exchange Act prohibits fraud “in connection with the purchase +or sale” of securities. Section 10(b) and Rule 10b-5 thereunder prohibit (a) using any device, +scheme, or artifice to defraud; (b) making material misstatements of fact or omitting a material fact +necessary to make a statement made not misleading; or (c) engaging in any act, practice, or course +of business that operates or would operate as a fraud or deceit upon any person. +41. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +issuers with securities registered under Section 12 of the Exchange Act to file annual and quarterly +reports with the Commission. Section 15(d) of the Exchange Act and Rules 15d-1 and 15d-13 +thereunder provide that issuers with reporting obligations under Section 15(d) of the Exchange Act +must file annual and quarterly reports with the Commission. Regulation S-X requires that audits +and reviews of such financial statements be done by an independent public accountant in +accordance with PCAOB standards. Regulation S-X, Rules 1-02(d) (annual audits) and 10-01(d) +(quarterly reviews of interim financial statements). The same requirements apply to smaller + +10 +reporting companies. Regulation S-X, Rules 8-02 (annual audits) and 8-03 (interim financial +statements). +42. Respondents knew that their issuer clients were required under the Commission’s +rules and regulations to have their financial statements audited and/or reviewed by BF Borgers in +accordance with PCAOB standards and to incorporate those financial statements into filings made +with the Commission. +43. Respondents falsely represented in the firm’s engagement letters to certain issuer +clients that the audits and quarterly reviews would be conducted in accordance with PCAOB +standards. +44. Respondents knew about the PCAOB standards discussed above and knowingly +violated those standards. +45. Borgers – the sole owner and sole engagement partner at the firm – authorized BF +Borgers to issue the audit reports that contained certifications falsely representing that the audits +had been conducted in compliance with PCAOB standards. +46. Respondents also falsified workpapers to create the illusion that the firm’s +engagements complied with PCAOB standards – including the falsification of workpaper sign offs +and EQR concurring approvals. +47. Respondents also knew that the fraudulent audit reports would be and were +included within hundreds of filings made by their issuer clients with the Commission, including +annual reports and registration statements, and that investors could and would access those +publicly-available filings. Respondents also knew that certain fraudulent audit reports would be +and were included within additional annual reports publicly disclosed (and thus available to +investors) via the website maintained by OTC Markets. +BF Borgers Violated Rule 2-02(b)(1) of Regulation S-X and Borgers Caused Those Violations +48. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state the +applicable professional standards under which the audit was conducted. +49. Through the conduct described above, BF Borgers violated Rule 2-02(b)(1) of +Regulation S-X in connection with the issuance of numerous audit reports, each of which falsely +stated that BF Borgers had conducted its audit in accordance with PCAOB standards. +50. Borgers – as the engagement partner on those audits – knew that the audits had not +been conducted in accordance with PCAOB standards. Nevertheless, he authorized BF Borgers to +issue audit reports containing the false certification. Thus, he knew or should have known that his +conduct would contribute to BF Borgers’ violations. As a result, Borgers caused BF Borgers’ +violations of Rule 2-02(b)(1). + + +11 +Respondents Violated Rule 2-06 of Regulation S-X +51. Rule 2-06 of Regulation S-X requires that: +For a period of seven years after an accountant concludes an audit or +review of an issuer’s financial statements …, the accountant shall +retain records relevant to the audit or review, including workpapers +and other documents that form the basis of the audit or review, and +memoranda, correspondence, communications, other documents, +and records (including electronic records) which: (1) Are created, +sent or received in connection with the audit or review; and (2) +Contain conclusions, opinions, analyses, or financial data related to +the audit or review. +52. Through the above-described conduct, Respondents violated Rule 2-06 of +Regulation S-X. +Respondents Caused Certain Issuer and Broker-Dealer Clients to Violate Sections 13(a), +15(d), 17(a), and 17(e) of the Exchange Act and Rules 13a-1, 13a-13, 15d-1, 15d-13, and 17a-5 +Thereunder +53. As discussed above, Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 +thereunder require issuers with securities registered under Section 12 of the Exchange Act to file +annual and quarterly reports with the Commission. +54. Regulation S-X requires that audits and reviews of such financial statements be +done by an independent public accountant in accordance with PCAOB standards. Regulation S-X, +Rules 1-02(d) (annual audits) and 10-01(d) (quarterly reviews of interim financial statements). The +same requirements apply to smaller reporting companies. Regulation S-X, Rules 8-02 (annual +audits) and 8-03 (interim financial statements). +55. Section 15(d) of the Exchange Act and Rules 15d-1 and 15d-13 thereunder provide +that issuers with reporting obligations under Section 15(d) of the Exchange Act must file annual +and quarterly reports with the Commission. +56. Thus, an issuer violates Section 13(a) of the Exchange Act and Rules 13a-1 and +13a-13 thereunder, or Section 15(d) of the Exchange Act and Rules 15d-1 and 15d-13 thereunder, +when it files annual or quarterly reports with the Commission that fail to include financial +statements audited or reviewed by an independent public accountant in accordance with PCAOB +standards. +57. Certain issuer clients of Respondents violated Section 13(a) of the Exchange Act +and Rules 13a-1 and 13a-13 thereunder, or Section 15(d) of the Exchange Act and Rules 15d-1 and +15d-13 thereunder, when they filed with the Commission annual and quarterly reports that included +financial statements which had not been audited or reviewed by Respondents in accordance with +PCAOB standards. + +12 +58. As discussed above, Respondents knew both that they had not audited or reviewed +those financial statements in accordance with PCAOB standards and that their clients would include +those financial statements in filings with the Commission. Thus, Respondents knew or should have +known that their actions would contribute to their clients’ violations. As a result, Respondents +caused their clients’ violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 +thereunder, and Section 15(d) of the Exchange Act and Rules 15d-1 and 15d-13 thereunder. +59. Sections 17(a) and 17(e) of the Exchange Act and Rule 17a-5 thereunder require +registered broker-dealers to file with the Commission annual financial statements audited by an +independent public accountant in accordance with PCAOB standards. +60. Thus, a registered broker-dealer violates Sections 17(a) and 17(e) and Rule 17a-5 +thereunder when it files annual financial statements that have not been audited by an independent +public accountant in accordance with PCAOB standards. +61. Certain registered broker-dealer clients of Respondents violated Sections 17(a) and +17(e) of the Exchange Act and Rule 17a-5 thereunder when they filed with the Commission annual +financial statements that had not been audited by Respondents in accordance with PCAOB +standards. +62. As discussed above, Respondents knew both that they had not audited those +financial statements in accordance with PCAOB standards and that their clients would include those +financial statements in filings with the Commission. Thus, Respondents knew or should have +known that their actions would contribute to their clients’ violations. As a result, Respondents +caused their clients’ violations of Sections 17(a) and 17(e) of the Exchange Act and Rule 17a-5 +thereunder. +E. FINDINGS +63. Based on the foregoing, the Commission finds that Respondents engaged in +improper professional conduct pursuant to Sections 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii). +64. Based on the foregoing, the Commission finds that Respondents violated Section +17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. +65. Based on the foregoing, the Commission finds that BF Borgers violated Rule 2- +02(b)(1) of Regulation S-X and that Borgers caused those violations. +66. Based on the foregoing, the Commission finds that Respondents violated Rule 2-06 +of Regulation S-X. +67. Based on the foregoing, the Commission finds that Respondents caused certain +issuer clients to violate Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder, +and caused certain other issuer clients to violate Section 15(d) of the Exchange Act and Rules 15d- +1 and 15d-13 thereunder. + +13 +68. Based on the foregoing, the Commission finds that Respondents caused certain +registered broker-dealer clients to violate Sections 17(a) and 17(e) of the Exchange Act and Rule +17a-5 thereunder. +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondents’ Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondents BF Borgers and Borgers shall 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), 15(d), 17(a), and 17(e) of the Exchange Act and Rules 10b-5, 13a-1, 13a-13, +15d-1, 15d-13, and 17a-5 promulgated thereunder, and Rules 2-02(b)(1) and 2-06 of Regulation S- +X. + + B. Respondents BF Borgers and Borgers are censured. + + C. Respondent BF Borgers is denied the privilege of appearing or practicing before the +Commission as an accountant. + + D. Respondent Borgers is denied the privilege of appearing or practicing before the +Commission as an accountant. + +E. Respondent BF Borgers shall, within 10 days of the entry of this Order, pay a civil +money penalty in the amount of $12 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. + +F. Respondent Borgers shall, within 10 days of the entry of this Order, pay a civil +money penalty in the amount of $2 million to the Securities and Exchange Commission for transfer +to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +G. 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; + + + +14 +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying the +Respondent making payment (i.e., BF Borgers CPA PC or Benjamin F. Borgers), and the file +number of these proceedings; a copy of the cover letter and check or money order must be sent to +Kathryn A. Pyszka, Associate Director, Division of Enforcement, Securities and Exchange +Commission, 175 West Jackson Blvd., Suite 1450, Chicago, Illinois 60604. + + H. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To preserve +the deterrent effect of the civil penalty, Respondents agree that in any Related Investor Action, they +shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of any award +of compensatory damages by the amount of any part of 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 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. + + + +15 +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by +Respondent Borgers, and further, any debt for disgorgement, prejudgment interest, civil penalty or +other amounts due by Respondent Borgers 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 Borgers 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/2024/AAER-4501.pdf b/raw/aaer/2024/AAER-4501.pdf new file mode 100644 index 0000000000000000000000000000000000000000..0a70ed30dc73b35f8d889af777e6871fb8f21c8b Binary files /dev/null and b/raw/aaer/2024/AAER-4501.pdf differ diff --git a/raw/aaer/2024/AAER-4501.txt b/raw/aaer/2024/AAER-4501.txt new file mode 100644 index 0000000000000000000000000000000000000000..11b0999c07779d1e02d4de3bd5cea270ad0e132e --- /dev/null +++ b/raw/aaer/2024/AAER-4501.txt @@ -0,0 +1,121 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 100101 / May 10, 2024 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4501 / May 10, 2024 +ADMINISTRATIVE PROCEEDING +File No. 3-20117 + +In the Matter of +NICHOLAS +TORNELLO, CPA + + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN +ACCOUNTANT RESPONSIBLE FOR THE +PREPARATION OR REVIEW OF FINANCIAL +STATEMENTS REQUIRED TO BE FILED WITH +THE COMMISSION OTHER THAN AS A MEMBER +OF AN AUDIT COMMITTEE + +On October 5, 2020, the Commission issued a consented Order Instituting Public +Administrative Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, +Making Findings and Imposing Remedial Sanctions (the “Suspension Order”) against +Respondent Nicholas Tornello, CPA.1 The Suspension Order denied Tornello the privilege of +appearing or practicing before the Commission as an accountant but permitted him, after one +year from the date of the Suspension Order, and if certain conditions were met, to request that +the Commission consider his reinstatement to resume appearing or practicing before the +Commission as (1) a preparer or reviewer, or a person responsible for the preparation or review, +of financial statements that are 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”); (2) a preparer or reviewer, or a person responsible for the preparation +or review, of financial statements that are required to be 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; or (3) an +independent accountant. +This order is issued in response to Tornello’s application for reinstatement to appear and +practice before the Commission as an accountant responsible for the preparation or review of + +1 See Accounting and Auditing Enforcement Release No. 4184, dated October 5, 2020. + + 2 +financial statements required to be filed with the Commission, other than as a member of an +audit committee. +In the Suspension Order, the Commission found that Tornello had been permanently +enjoined from future violations of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 +thereunder and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the +Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. In the underlying civil +injunctive action before the United States District Court for the Eastern District of Pennsylvania, +the Commission alleged, among other things, that Tornello engaged in improper conduct +resulting in the improper accounting for certain intercompany transactions involving currency +fluctuations which caused his employer, Hill International, Inc., to materially overstate its net +income in the company’s annual report on Form 10-K for each of the years ended December 31, +2014, 2015, and 2016 and in the company’s quarterly reports on Form 10-Q for each of the +quarters ended March 31, June 30, and September 30 in 2015 and 2016, and for the quarter +ended March 31, 2017. The Complaint further alleged that Tornello engaged in a number of +improper accounting practices that materially increased Hill’s Accumulated Other +Comprehensive Income on its balance sheet and decreased expenses on its income statement in a +departure from generally accepted accounting principles. + +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 which determination is necessarily +highly fact specific. + +Tornello has shown good cause for reinstatement and has met the conditions set forth in +the Suspension Order to be reinstated to appear and practice before the Commission as a person +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. In his capacity as a person +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, Tornello attests that he will have his +work reviewed by the independent audit committee of any company for which he works, or in +some other manner acceptable to the Commission, while practicing before the Commission in +this capacity. + +Tornello is not, at this time, seeking to appear or practice before the Commission as a +person responsible for the preparation or review of financial statements required to be filed with +the Commission as a member of an audit committee or as an independent accountant. If, in the +future, Tornello should wish to resume appearing and practicing before the Commission in such +a capacity, he will be required to submit an application to the Commission showing, among other +things, that he has complied and will comply with the terms of the Suspension Order. + +2 Rule 102(e)(5)(i) provides: + +“[a]n 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 + +On the basis of information supplied, representations made, and undertakings agreed to +by Tornello, and for the reasons stated immediately above, it appears that he has complied with +the terms of the Suspension Order denying him the privilege of appearing or practicing before +the Commission as an accountant. No information has come to the attention of the Commission +relating to his character, integrity, professional conduct, or qualifications to practice before the +Commission that would be a basis for adverse action against him pursuant to Rule 102(e) of the +Commission's Rules of Practice. As a result, Tornello 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 +Nicholas Tornello, 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. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4502.txt b/raw/aaer/2024/AAER-4502.txt new file mode 100644 index 0000000000000000000000000000000000000000..dd234f79228a48f5af79d15ac62bf06bddd3b1c2 --- /dev/null +++ b/raw/aaer/2024/AAER-4502.txt @@ -0,0 +1,270 @@ + + +1 +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 100165 / May 17, 2024 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 6607 / May 17, 2024 + +INVESTMENT COMPANY ACT OF 1940 +Release No. 35195 / May 17, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4502 / May 17, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-21938 + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT +TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF +1934, SECTIONS 203(f) AND 203(k) OF +THE INVESTMENT ADVISERS ACT +OF 1940, SECTION 9(b) OF THE +INVESTMENT COMPANY ACT OF +1940, AND RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate and +in the public interest that public administrative and cease-and-desist proceedings be, and +hereby are, instituted against Varun Aggarwal (“Respondent”) pursuant to 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 . . . +(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. + +In the Matter of + + +VARUN AGGARWAL, CPA, + + +Respondent. + + +2 +Securities Exchange Act of 1934 (“Exchange Act”), Sections 203(f) and 203(k) of the +Investment Advisers Act of 1940 (“Advisers Act”), Section 9(b) of the Investment Company +Act of 1940 (“Investment Company Act”), and Rule 102(e)(1)(iii) of the Commission’s +Rules of Practice [17 C.F.R. 201.102(e)(1)(iii)]. 2 + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an +Offer of Settlement (the “Offer”) which the Commission has determined to accept. Solely +for the purpose of these proceedings and any other proceedings brought by or on behalf of +the Commission, or to which the Commission is a party, Respondent admits the +Commission’s jurisdiction over him and the subject matter of these proceedings, and +consents to the entry of this Order Instituting Administrative and Cease-And-Desist +Proceedings Pursuant to Section 4C of the Securities Exchange Act of 1934, Sections +203(f) and 203(k) of the Investment Advisers Act of 1940, and Section 9(b) of the +Investment Company Act of 1940, and Rule 102(e) of the Commission’s Rules of Practice, +Making Findings, and Imposing Remedial Sanctions (“Order”), as set forth below. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +Summary + +1. These proceedings arise from Respondent’s conduct in his role as the head +of internal audit and information technology (“IT”) for a registered investment adviser, +referred to in this Order as “Adviser A,” from at least January 2011 through February 2022 +(the “Relevant Period”). During the Relevant Period, Respondent engaged in fraudulent +conduct involving irregular billing practices that harmed three Real Estate Investment +Trusts (REITs) advised by Adviser A (referred to in this Order as “REIT X,” “REIT Y,” +and “REIT Z,” or collectively, “the REITs”). Respondent aided and abetted and caused +Adviser A to violate federal securities laws and breach its fiduciary duty to the REITs. +2. Specifically, through his role in internal audit and IT, Respondent assisted +certain vendors controlled by his friends and family in either overcharging Adviser A for +services performed or billing Adviser A for services never performed. In turn, Adviser A +passed some of these expenditures on to the REITs pursuant to their advisory agreements. + + +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 . . . [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. + +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 +After the invoices were paid, these vendors provided a kickback to Respondent. During the +Relevant Period, Respondent knowingly caused the REITs to overpay these vendors +approximately $1.8 million. +3. As a result of the conduct described herein, Respondent willfully aided and +abetted and caused Adviser A to violate Sections 206(1) and 206(2) of the Advisers Act. +Further, Respondent has willfully aided and abetted the violation of provisions of the +federal securities laws and the rules and regulations thereunder that provide a basis to +impose remedies pursuant to Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + +Respondent + +4. Varun Aggarwal, age 42, resides in Irvine, California. During the Relevant +Period, Respondent was employed by a registered investment adviser, referred to in this +Order as “Adviser B,” and served as Chief Audit Executive and in various other senior +roles in compliance and IT for its affiliate, Adviser A. Respondent was a licensed CPA in +California, though his license is currently inactive. + +Other Relevant Entities + +5. Adviser A is a registered investment adviser headquartered in California for +which Respondent served in executive positions in internal audit, compliance, and IT. It is +an investment adviser to the REITs and an affiliate of Adviser B. +6. Adviser B is a registered investment adviser headquartered in California +and an affiliate of Adviser A. +7. REIT X is an investment pool advised by Adviser A. +8. REIT Y is an investment pool advised by Adviser A. +9. REIT Z is an investment pool advised by Adviser A. + +Facts + +10. During the Relevant Period, Respondent held several positions at Adviser +A, becoming its Director of Internal Audit in 2009 and Chief Audit Executive in 2015, and +serving as a compliance officer to the REITs. From approximately 2020 to 2021, +Respondent was also Adviser A’s head of IT. +11. As part of his duties, Respondent was instrumental in hiring, and approving +payments to, internal audit and IT contractors. Respondent exploited his involvement in +those processes to hire, and approve payments to, vendors controlled by his friends and +family. +12. At least five contracting companies that were controlled by Respondent’s +friends or family became approved vendors (the “Approved Vendors”) of Adviser A, with + + +4 +the help of Respondent. During the Relevant Period, some of the work the Approved +Vendors purportedly conducted included network penetration testing, software +development for onboarding new employees, and internal audit and IT consulting. +13. The Approved Vendors either overcharged Adviser A for services +performed or billed Adviser A for services never performed. Respondent created some of +the fraudulent invoices that the Approved Vendors sent to Adviser A. +14. From 2011 to 2021, the Approved Vendors charged Adviser A and Adviser +B nearly $5 million. In turn, Adviser A passed some of these expenditures on to the REITs +pursuant to their advisory agreements. According to the REITs’ Form 10-K filings for the +year ending December 31, 2021, the REITs paid approximately $1.8 million in overcharges +or for work never performed. Of this $1.8 million, REIT X disclosed that it overpaid +approximately $300,000 to the Approved Vendors between 2016 and 2021; REIT Y +disclosed that it overpaid approximately $700,000 to the Approved Vendors between 2011 +to 2021; and REIT Z disclosed that it overpaid approximately $800,000 to the Approved +Vendors between 2011 and 2021. +15. Respondent knew Adviser A was paying fraudulent invoices from the +Approved Vendors and passing some of the expenses on to the REITs. On multiple +fraudulent invoices that he approved, Respondent made handwritten notes concerning how +Adviser A would allocate the expenses among the REITs. +16. The Approved Vendors then made payments, or kickbacks, to Respondent. +Depending on the Approved Vendor and the specific project, Respondent received +kickbacks ranging from 33.3% to 95% of the payments that Adviser A or Adviser B made +to the Approved Vendors. Since December 22, 2018, Respondent received $1,100,948 in +kickbacks attributable to the fraudulent expenses passed on to the REITs. +17. As an employee of Adviser B and the Chief Audit Executive at Adviser A, +Respondent was a person associated with an investment adviser for purposes of the +Advisers Act. +18. Adviser A owed a fiduciary duty to the REITs, which Respondent knew or +was reckless in not knowing he had caused to be breached when he willfully engaged in +fraudulent billing practices that harmed the REITs. +19. On August 21, 2023, Respondent pleaded guilty to one count of wire fraud +in United States v. Varun Aggarwal, No. SA CR 22-173-CJC, in the United States District +Court for the Central District of California. The count of the indictment to which +Respondent pled guilty alleged, among other things, that Respondent engaged in a scheme +to defraud his employer by submitting fictitious invoices from service vendors controlled +by his family and friends, when those services were not performed or charging inflated +amounts for services that were performed, and Respondent executed the scheme to defraud +by means of wire and radio communication in interstate and foreign commerce. +20. As a result of this conviction, Respondent was sentenced to imprisonment in +a federal penitentiary and ordered to pay restitution in the amount of $2,729,717.91. + + +5 + +Violations + +21. As a result of the conduct described above, Respondent willfully aided and +abetted and caused Adviser A to violate Sections 206(1) and 206(2) of the Advisers Act, +which prohibits investment advisers from, directly or indirectly, employing any device, +scheme, or artifice to defraud, or engaging in any transaction, practice, or course of +business which operates as a fraud or deceit upon, any client or prospective client. + +Findings + +22. Based on the foregoing, the Commission finds that Respondent willfully +caused, and willfully aided and abetted, Adviser A to violate Sections 206(1) and 206(2) of +the Advisers Act. + +Disgorgement + +23. The disgorgement and prejudgment interest ordered, but deemed satisfied, +as described in Section IV.E below, are consistent with equitable principles and do not +exceed Respondent’s net profits from his violations. + +IV. + +In view of the foregoing, the Commission deems it appropriate and in the public +interest to impose the sanctions agreed to in Respondent’s Offer. + +Accordingly, pursuant to Section 4C of the Exchange Act, Sections 203(f) and +203(k) of the Advisers Act, Section 9(b) of the Investment Company Act, and Rule +102(e)(1)(iii) of the Commission’s Rules of Practice, it is hereby ORDERED that: + +A. Respondent cease and desist from committing or causing any violations and +any future violations of Sections 206(1) and 206(2) of the Advisers Act. + +B. Respondent be, and hereby is: + +1. barred from association with any investment adviser, broker, dealer, +municipal securities dealer, municipal advisor, transfer agent, or nationally +recognized statistical rating organization; and + +2. prohibited from serving or acting as an employee, officer, director, member +of an advisory board, investment adviser or depositor of, or principal +underwriter for, a registered investment company or affiliated person of such +investment adviser, depositor, or principal underwriter. + +C. Any reapplication for association by Respondent will be subject to the + + +6 +applicable laws and regulations governing the reentry process, and reentry may be +conditioned upon a number of factors, including, but not limited to, compliance with the +Commission’s Order and payment of any or all of the following: (a) any disgorgement or +civil penalties ordered by a Court against the Respondent in any action brought by the +Commission; (b) any disgorgement amounts ordered against the Respondent for which the +Commission waived payment; (c) any arbitration award related to the conduct that served +as the basis for the Commission Order; (d) any self-regulatory organization arbitration +award to a customer, whether or not related to the conduct that served as the basis for the +Commission Order; and (e) any restitution order by a self-regulatory organization, whether +or not related to the conduct that served as the basis for the Commission Order. + +D. Respondent is denied the privilege of appearing or practicing before the +Commission as an accountant. + +E. Respondent shall pay disgorgement of $1,100,948 and prejudgment interest +of $90,349; however, the disgorgement and prejudgment interest amounts shall be deemed +satisfied by Respondent’s payment described in Paragraph 20 above. + + + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4503.txt b/raw/aaer/2024/AAER-4503.txt new file mode 100644 index 0000000000000000000000000000000000000000..f34e6da066e777b9edf95b335dd5d4d6c8ecc5f2 --- /dev/null +++ b/raw/aaer/2024/AAER-4503.txt @@ -0,0 +1,408 @@ + + +UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 100170 / May 17, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4503 / May 17, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-21939 + +In the Matter of +TYLER BURNETT WILSON, 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 Tyler +Burnett Wilson (“Respondent” or “Wilson”) pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any 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 +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III. 3. below, which are admitted, Respondent +consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 1. Wilson, age 39, is an attorney admitted to the Idaho and Washington state +bars. Wilson held the following positions at Taronis Fuels, Inc. (“Taronis Fuels”): (a) General +Counsel (“GC”) from approximately 2018 to May 6, 2021, (b) Chief Financial Officer (“CFO”) +from approximately September 1, 2019 to November 4, 2020, and (c) Secretary from +approximately 2018 to May 6, 2021. + + 2. Taronis Fuels is a Delaware corporation headquartered in Peoria, Arizona, +with common stock registered with the Commission under Section 12(g) of the Exchange Act +until May 23, 2022, when Taronis Fuels filed a Form 15 with the Commission to terminate its +registration. Taronis Fuels produces fuel and water products. + + 3. On April 25, 2024, a final judgment was entered against Wilson, +permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933 +(“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 of the Sarbanes-Oxley Act of 2002 (“SOX”); +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 and 13a-13 thereunder; and, pursuant to Section 20(a) of the +Exchange Act, from controlling any person who violates Sections 10(b), 13(a), 13(b)(2)(A), +and13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20 and 13a-13 thereunder, in the civil +action entitled Securities and Exchange Commission v. Taronis Technologies, Inc. et al., Civil +Action Number 8:22-cv-01939-TPB, in the United States District Court for the Middle District of +Florida. Wilson was also ordered to pay: a) disgorgement plus prejudgment interest in amount of +$56,367.10, b) reimbursement to Taronis Fuels of $43,788 pursuant to Section 304(a) of the +Sarbanes-Oxley Act, c) and a $150,000 civil money penalty. + + 4. The Commission’s complaint alleged, among other things, that Wilson +knowingly or recklessly engaged in an improper accounting scheme and falsified Taronis Fuels’ +books and records, which resulted in Taronis Fuels improperly recognizing revenue. More +specifically, Taronis Fuels’ financial statements for the second and third quarters of its 2020 fiscal +year improperly recognized revenue as a result of intentional or reckless incorrect application of +Generally Accepted Accounting Principles (“GAAP”). During that period, Taronis Fuels raised +approximately $30 million from investors, while making representations and warranties that the +financial statements in SEC filings were prepared in accordance with GAAP. The Commission +alleged Wilson acted as an accountant when, among other things, he acted in his CFO capacity, + 3 +reviewed accounting entries, reviewed a revenue recognition memorandum and drafted supporting +documentation for same, and supervised Taronis Fuels’ accounting staff. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Wilson’s Offer. + + Accordingly, it is hereby ORDERED, pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice, effective immediately, that: + +1. Rule 102(e) accountant suspension + + A. Wilson is suspended from appearing or practicing before the Commission as an +accountant. + +B. After five years from the date of the Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the attention of +the Office of the Chief Accountant. + +C. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Respondent +shall submit a written statement attesting to an undertaking to have Respondent’s work reviewed +by the independent audit committee of any public company for which Respondent works or in +some other manner acceptable to the Commission, as long as Respondent practices before the +Commission in this capacity and will comply with any Commission or other requirements related +to the appearance and practice before the Commission as an accountant. + +D. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934 (“Exchange Act”), as a preparer or reviewer, or as a person +responsible for the preparation or review, of any public company’s financial statements that are +filed with the Commission, Respondent shall submit a statement prepared by the audit +committee(s) with which Respondent will be associated, including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Respondent will be associated; + +2. A description of Respondent’s role on the specific audit committee(s) with +which Respondent will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + 4 + +4. A description relating to the necessity of Respondent’s service on the specific +audit committee; and + +5. A statement noting whether Respondent will be able to act unilaterally on behalf +of the Audit Committee as a whole. + +E. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Respondent must be +associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (the “PCAOB”) and Respondent shall submit the following additional +information: + +1. A statement from the public accounting firm (the “Firm”) with which +Respondent is associated, stating that the firm is registered with the PCAOB in +accordance with the Sarbanes-Oxley Act of 2002; + +2. A statement from the Firm with which the Respondent is associated that the +Firm has been inspected by the PCAOB and that the PCAOB did not identify +any criticisms of or potential defects in the Firm’s quality control system that +would indicate that Respondent will not receive appropriate supervision; and + +3. A statement from Respondent indicating that the PCAOB has taken no +disciplinary actions against Respondent since seven (7) years prior to the date of +the Order other than for the conduct that was the basis for the Order. + +F. In support of any application for reinstatement, Respondent shall provide +documentation showing that Respondent is currently licensed as a certified public accountant +(“CPA”) and that Respondent has resolved all other disciplinary issues with any applicable state +boards of accountancy. If Respondent is not currently licensed as a CPA, Respondent shall provide +documentation showing that Respondent’s licensure is dependent upon reinstatement by the +Commission. + +G. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings, including any orders in Securities +and Exchange Commission v. Taronis Technologies, Inc. et al., Civil +Action Number 8:22-cv-01939-TPB, or any related Commission +proceedings, including any orders requiring payment of disgorgement or +penalties; + +2. That Respondent undertakes to notify the Commission immediately in +writing if any information submitted in support of the application for + 5 +reinstatement becomes materially false or misleading or otherwise changes +in any material way while the application is pending; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a +basis for a forthwith suspension from appearing or practicing before the +Commission pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +a. has not been charged with a felony or a misdemeanor involving moral +turpitude as set forth in Rule 102(e)(2) of the Commission’s Rules of +Practice, except for any charge concerning the conduct that was the +basis for the Order; + +b. has not been found by the Commission or a court of the United States to +have committed a violation of the federal securities laws, and has not +been enjoined from violating the federal securities laws, except for any +finding or injunction concerning the conduct that was the basis for the +Order; + +c. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge concerning +the conduct that was the basis for the Order; + +d. has not been found by a court of the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, or any bar thereof to have committed an offense (civil or +criminal) involving moral turpitude, except for any finding concerning +the conduct that was the basis for the Order; and + +e. has not been charged by the United States (or any agency of the United +States) or any state, territory, district, commonwealth, or possession, +civilly or criminally, with having committed an act of moral turpitude, +except for any charge concerning the conduct that was the basis for the +Order. + +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement, the PCAOB’s Division of +Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis +for the Order. + + 6 +6. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by any State Board of Accountancy, or other regulatory body. +H. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Respondent reported for +such work; and + +2. Respondent’s plans for any future appearance or practice before the +Commission. + + I. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +J. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under Paragraph I, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +K. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph I, the burden shall be on the Respondent to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + +L. If the Commission declines to reinstate Respondent pursuant to Paragraphs J and K, +it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an accountant. + +2. Rule 102(e) attorney suspension + +A. Wilson is suspended from appearing or practicing before the Commission as an +attorney. + + 7 +B. After five years, from the date of the Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the attention of +the Office of the General Counsel. + +C. In support of any application for reinstatement to appear and practice before the +Commission as an attorney, Respondent shall provide a certificate of good standing from each state +bar where Respondent is a member. + +D. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +1. That Respondent has complied with the Commission suspension Order, and with +any related orders and undertakings including any orders in Securities and +Exchange Commission v. Taronis Technologies, Inc. et al., Civil Action Number +8:22-cv-01939-TPB, or any related Commission proceedings, including any +orders requiring payment of disgorgement or penalties; + +2. That Respondent is not currently suspended or disbarred as an attorney by a court +of the United States (or any agency of the United States) or the bar or court of any +state, territory, district, commonwealth, or possession; + +3. That Respondent, since the entry of the Order, has not been convicted of a felony +or a misdemeanor involving moral turpitude that would constitute a basis for a +forthwith suspension from appearing or practicing before the Commission +pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +a. has not been charged with a felony or a misdemeanor involving moral +turpitude as set forth in Rule 102(e)(2) of the Commission’s Rules of +Practice, except for any charge concerning the conduct that was the +basis for the Order; + +b. has not been found by the Commission or a court of the United States to +have committed a violation of the federal securities laws, and has not +been enjoined from violating the federal securities laws, except for any +finding or injunction concerning the conduct that was the basis for the +Order; + +c. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge concerning +the conduct that was the basis for the Order; + +d. has not been found by a court of the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or + 8 +possession, or any bar thereof to have committed an offense (civil or +criminal) involving moral turpitude, except for any finding concerning +the conduct that was the basis for the Order; + +e. has not been charged by the United States (or any agency of the United +States) or any state, territory, district, commonwealth, or possession, +civilly or criminally, with having committed an act of moral turpitude, +except for any charge concerning the conduct that was the basis for the +Order; and + +f. has not been subject to disciplinary action by a bar, court or agency of +any state for violations of applicable rules of professional conduct, +except for any charge concerning the conduct that was the basis for the +Order; + +5. That Respondent’s conduct is not at issue in any pending investigation of the +Commission’s Division of Enforcement or any criminal law enforcement +investigation; + +6. That Respondent is not the subject of any complaints to, or investigations by, the +bar or court of any state, territory, district, commonwealth, or possession, except to +the extent that such complaints concern the conduct that was the basis for the +Order; + +7. That Respondent has complied with any and all orders, undertakings, or other +remedial, disciplinary, or punitive sanctions resulting from any action taken by +the bar or court of any state, territory, district, commonwealth, or possession, or +other regulatory body; and + +8. That Respondent undertakes to notify the Office of General Counsel immediately in +writing if any information submitted in support of the application for reinstatement +becomes materially false or misleading or otherwise changes in any material way +while the application is pending. + +E. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Respondent reported for +such work; and + + 9 +2. The circumstances under which Respondents’ membership in a state bar or any +court for which Respondent was a member has lapsed or otherwise is no longer +active and an explanation of why for each; and + +3. Respondent’s plans for any future appearance or practice before the +Commission. + + F. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +G. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under Paragraph F, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +H. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph F, the burden shall be on the Respondent to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + +I. If the Commission declines to reinstate Respondent pursuant to Paragraphs G and +H, it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an attorney. + + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4504.pdf b/raw/aaer/2024/AAER-4504.pdf new file mode 100644 index 0000000000000000000000000000000000000000..8e6b9615377c524e8284ef8e8b5513d8c9624d1c Binary files /dev/null and b/raw/aaer/2024/AAER-4504.pdf differ diff --git a/raw/aaer/2024/AAER-4504.txt b/raw/aaer/2024/AAER-4504.txt new file mode 100644 index 0000000000000000000000000000000000000000..4eb16b980795d3b8b0707ac7fab347ec286ffe38 --- /dev/null +++ b/raw/aaer/2024/AAER-4504.txt @@ -0,0 +1,116 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 100250 / May 30, 2024 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4504 / May 30, 2024 +ADMINISTRATIVE PROCEEDING +File No. 3-18123 + +In the Matter of +MATTHEW GAMSEY, +CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN +ACCOUNTANT RESPONSIBLE FOR THE +PREPARATION OR REVIEW OF FINANCIAL +STATEMENTS REQUIRED TO BE FILED WITH +THE COMMISSION OTHER THAN AS A MEMBER +OF AN AUDIT COMMITTEE + +On August 22, 2017, the Commission issued a consented Order Instituting Public +Administrative Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, +Making Findings and Imposing Remedial Sanctions (the “Suspension Order”) against +Respondent Matthew Gamsey, CPA.1 The Suspension Order denied Gamsey the privilege of +appearing or practicing before the Commission as an accountant but permitted him, after three +years from the date of the Suspension Order and if certain conditions were met, to request that +the Commission consider his reinstatement to resume appearing or practicing before the +Commission as (1) a preparer or reviewer, or a person responsible for the preparation or review, +of financial statements that are 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”); (2) a preparer or reviewer, or a person responsible for the preparation +or review, of financial statements that are required to be 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; or (3) an +independent accountant. +This order is issued in response to Gamsey’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. + +1 See Accounting and Auditing Enforcement Release No. 3891, dated August 22, 2017. + + 2 + +In the Suspension Order, the Commission found that Gamsey had been permanently +enjoined from violating Section 17(a)(3) of the Securities Act of 1933 and from violating Rules +13b2-1 and 13b2-2 of the Exchange Act, and from aiding and abetting violations of Section 13(a) +and 13(b)(2)(A) and (B) of the Exchange Act and Rules 12b-20, 13a-11, and 13a-13 thereunder. +In the underlying civil injunctive action before the United States District Court for the Southern +District of New York, the Commission alleged that Gamsey negligently violated the federal +securities laws by participating in a course of business to artificially inflate revenues and +understate expenses at Bankrate, Inc. in order to meet the company’s financial targets. This had +the effect of materially overstating the company’s financial results for the second quarter of +2012. + +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 which determination is necessarily +highly fact specific. + +Gamsey has shown good cause for reinstatement and has met the conditions set forth in +the Suspension Order to be reinstated to appear and practice before the Commission as a person +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. In his capacity as a person +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, Gamsey attests that he will have his +work reviewed by the independent audit committee of any company for which he works, or in +some other manner acceptable to the Commission, while practicing before the Commission in +this capacity. + +Gamsey is not, at this time, seeking to appear or practice before the Commission as a +person responsible for the preparation or review of financial statements required to be filed with +the Commission as a member of an audit committee or as an independent accountant. If, in the +future, Gamsey should wish to resume appearing and practicing before the Commission in such a +capacity, he will be required to submit an application to the Commission showing, among other +things, that he has complied and will comply with the terms of the Suspension Order. + +On the basis of information supplied, representations made, and undertakings agreed to +by Gamsey, and for the reasons stated immediately above, it appears that he has complied with +the terms of the Suspension Order denying him the privilege of appearing or practicing before +the Commission as an accountant. No information has come to the attention of the Commission +relating to his character, integrity, professional conduct, or qualifications to practice before the +Commission that would be a basis for adverse action against him pursuant to Rule 102(e) of the + +2 Rule 102(e)(5)(i) provides: + +“[a]n 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 +Commission's Rules of Practice. As a result, Gamsey 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 +Matthew Gamsey, 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. + +By the Commission. + + +Vanessa Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4505.txt b/raw/aaer/2024/AAER-4505.txt new file mode 100644 index 0000000000000000000000000000000000000000..9f27013bd8d0f5a0bc20b75c900963ea93b9b553 --- /dev/null +++ b/raw/aaer/2024/AAER-4505.txt @@ -0,0 +1,105 @@ + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 100258 / June 3, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4505 / June 3, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-21953 + +In the Matter of +GREGORY P. MANNING, +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 Gregory +P. Manning (Respondent” or “Manning”) 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 + +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 +jurisdiction over him and the subject matter of these proceedings, and the findings contained in +Section III.2. below, and consents to the entry of this Order Instituting Public Administrative +Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and +Imposing Remedial Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 1. Manning, 61, during the period from at least 2016 through at least January +2022, worked as an accountant for various publicly traded companies. + + 2. On May 30, 2024, a judgment was entered against Manning, permanently +enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and +Rule 10b-5 thereunder, in the civil action entitled Securities and Exchange Commission v. Gregory +P. Manning, et al., Civil Action Number 1:22-CV-10074, in the United States District Court for the +District of Massachusetts. Manning was also ordered to pay $34,750 in disgorgement of ill-gotten +gains, with the disgorgement amount deemed satisfied by the Order of Forfeiture in United States +v. Gregory Manning, et al., No. 22-CR-10026-ADB (D. Mass.), $14,940.39 in prejudgment +interest; and a $14,750 civil money penalty. + + 3. The Commission’s complaint alleged that Manning engaged in insider trading. +The complaint alleged, among other things, that on or about July 22, 2016, Manning was tipped +by a close friend that Linear Technology Corporation (“Linear”) was about to be acquired by +Analog Devices, Inc. (“Analog”). The complaint further alleged that Manning then purchased +shares of Linear’s common stock in his and his wife’s brokerage accounts. The complaint +alleged that on July 26, 2016, Linear announced that it would be acquired by Analog, and +Manning sold his and his wife’s shares of Linear stock realizing profits of more than $34,000. +The complaint further alleged that Manning paid his close friend several thousand dollars in cash +in return for the tip. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Manning’s Offer. + + + + + + + + + 3 + Accordingly, it is hereby ORDERED pursuant to 102(e)(3)(i) of the Commission’s Rules +of Practice, effective immediately, that Manning 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/2024/AAER-4506.txt b/raw/aaer/2024/AAER-4506.txt new file mode 100644 index 0000000000000000000000000000000000000000..3e8df12dd0ca49c191da631f75c884b9557cc3fc --- /dev/null +++ b/raw/aaer/2024/AAER-4506.txt @@ -0,0 +1,538 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11289 / June 6, 2024 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 100288 / June 6, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4506 / June 6, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-21959 + + +In the Matter of + +HF FOODS GROUP 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 HF Foods Group Inc. (“HF Foods” 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. These proceedings concern violations of the antifraud and other provisions of the +federal securities laws by Respondent HF Foods, a Nevada-based food service distributor to Asian +restaurants in the United States, resulting from materially false and misleading disclosures and +other fraudulent conduct implemented by its former Chairman and CEO Zhou Min Ni and former +CFO Jian Ming “Jonathan” Ni. + +2. From August 2018 through 2020, Zhou Min Ni, with the assistance of Jonathan Ni, +misappropriated approximately $3.4 million from HF Foods, through related party transactions and +otherwise, for the benefit of himself and his family, including to purchase and maintain a stable of +luxury vehicles for the personal use of Zhou Min Ni and his family. Additionally, in anticipation +of a 2018 reverse merger between a predecessor entity to HF Foods and a special purpose +acquisition company (“SPAC”), Zhou Min Ni and Jonathan Ni schemed to remove $7.4 million of +liabilities from the predecessor company’s books by creating a fictitious line of credit in the name +of a purported supplier to conceal future repayments on the liabilities. After the reverse merger, +pursuant to which HF Foods became a public company, HF Foods converted the line of credit into +promissory notes to continue concealing the fraudulent conduct. + +3. As a result of the above misconduct, from 2018 to 2020, HF Foods’s public filings +contained both materially inaccurate financial statements and other false and misleading +statements, including materially false statements regarding related party transactions and executive +compensation. Zhou Min Ni, as Chairman and CEO of HF Foods, and Jonathan Ni, as CFO of HF +Foods, reviewed and signed filings by HF Foods containing materially false and misleading +statements. + +4. In 2023, after an internal investigation conducted by a Special Investigation +Committee of the Board of Directors (“SIC”), HF Foods announced a restatement of financial +statements for fiscal years 2019 and 2020. The company further announced that it had determined, +based on factual findings made by the SIC, among other things: certain advances to related parties, +including payments for luxury cars, did not occur in the normal course of business, and certain +payments should have been counted as compensation for the CEO; the purported supplier to which +HF Foods extended a line of credit was not a supplier to HF Foods and there is no evidence that +funds from the line of credit were provided to the purported supplier (contrary to what had been +represented to the public); and payments to another related party were not commensurate with the +services provided. + + +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. HF Foods Group Inc., a Delaware corporation currently headquartered in Las +Vegas, Nevada, is a food service distributor to Asian restaurants in the United States. HF Group +Holding Corp. (“HF Group”) was founded in 1997 by Zhou Min Ni and his spouse to distribute +food primarily to Chinese restaurants. In August 2018, HF Group became an Exchange Act +registrant, HF Foods, through a reverse merger with a SPAC.2 HF Group included its 2016 and +2017 financial statements in SEC filings as part of its reverse merger. Those financial statements +were indicated as having been prepared in accordance with Generally Acceptable Accounting +Principles (“GAAP”). HF Foods’s common stock is registered with the Commission pursuant to +Section 12(b) of the Exchange Act and trades on the Nasdaq Capital Market. HF Foods’s fiscal +year ends on December 31, and it is required to file periodic reports, including Form 10-K, with the +Commission pursuant to Section 13(a) of the Exchange Act and related rules thereunder. + +Related Individuals + +6. Zhou Min Ni, age 55, resides in Greensboro, North Carolina. Zhou Min Ni co- +founded HF Group with his spouse in 1997. He served as CEO of HF Group from 1997 until +August 2018, then as CEO of HF Foods from August 2018 until his resignation on February 23, +2021. Zhou Min Ni served as Chairman of HF Foods between August 2018 until February 2021. + +7. Jian Ming (“Jonathan”) Ni, CPA, age 51, resides in Greensboro, North Carolina. +Jonathan Ni was a consultant to HF Foods from 2003 to approximately 2015. He has been a +certified public accountant (“CPA”) licensed to practice in the State of North Carolina since +January 2014, but this license currently is in retired status. He was the CFO of HF Foods +beginning in 2015 and was CFO when it completed the reverse-merger process and became a +public company (August 2018). He resigned from his CFO position in April 2019. + +Background + +8. Zhou Min Ni and his wife founded HF Group in 1997 in Kernersville, North +Carolina, providing wholesale food distribution services to Asian restaurant customers. From the +beginning, Zhou Min Ni served as the CEO of HF Group, directing the growth of the business. +After joining as a consultant in 2003, Jonathan Ni became CFO of HF Group in 2015. + +9. Prior to August 2018, HF Group was primarily owned by Zhou Min Ni and his +family. In August 2018, HF Group transformed from a private, wholly-owned corporate entity into +HF Foods, a publicly-listed company. + +10. In the leadup to the company going public, Jonathan Ni and his financial team +helped reorganize the company’s financials in response to comments and questions from its +auditors, its attorneys, and an external consultant recommended by Atlantic Acquisition. + +2 A SPAC has no underlying business operations. A SPAC raises capital through an initial public offering for the +purpose of using the proceeds to acquire an unidentified private operating company at a later date through a business +combination transaction. After the SPAC combines with the private company via a merger transaction, also called +the “de-SPAC process,” it continues operating as a public company. + +4 + + +11. As the company transitioned from the private HF Group to the public HF Foods, +Zhou Min Ni and Jonathan Ni knew the company needed to change or eliminate at least three +financial practices to effectuate a merger and comport with reporting requirements for a publicly +listed company. First, Zhou Min Ni and his family had historically used HF Group’s funds to buy, +maintain, and insure a stable of exotic and luxury cars. The title to these cars was held by an HF +Group subsidiary. Second, HF Group offered its employees a staff loan program, through which +the company offered employees what it called a guaranteed rate of return on monetary +contributions held in an internal company account, which HF Group commingled with the +company’s general operating fund. Third, HF Group had an ongoing relationship with UGO, a +company owned by Zhou Min Ni and his niece, that contracted with HF Group to provide +professional services in exchange for payments far in excess of the value of the services provided. + +12. Although Zhou Min Ni and Jonathan Ni understood the problems presented by each +of these practices, they continued after HF Foods became a public company in August 2018. HF +Foods issued public disclosures, signed by Zhou Min Ni and Jonathan Ni, that misled investors +about the fraudulent conduct that was ongoing at the company. + +The Luxury Vehicles Scheme + +13. As a private company, HF Group purchased and leased cars for the personal use of +Zhou Min Ni, his wife, and their children, including luxury cars used as “daily drivers” by Zhou +Min Ni and his family, as well as exotic sports cars purchased for the personal use of the then- +teenage son of Zhou Min Ni. In preparation for the 2018 de-SPAC transaction, Zhou Min Ni and +Jonathan Ni commenced a complex scheme to hide the continued funding of luxury and exotic cars +for Zhou Min Ni and his family. As set out below, this scheme was executed via a series of related +party transactions with entities owned by Zhou Min Ni and his son. + +14. Between mid-2017 and early 2018, at Zhou Min Ni’s direction, Jonathan Ni +established three entities to facilitate the misappropriation of funds from HF Group Holding Corp.: +Revolution Industry, Revolution Automotive, and Revolution Property. Revolution Industry, +which was owned by Zhou Min Ni’s then-teenage son, became a vendor of HF Group which +allowed HF Group to transfer funds to it for related party transactions and to fund the lease and +purchase of luxury cars for the son. Revolution Automotive, which was co-owned by Zhou Min +Ni and his son, held possession of the luxury vehicles and received its operating funds from HF +Foods and Revolution Industry. + +15. Between August 2018 and 2020, HF Foods made improper payments of +approximately $2.4 million to Revolution Industry and Revolution Automotive. In its public filings +between 2018 and 2020, HF Foods represented that these advances occurred in the normal course +of business. In reality, the proceeds of these advances were used to maintain and expand the stable +of luxury vehicles owned by Revolution Automotive that were ultimately enjoyed by Zhou Min +Ni’s family. Although certain business transactions between HF Foods and Revolution Industry +may have been legitimate, there were additional “advances” and other payments made by HF +Foods to Revolution Industry that were forwarded to Revolution Automotive for the sole purpose +of making payments for luxury vehicles. In addition, HF Foods made several direct payments to + +5 + +Revolution Automotive, even though there was no legitimate commercial relationship between HF +Foods and Revolution Automotive. + +16. Zhou Min Ni, as the then-CEO of HF Group and co-owner of Revolution Industry, +knew, or was extremely reckless in not knowing, that the Revolution entities were created to divert +funds from HF Foods to maintain and expand the fleet of luxury vehicles for the benefit of his +family. + +17. Jonathan Ni, as a CPA and the then-CFO of HF Foods, and as a close business +associate of Zhou Min Ni and a personal confidante of Zhou Min Ni’s son, knew or was extremely +reckless in not knowing that the Revolution entities were used to divert funds from HF Foods to +maintain and expand the fleet of luxury vehicles for the benefit of Zhou Min Ni’s family. Jonathan +Ni worked to execute a series of transactions that established the Revolution entities and +transferred the vehicles from HF Group to Revolution Automotive. He directed, reviewed, and +authorized certain payments made by HF Group and HF Foods to the Revolution entities that were +ultimately used to finance, insure, and maintain the vehicles. + +18. As a result of this misconduct by Zhou Min Ni and Jonathan Ni, HF Foods made +material misstatements in its public filings. For example, HF Foods later concluded as a result of +the SIC’s investigation and reflected in its January 2023 restatement that it should have recorded +these payments to Revolution Industry and Revolution Automotive as compensation expense to +Zhou Min Ni and his spouse but did not. These misstatements were material because reasonable +investors would have wanted to know that the company’s financials were not prepared in +accordance with GAAP and that the company was providing advances to a related party that were +being used to pay for luxury cars as that would have significantly altered the total mix of +information made available. These misstatements occurred in the company’s previously filed +financial statements that were included in its quarterly report on Form 10-Q for the 2018 third +quarter, as well as in quarterly reports on Form 10-Q for the first three quarters of 2019 and 2020, +in addition to its annual reports on Form 10-K for fiscal years 2018 and 2019, and in the +company’s disclosures of Zhou Min Ni’s compensation amounts in the company’s proxy filings +for 2019 and 2020. + +The Staff Loan Scheme + +19. Prior to the 2018 de-SPAC transaction, HF Group had what it called a “staff loan +program” for its employees, other business associates, and relatives. Participants invested in the +program by either making cash contributions or by allowing HF Group to withhold funds +otherwise due to the participants and were promised a guaranteed rate of interest. HF Group +commingled program funds with its general operating funds, and participants were not told how +their funds would be used. + +20. In anticipation of the 2018 merger, Zhou Min Ni and Jonathan Ni were advised by +consultants and auditors that the staff loan program balance should be removed from the +company’s books. Ultimately, the staff loan program was removed from HF Group’s books prior +to the 2018 de-SPAC transaction by offsetting the outstanding program balance partially against +assets listed on HF Group’s books and recording other credits. These accounting entries included + +6 + +references to Zhou Min Ni assuming the debt “personally.” However, Zhou Min Ni continued to +use the company funds in connection with the staff loan program in 2018 even after HF Group +became a public company and its books no longer reflected the staff loan program. + +21. To conceal that Zhou Min Ni continued to use HF Foods to make payments to +program participants, in September 2017, Jonathan Ni created a line of credit between HF Group +and a purported supplier of HF Group. This line of credit was converted into a promissory note in +February 2018, and then amended in September 2018 and November 2018, to reflect the increasing +amount of credit purportedly made available to this purported supplier. HF Foods did not send any +funds to this purported supplier under the promissory note agreement. Instead, it appears that Zhou +Min Ni paid the participants of the staff loan program out of HF Foods’s cash-on-hand account +and, to conceal the payments, recorded them as payments to the purported supplier under the notes. + +22. Moreover, to secure the purported business loan to this alleged supplier, in +September 2018, Zhou Min Ni and Jonathan Ni misrepresented the nature of the relationship +between HF Foods and the supplier to HF Foods’s board of directors, falsely telling the board that +the supplier was providing food containers to HF Foods and a loan was necessary to ensure a +reliable supply chain of food containers. In its January 2023 restatement, HF Foods disclosed that +it had determined that this supplier was never an actual supplier of HF Foods. In September 2019, +Zhou Min Ni used his HF Foods stock to pay HF Foods the amounts purportedly owed to it by the +supplier under the notes. + +23. Zhou Min Ni and Jonathan Ni knew or were extremely reckless in not knowing that +the alleged supplier did not actually supply HF Foods with anything, that the supposed transactions +between HF Foods and the alleged supplier only existed on paper, and that the only reason that HF +Foods’s line of credit and promissory notes with the alleged supplier existed was to remove the +staff loan liability from HF Foods’s books. Zhou Min Ni and Jonathan Ni also knew that HF +Foods was recording payments to the purported supplier when the money was not going to that +company. + +24. As a result of this scheme, HF Foods made material misstatements in its public +filings, including in its description of the line of credit with the purported supplier. Despite their +knowledge of the scheme to conceal the staff loan program, Zhou Min Ni and Jonathan Ni signed +HF Foods’s public filings that omitted material information regarding the staff loan program and +the true nature of the promissory notes. + +The UGO Scheme + +25. During the relevant period, UGO, a wholesaler with the same address as HF Foods, +was 30% owned by Zhou Min Ni and 70% by his niece. Filings made in connection with the +reverse merger, as well as HF Foods’s 2019 and 2020 proxy statements, disclosed that UGO was a +related party of HF Group. + +26. Beginning in January 2018, HF Group paid UGO $50,000 per month for +“professional services” to create an online shopping portal for HF Group and a mobile application +through which HF Group’s customers could place orders. UGO allegedly subcontracted with a + +7 + +China-based company that was wholly owned by Zhou Min Ni. Some of the payments booked as +UGO payments went from HF Group directly to Zhou Min Ni; others went to UGO but then +UGO sent the payments either directly to Zhou Min Ni or to one of Zhou Min Ni’s companies . +These payments continued after HF Group became a publicly listed company, HF Foods. Between +August 2018 and February 2021, HF Foods sent approximately $1 million to UGO for nominal +professional services. In its restatement, HF Foods concluded that the amount of money paid to +UGO was not commensurate with the services it received from UGO. + +27. Zhou Min Ni directly benefited from the UGO scheme. He knew that HF Foods +was paying UGO $50,000 per month, purportedly for creating and maintaining an online shopping +portal for HF Foods, and that he directly received a large portion of these monthly payments. +Ultimately, following the SIC’s investigation, HF Foods concluded that the amounts paid to UGO +which were made to Zhou Min Ni or eventually forwarded to him should have been recorded and +disclosed as compensation to him. + +28. Jonathan Ni facilitated this scheme. For example, in an email dated March 29, +2018, HF Group’s Controller told HF Group’s Treasurer that Jonathan Ni would speak to her about +preparing monthly invoices for UGO, despite the fact that neither Jonathan Ni, nor the Controller, +nor the Treasurer were employees of UGO. In March 2018, Jonathan Ni also directed HF Group’s +finance personnel to reclassify in HF Group’s books and records the payments to UGO from +“professional fees” to “advertising expense,” which helped to avoid further questions about the +payments from HF Group’s auditors. + +29. Zhou Min Ni and Jonathan Ni knew, or were extremely reckless in not knowing, +that certain of HF Foods’s payments to UGO constituted compensation to Zhou Min Ni. Zhou +Min Ni and Jonathan Ni knew that HF Foods was paying UGO $50,000 per month and that Zhou +Min Ni was receiving a large portion of these monthly payments. Zhou Min Ni and Jonathan Ni +knew that Zhou Min Ni owned 100% of the Chinese entity that subcontracted with UGO. Zhou +Min Ni and Jonathan Ni also knew, or were extremely reckless in not knowing, that Zhou Min Ni +had not provided any documentation of expenses that would justify receiving these payments. + +30. As a result, HF Foods made material misstatements in its public filings, including +its 2019 and 2020 proxy statements, regarding its related party transactions and executive +compensation paid to Zhou Min Ni. The proxy statements also included a false assertion which +stated that the Board of Directors had analyzed the prices paid to HF Foods’s related parties, which +would include UGO. + +Failure to Maintain Adequate Internal Control over Financial Reporting and +Disclosure Controls and Procedures + +31. HF Foods failed to maintain adequate internal control over financial reporting +(“ICFR”) and disclosure controls and procedures (“DCP”). HF Foods has disclosed in its annual +reports since its Form 10-K for the reporting period ended December 31, 2018, and in its quarterly +reports since its Form 10-Q filed May 15, 2019, that its ICFR and DCP were not effective and +identified several material weaknesses. These material weaknesses include “the deficiency in the + +8 + +ability of [HF Foods’s] in-house accounting professionals to generate financial statements in the +form required by applicable SEC requirements.” + +32. In 2018, HF Foods hired an external consulting company to provide the company’s +management with recommendations for stronger ICFR, including a review of books and records +and to highlight weaknesses, if any, in the existing system. However, HF Foods did not correct the +existing ICFR deficiencies. Even after HF Foods became an Exchange Act registrant, HF Foods +failed to develop adequate ICFR and DCP for the information required to be disclosed in its public +filings. + +HF Foods’s Response to Public Allegations + +33. On March 23, 2020, a financial research company that describes itself as +specializing in forensic financial research released a public report (“Report”) that described +misappropriation of company funds and accounting irregularities at HF Foods. Specifically, the +Report noted that Zhou Min Ni’s son publicly advertised his use of a fleet of luxury cars, which +were publicly owned by a subsidiary of HF Foods, and noted the ongoing relationship between HF +Foods and Revolution Industry. The Report also noted that over $1 million in shareholder money +had been transferred to UGO from HF Foods, from 2018 through March 2020. + +34. On March 25, 2020, HF Foods issued an interim report, signed by Zhou Min Ni, on +Form 8-K filed with the Commission that denied the “derogatory assertions” made by the Report +and represented that “[HF Foods’s] published financial statements and other public disclosures +fairly present, in all material respects, the financial condition and results of operations of the +Company, as well as [its] subsidiaries, [its] dealings with related parties, and the compensation of +the Company’s executive officers.” + +35. HF Foods’s public filing was materially false and misleading because Zhou Min Ni, +as then Co-CEO of HF Foods, was aware that many of the allegations made in the Report were +true, such as allegations relating to the luxury vehicles and UGO. + +HF Foods Restates Its Earnings and Acknowledges Material Misstatement + +36. On January 20, 2023, following the SIC’s internal investigation, HF Foods filed an +interim report on Form 8-K disclosing that its financial statements for full years 2019 and 2020, +and each interim quarterly period for 2019, 2020, and 2021 should not be relied upon due to errors +related to, among other things, related party transactions. + +37. On January 31, 2023, HF Foods filed an annual report on Form 10-K for the year +2021. In this document, HF Foods restated its financial statements from 2019 and 2020 and certain +2018 financial information and provided a public update as to the investigation that had been +conducted by the SIC. Specifically, the SIC found: (a) Zhou Min Ni and members of his family +received undisclosed compensation from transactions with related parties that had been excluded +from previously filed proxy statements; (b) certain advances made by HF Foods to Revolution +Industry, in particular, payments for luxury cars, “did not occur in the normal course of business” +and “should be accounted as compensation expense” because Revolution Industry and Revolution + +9 + +Automotive “were used to obtain funds which paid for luxury cars for the benefit of the Ni +family”; (c) that the alleged supplier in the staff loan program scheme was not a supplier to the +company and that there was no evidence that funds were ever provided to the alleged supplier; the +notes receivable were not provided in the ordinary course of business; and the notes receivable +appeared to have benefited the CEO; and (d) the “marketing services” provided by UGO were not +“commensurate to the amounts paid” to UGO from 2018 to 2021. + +Violations + +38. As a result of the conduct described above, HF Foods violated Section 17(a) of the +Securities Act, which prohibits fraudulent conduct in the offer or sale of securities. + +39. As a result of the conduct described above, HF Foods 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. + +40. As a result of the conduct described above, HF Foods violated Section 13(a) of the +Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, which require issuers with +securities registered under Section 12 of the Exchange Act to file annual, current, and quarterly +reports with the Commission containing such information as the Commission’s rules may require, +and mandate that periodic reports contain such further material information as may be necessary to +make the required statements not misleading. + +41. As a result of the conduct described above, HF Foods 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. + +42. As a result of the conduct described above, HF Foods 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 and maintain a system of internal accounting controls sufficient to provide +reasonable assurances that, among other things, transactions are recorded as necessary to permit +preparation of financial statements in conformity with GAAP. + +43. As a result of the conduct described above, HF Foods violated Section 14(a) of the +Exchange Act and Rule 14a-9 thereunder. Section 14(a) of the Exchange Act makes it unlawful to +solicit any proxy in respect of securities registered under Section 12 of the Exchange Act in +contravention of such rules and regulations as the Commission may prescribe. Rule 14a-9 +prohibits the use of proxy statements containing materially false or misleading statements or which +omits to state any material fact necessary to make the statements made not false or misleading. + +44. As a result of the conduct described above, Respondent HF Foods violated Rule +13a-15(a) of the Exchange Act, which requires issuers with a class of securities registered under +Section 12 of the Exchange Act to maintain disclosure controls and procedures, and for issuers that +were required to file or filed an annual report with the Commission for the prior fiscal year, +internal control over financial reporting. + +10 + + +HF Foods’s Cooperation and Remedial Efforts + +In determining to accept the Offer, the Commission considered remedial acts promptly +undertaken by Respondent and cooperation afforded to the Commission staff. Once the Report +was published in March 2020, HF Foods’s SIC appointed an external counsel to conduct an +extensive internal investigation into the allegations made in the Report. The SIC, through its +counsel, provided its findings from the investigation to the Commission staff. HF Foods also +undertook numerous remedial efforts, including but not limited to removing culpable individuals +from the company’s management, establishing more thorough DCP and ICFR, and strengthening +its internal compliance program. The Company also created a Special Litigation Committee that +determined to pursue legal claims against Zhou Min Ni and Jonathan Ni and others, which +resulted in a settlement that benefitted the Company. + +IV. + +In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent HF Foods’s Offer. + +Accordingly, pursuant to Sections 8A of the Securities Act and Section 21C of the +Exchange Act, it is hereby ORDERED that: + +A. Respondent HF Foods cease and desist from committing or causing any violations +and any future violations of Sections 17(a) of the Securities Act, and of Sections +10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act, and Rules +10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13a-15(a), and 14a-9 thereunder. + +B. Respondent HF Foods shall, within 20 days of the entry of this Order, pay a civil +money penalty in the amount of $3,900,000 to the Securities and Exchange +Commission. If timely payment of a 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 + +(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 + +11 + +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 HF +Foods 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 Mark Cave, Associate Director, Division +of Enforcement, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC +20549. + +C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is +created for the penalties referenced in paragraph IV.B above. This Fair Fund may be combined +with any fund established for the benefit of harmed investors in SEC v. Zhou Min Ni, et al., No. +1:24-cv-01632 (D.D.C. June 3, 2024). Amounts ordered to be paid as civil money penalties +pursuant to this Order shall be treated as penalties paid to the government for all purposes, +including all tax purposes. To preserve the deterrent effect of the civil penalty, Respondent agrees +that in any Related Investor Action, it shall not argue that it is entitled to, nor shall it benefit by, +offset or reduction of any award of compensatory damages by the amount of any part of +Respondent’s payment of a civil penalty in this action (“Penalty Offset”). If the court in any +Related Investor Action grants such a Penalty Offset, Respondent agrees that it shall, within 30 +days after entry of a final order granting the Penalty Offset, notify the Commission’s counsel in +this action and pay the amount of the Penalty Offset to the Securities and Exchange Commission. +Such a payment shall not be deemed an additional civil penalty and shall not be deemed to change +the amount of the civil penalty imposed in this proceeding. For purposes of this paragraph, a +“Related Investor Action” means a private damages action brought against Respondent by or on +behalf of one or more investors based on substantially the same facts as alleged in the Order +instituted by the Commission in this proceeding. + +D. Respondent acknowledges that the Commission is not imposing a civil penalty in +excess of $3,900,000 based upon its cooperation in a Commission investigation. If at any time +following the entry of the Order, the Division of Enforcement (“Division”) obtains information +indicating that Respondent knowingly provided materially false or misleading information or +materials to the Commission, or in a related proceeding, the Division may, at its sole discretion and +with prior notice to the Respondent, petition the Commission to reopen this matter and seek an +order directing that the Respondent pay an additional civil penalty. Respondent may contest by +way of defense in any resulting administrative proceeding whether it knowingly provided +materially false or misleading information, but may not: (1) contest the findings in the Order; or (2) +assert any defense to liability or remedy, including, but not limited to, any statute of limitations +defense. + +By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4510.txt b/raw/aaer/2024/AAER-4510.txt new file mode 100644 index 0000000000000000000000000000000000000000..b241d2b56ae5416409e761249681825ac6935195 --- /dev/null +++ b/raw/aaer/2024/AAER-4510.txt @@ -0,0 +1,551 @@ + + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 100389 / June 20, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4510 / June 20, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-21975 + + +In the Matter of + +CPI AEROSTRUCTURES, +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 CPI Aerostructures, Inc. (“CPI Aero” or +“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-And-Desist Order (“Order”), as set forth below. + + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +Summary + + 1. This matter involves financial reporting, accounting, internal accounting controls, +and disclosure controls and procedures failures by CPI Aero, an aerospace structural products +manufacturer. These failures led to multiple restatements of CPI Aero’s financial statements for +fiscal periods between January 1, 2018 and December 31, 2022 concerning, among other things, +reported revenue, inventory, loss reserves, and deferred tax asset and liability balances contained in +the Income Taxes footnote. In addition, CPI Aero reported multiple material weaknesses in its +internal control over financial reporting (“ICFR”) and failed to maintain effective disclosure +controls and procedures (“DCP”) for the six consecutive annual reporting periods from 2018 +through 2023. + + 2. As a result of this conduct, CPI Aero violated Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15(a) +thereunder. + +Respondent + + 3. CPI Aerostructures, Inc. is a New York corporation headquartered in Edgewood, +New York. CPI Aero is a manufacturer of structural assemblies, integrated systems, and kitted +components for the domestic and international aerospace and defense markets. CPI Aero’s +common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act. +Respondent’s securities trade on the NYSE American exchange under the symbol “CVU.” 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. + +CPI Aero’s Third Quarter 2018 Restatement and Material Weakness + +4. On February 8, 2019, CPI Aero filed a Form 8-K announcing that its prior quarterly +report for the third quarter of 2018 should no longer be relied upon due to an error in the financial +statements. Respondent stated that its review control procedures failed to identify, in a timely +manner, the miscoding of an invoice in its records resulting in an overstatement of revenue. The +financial statements as of and for the three and nine months ended September 30, 2018 were +restated on February 27, 2019, resulting in a reduction of net income of approximately $742,000. +As a result of this error, CPI Aero disclosed in its 2018 Form 10-K that ICFR and DCP were not +effective and identified the miscoding error as a material weakness in ICFR. + + + + + + + + 3 +CPI Aero’s 2018 and 2019 Restatements + +5. On February 14, 2020, CPI Aero filed a Form 8-K announcing that its prior annual +report on Form 10-K for 2018 and quarterly reports on Form 10-Q for 2018 and 2019 should no +longer be relied upon due to revenue recognition errors in the financial statements resulting from +the misapplication of ASC Topic 606, and that management’s reports on the effectiveness of ICFR, +press releases, and investor communications describing Respondent’s financial statements for such +periods also should no longer be relied upon. + +6. Respondent recognizes revenues and profits for contracts with customers using +the cost-to-cost percentage of completion method of accounting. Historically, for long-term +programs, CPI Aero applied the cost-to-cost percentage of completion method at the program +level, which considered the entire duration of expected production activity on a particular +program. Respondent estimated its revenue recognition utilizing the life of the program, +including unexercised and non-binding customer purchase options, to both measure progress and +estimate profit margin. Management subsequently concluded that its life of the program +accounting was not an appropriate application of ASC Topic 606. + +7. CPI Aero determined the performance obligation, rather than the life of the +program, to be the appropriate unit of accounting for its long-term programs. Respondent +considers only the costs incurred relative to the total expected costs of satisfying the performance +obligations identified in the contract when measuring progress, and no longer includes +unexercised and non-binding customer purchase options in its application of ASC Topic 606. + +8. On August 25, 2020, CPI Aero filed its 2019 Form 10-K, which included restated +amounts for its previously filed 2018 Form 10-K. On this same date, CPI Aero filed amended +quarterly reports on Form 10-Q/A for 2019, which included restated amounts for its previously +filed quarterly reports for 2019 and 2018. The restatements corrected numerous accounting +errors, including the following: + + + + +Balance Sheet +2018 +(As Restated) +2018 +(As Previously +Reported) +2019 +(As Restated) +2019 +(As Previously +Reported) +Contract Assets 17,588,866$ 113,333,491$ 14,487,015$ 121,458,084$ +Total Current Assets 44,208,723$ 140,204,589$ 38,956,888$ 146,016,968$ +Contract Liabilities 5,252,579$ 3,588,500$ 1,561,543$ 1,606,649$ +Loss Reserve 3,663,558$ 216,606$ 2,895,045$ 216,606$ +Total Current Liabilities 22,925,751$ 17,815,728$ 21,282,110$ 18,346,825$ +Retained Earnings +(Accumulated Deficit) (74,596,536)$ 22,760,215$ (6,430,353)$ 100,165,509$ +As of December 31 As of September 30 + + + + 4 + + +9. The misstated financial statement amounts were also included in several current +reports on Form 8-K, including those filed on March 22, 2018, August 8, 2018, November 8, +2018, March 13, 2019, May 10, 2019, August 7, 2019, and November 6, 2019. + +CPI Aero’s 2018 and 2019 Material Weaknesses + +10. CPI Aero disclosed in its 2019 Form 10-K that ICFR and DCP were not effective +as of December 31, 2019 or December 31, 2018. Respondent identified several material +Statement of Operations +2018 +(As Restated) +2018 +(As Previously +Reported) +2019 +(As Restated) +2019 +(As Previously +Reported) +Revenue 14,989,951$ 18,191,623$ 21,988,384$ 25,583,531$ +Net Income (Loss) (1,442,907)$ 1,256,765$ (934,716)$ 1,658,598$ +2018 +(As Restated) +2018 +(As Previously +Reported) +2019 +(As Restated) +2019 +(As Previously +Reported) +Revenue 17,175,679$ 20,261,239$ 20,101,713$ 23,158,251$ +Net Income (Loss) (1,884,106)$ 1,257,225$ (881,167)$ 2,710,457$ +2018 +(As Restated) +2018 +(As Previously +Reported) +2019 +(As Restated) +2019 +(As Previously +Reported) +Revenue 15,842,610$ 19,017,301$ 22,689,762$ 25,711,153$ +Net Income (Loss) (2,524,326)$ 585,896$ (1,255,051)$ 1,666,913$ +2018 +(As Restated) +2018 +(As Previously +Reported) +Revenue 70,366,016$ 83,929,270$ +Net Income (Loss) (7,546,753)$ 2,211,563$ +For the Year Ended December 31 +For the 3 Months Ended March 31 +For the 3 Months Ended June 30 +For the 3 Months Ended September 30 + + + + 5 +weaknesses in ICFR relating to the control environment, risk assessment, control activities and +monitoring, revenue recognition, accounting for significant non-routine complex transactions, +and information technology general controls. Specific material weaknesses included, among +other things, failure to hire and retain personnel with an appropriate level of knowledge and +experience in certain areas of financial accounting, lack of technical proficiency and training of +management to provide adequate oversight of accounting and financial reporting in the +implementation of certain accounting practices, and insufficiently documented and detailed +accounting policies and procedures. + +CPI Aero’s 2019 and 2020 Restatements + + 11. On June 7, 2021, CPI Aero filed a Form 8-K announcing that its prior annual report +on Form 10-K for 2020 and quarterly reports on Form 10-Q for 2020 should no longer be relied +upon due to inventory costing and related internal accounting controls errors, and that +management’s reports on the effectiveness of ICFR, press releases, and investor communications +describing Respondent’s financial statements for such periods also should no longer be relied upon. + + 12. On November 17, 2021, CPI Aero filed a Form 8-K announcing that its prior +annual report on Form 10-K for 2019 should no longer be relied upon due to additional accounting +impacts resulting from correcting the inventory costing errors, and that management’s reports on +the effectiveness of ICFR, press releases, and investor communications describing Respondent’s +financial statements for such periods also should no longer be relied upon. Specifically, CPI Aero +anticipated previously reported reserves would be insufficient upon the correction of the inventory +costing errors. + + 13. CPI Aero’s inventory cost accounting errors resulted from software processing and +coding errors when a December 2018 acquisition was integrated into CPI Aero’s software system. +These accounting errors impacted CPI Aero’s product lines for which revenue is recognized when +a product ships to customers, which represented approximately 15% of total 2020 revenue. +Accounting errors included, among other things, inconsistent units of measure being used for +quantities ordered and quantities received of certain purchased parts, incorrect accrual of inventory +received but awaiting quality inspection, the double counting of labor attributable to inventory, and +the failure to record over or under absorbed overhead costs at the end of accounting periods. + + 14. The correction of the inventory cost accounting errors resulted in the determination +that certain contracts previously believed to be in a profitable position were actually in a loss +position and required the recording of additional allowance for losses. Certain other inventory +items also required additional allowances. Respondent re-evaluated the sufficiency of its +provisions for loss contracts and inventory reserves that it had previously recorded and concluded +that increases to these reserves were required. It was further determined that the correction of these +errors began with the fourth quarter of 2019. + + + + + 6 + 15. On November 24, 2021, CPI Aero filed its amended 2020 Form 10-K/A and +included corrected balances for each quarter. The restatements corrected numerous accounting +errors, including the following: + + + + +In addition, net loss for the three months ended March 31, 2020 and June 30, 2020 increased by +approximately $545,000 and $764,000, respectively; and net income for the three months ended +September 30, 2020 increased by approximately $24,000. + +16. The misstated financial statement amounts were also included in several current +reports on Form 8-K including those filed on August 25, 2020, September 30, 2020, November +12, 2020, December 31, 2020, and April 16, 2021. + +CPI Aero’s 2019 and 2020 Material Weaknesses + + 17. Prior to the restatements, CPI Aero’s 2020 Form 10-K filed on April 15, 2021 +disclosed material weaknesses related to the control environment, risk assessment, and control +activities and monitoring that resulted in ineffective ICFR. The 2020 Form 10-K also disclosed +that DCP were not effective as of December 31, 2020. Specifically, the material weaknesses +related to cut-off procedures and the preparation and review of financial statement disclosures, as +well as insufficiently documented policies and detailed procedures. + + 18. In its 2020 Form 10-K/A filed on November 24, 2021, CPI Aero disclosed several +additional material weaknesses in ICFR related to the control environment, risk assessment, control +Balance Sheet +2019 +(As Restated) +2019 +(As Previously +Reported) +2020 +(As Restated) +2020 +(As Previously +Reported) +Inventory 4,906,253$ 5,891,386$ 6,386,288$ 9,567,921$ +Total Current Assets 33,846,323$ 34,831,456$ 37,687,226$ 40,868,859$ +Loss Reserve 3,965,913$ 2,650,963$ 2,009,247$ 800,971$ +Total Current Liabilities 22,294,687$ 20,979,737$ 30,012,252$ 28,559,487$ +Retained Earnings +(Accumulated Deficit) (81,346,771)$ (79,046,688)$ (85,001,254)$ (80,367,126)$ +Statement of Operations +2019 +(As Restated) +2019 +(As Previously +Reported) +2020 +(As Restated) +2020 +(As Previously +Reported) +Cost of Sales 80,687,080$ 78,386,997$ 77,824,732$ 75,490,503$ +Net Income (Loss) (6,750,235)$ (4,450,152)$ (3,654,753)$ (1,320,438)$ +As of December 31 As of December 31 +For the Year Ended December 31 + + + + 7 +activities and monitoring, and accounting for inventory and the related IT environment. +Specifically, the material weaknesses included, among other things: + +a. insufficiently documented accounting policies; + +b. insufficiently designed and implemented controls related to cut-off +procedures for in-transit inventory items; + +c. insufficiently designed and implemented controls related to the +establishment, monitoring, and review of loss contracts and excess and +obsolete inventory reserves; + +d. insufficient controls related to financial statement preparation and +disclosures; and + +e. insufficient controls related to accounting for inventory costing, including +the double counting of labor and overhead, inconsistent use of units of measure, +and inappropriate accounting for under or over absorbed overhead. + +CPI Aero Continued to Report Material Weaknesses in ICFR and Ineffective DCP For +Several Years + + 19. CPI Aero disclosed in its 2021 Form 10-K that ICFR was not effective due to +material weaknesses related to the insufficient design and implementation of internal controls +related to monitoring and review of inventory costing to ensure proper valuation and +appropriately stated inventory costs and the preparation and review of financial statement +disclosures to ensure the completeness and accuracy of required disclosures. CPI Aero also +disclosed in its 2021 Form 10-K that DCP were not effective. + + 20. CPI Aero disclosed in its 2022 Form 10-K that ICFR was not effective. +Respondent reported material weaknesses related to the processing and accrual of vendor +invoices, the reconciliation of accounts receivable and contract assets, and the documentation +with respect to its internal controls over inventory. CPI Aero also disclosed that DCP were not +effective. + + 21. CPI Aero disclosed in its second quarter 2023 Form 10-Q that ICFR continued to +be ineffective due to a material weakness related to the accounting for the quarterly accrual of +goods in transit, including the effects on revenue and cost of sales. CPI Aero also disclosed that +DCP were not effective. CPI Aero disclosed in its third quarter 2023 Form 10-Q that ICFR and +DCP continued to be ineffective. + +CPI Aero’s 2022 Footnote Restatement and 2023 Material Weakness + + 22. On April 3, 2024, CPI Aero filed a Form 8-K announcing that its prior annual +report on Form 10-K for 2022 should no longer be relied upon due to errors within the Income + + + + 8 +Taxes footnote to the financial statements, and that management’s report on the effectiveness of +ICFR for the same period also should no longer be relied upon. Respondent disclosed that the +deferred tax asset and deferred tax liability balances reported in the footnote were each overstated +by approximately $2.6 million due to computational errors and incomplete analyses of temporary +differences between book and taxable income. + + 23. There was no impact on the balance sheet or income statement because the net +deferred tax asset reported on the Respondent’s balance sheet did not change. Respondent’s net +deferred tax asset consists primarily of net operating loss carryforwards large enough to absorb the +other miscalculated timing differences. + + 24. On April 8, 2024, CPI Aero filed its 2023 Form 10-K and included corrected +balances in the Income Taxes footnote for 2022. CPI Aero disclosed that this error resulted from +the inadequate review, assessment, and reporting of the deferred tax asset and deferred tax liability +balances and represented a material weakness in ICFR. The material weakness resulted in +ineffective ICFR and DCP for the year ended December 31, 2023. + +Violations + +25. As a result of the conduct described above, CPI Aero violated Section 13(a) of the +Exchange Act and Rules 12b-20, 13a-1, 13-11, and 13a-13 thereunder, which require every issuer +of a security registered pursuant to Section 12 of the Exchange Act file with the Commission +information, documents, and annual, current, and quarterly reports as the Commission may +require and mandate that such reports contain such further material information as may be +necessary to make the required statements not misleading. + + 26. As a result of the conduct described above, CPI Aero 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. + + 27. As a result of the conduct described above, CPI Aero violated Section 13(b)(2)(B) +of the Exchange Act, which requires all reporting companies to devise and maintain a system of +internal accounting controls sufficient to provide reasonable assurances that transactions are +recorded as necessary to permit preparation of financial statements in accordance with generally +accepted accounting principles. + +28. Finally, as a result of the conduct described above, CPI Aero violated Exchange +Act Rule 13a-15(a), which requires every issuer of a security registered pursuant to Section 12 of +the Exchange Act to maintain ICFR and DCP. + + + + + + + + 9 +CPI Aero’s Remedial Efforts + +29. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded the Commission staff. +Specifically, CPI Aero implemented the following remedial measures: (i) as material +weaknesses were identified, CPI Aero implemented corrective action to address the miscoded +invoice error; reviewed, updated, and implemented its revenue recognition policies and procedures +in accordance with ASC Topic 606; revised its Sarbanes-Oxley compliance program; and +implemented various policies and procedures to address the inventory costing and allowance for +losses errors; (ii) CPI Aero retained new personnel with expanded expertise in financial reporting, +including a new Chief Financial Officer and Controller; and (iii) CPI Aero’s Audit and Finance +Committee hired a consultant to assist CPI Aero with identifying, documenting, and testing +internal controls, including an assessment of internal control effectiveness, as well as working with +management to identify and rate any deficiencies noted. + +Undertakings + + 30. Respondent has undertaken to: + +a. Fully remediate its outstanding material weaknesses in ICFR and have +effective ICFR and DCP by December 31, 2024. + +b. Publicly disclose, concurrent with the filing of the 2024 Form 10-K, +whether in management’s opinion, CPI Aero has fully remediated its +material weaknesses in ICFR and has effective ICFR and DCP. + + c. CPI Aero shall certify, in writing, compliance with the undertaking(s) set +forth above. The certification shall be made by CPI Aero’s CEO and +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 +Paul Pashkoff, Assistant Director, with a copy to the Office of Chief +Counsel of the Enforcement Division, no later than sixty (60) days from +the date of the completion of the undertakings. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent CPI Aero’s Offer. + + Accordingly, it is hereby ORDERED that: + + + + + 10 + A. Pursuant to Section 21C of the Exchange Act, Respondent CPI Aero cease and +desist from committing or causing any violations and any future violations of Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, and +13a-15(a) thereunder. + + B. Respondent shall comply with the undertakings enumerated in Paragraph 30, above. + +C. If Respondent fails to comply with the undertakings enumerated in Paragraph 30, +above, Respondent shall, by June 30, 2025, pay a civil money penalty in the amount of $400,000 to +the Securities and Exchange Commission for transfer to the general fund of the United States +Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, additional +interest shall accrue pursuant to 31 U.S.C. § 3717. + +D. If Respondent must pay a penalty, 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 CPI +Aero 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. + + 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 + + + + 11 +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 acknowledges that the Commission is not imposing a civil penalty if +Respondent timely complies with the undertakings set forth in Paragraph 30 above based upon its +cooperation in a Commission investigation. If at any time following the entry of the Order, the +Division of Enforcement (“Division”) obtains information indicating that Respondent knowingly +provided materially false or misleading information or materials to the Commission, or in a related +proceeding, the Division may, at its sole discretion and with prior notice to the Respondent, +petition the Commission to reopen this matter and seek an order directing that the Respondent pay +a civil money penalty even if Respondent has complied with the undertakings set forth in +Paragraph 30. 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/2024/AAER-4511.txt b/raw/aaer/2024/AAER-4511.txt new file mode 100644 index 0000000000000000000000000000000000000000..f4c8df303957ca6f9c61ee78b42e6f3423b29d4f --- /dev/null +++ b/raw/aaer/2024/AAER-4511.txt @@ -0,0 +1,278 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 100419 / June 25, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4511 / June 25, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-21977 + + +In the Matter of + + +ROBERT J. SCHETTINO, + + +Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING +FINDINGS, AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND-DESIST +ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Robert J. +Schettino (“Schettino” or “Respondent”) pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + + + +2 +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over him and the subject matter of +these proceedings, which are admitted, and except as provided herein in Section V, Respondent +consents to the entry of this Order Instituting Public Administrative and Cease-and-Desist +Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. + +III. + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +Summary + + This matter involves insider trading by Schettino in the securities of Napco Security +Technologies, Inc. (“NAPCO”) in advance of the February 3, 2020 announcement of NAPCO’s +financial results for its fiscal quarter ended December 31, 2019 (the “Announcement”). Schettino +obtained material nonpublic information (“MNPI”) about NAPCO’s financial results through his +role as NAPCO’s Vice President of Finance and Controller. On January 17, 2020, in violation of +his duties to NAPCO, Schettino sold 20,975 shares of NAPCO stock, while aware of and on the +basis of that MNPI. When NAPCO’s stock price dropped by approximately 22% following the +Announcement, Schettino avoided losses of $198,566. + +Respondent + +1. Schettino, age 63, resides in Ronkonkoma, New York. During the relevant period, +Schettino was employed at NAPCO as Vice President of Finance and Controller. + +Relevant Entity + +2. NAPCO is a Delaware corporation headquartered in Amityville, New York. +NAPCO manufactures and designs electronic security devices, cellular communication services for + +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 +intrusion and fire alarm systems, and school safety solutions. During the relevant period, +NAPCO’s common stock was listed on NASDAQ under the symbol “NSSC.” + +Facts + +3. Schettino has been employed at NAPCO since 1991. Since 1991, he has been +Controller, and since 2018 has also served as Vice President of Finance. Throughout Schettino’s +time at NAPCO, he has been responsible for overseeing the process of finalizing the accounting +records for each quarter and the preparation of NAPCO’s financial reports. During that time, +Schettino was subject to NAPCO’s policies and procedures concerning non-public information. +Under NAPCO’s Code of Ethics, Schettino owed NAPCO a duty to “[t]ake all reasonable +measures to protect the confidentiality of non-public information about NAPCO or its +subsidiaries and their customers obtained or created in connection with employee’s activities and +to prevent the unauthorized disclosure of such information unless required by applicable law or +regulation or legal or regulatory process.” + +4. NAPCO’s primary revenue stream is from equipment sales of security devices. +NAPCO’s other revenue stream is recurring services revenues for certain of its equipment +products. + +5. NAPCO’s second quarter for fiscal year 2020 ended December 31, 2019. By early +January 2020, Schettino was in possession of key data concerning NAPCO’s financial results, +such as sales revenue data and expense information, by virtue of his position as Controller and +role in overseeing the finalization of NAPCO’s accounting records for each quarter and +preparation of its financial reports. Among other things, on January 1, 2020, he and the +company’s executive officers received an email from the Chief Financial Officer that attached +detailed sales revenue results for equipment sales and recurring services revenues and stated, in +bold: “Attached information is strictly confidential and is not to be disclosed with anyone +until earnings are released in February.” These results showed a decline in net revenue from +equipment sales from the prior-year’s second fiscal quarter. NAPCO’s sales figures were +essentially final in the first week in January, and did not substantially vary from the results +Schettino received on January 1, 2020. + +6. Prior to the second fiscal quarter of 2020, NAPCO had not reported a quarter- +over-quarter decline in equipment revenues in recent years. Moreover, NAPCO’s consolidated +revenues for the quarter were below analyst consensus figures. + +7. On January 17, 2020, while Schettino was overseeing NAPCO’s finalization of its +accounting records and the preparation of its financial reports, he sold all of the 20,975 shares of +NAPCO stock in his brokerage account at the time. Schettino did not consult anyone else at the +company about the information he had prior to trading. Prior to these sales on January 17, 2020, +Schettino had not traded in NAPCO stock, either buying or selling, over the preceding 5 years. +Schettino made these sales while in possession of and on the basis of MNPI he obtained in his + + +4 +role as Controller, in breach of his duty of trust and confidence and duty of confidentiality owed +to NAPCO. + +8. NAPCO issued the Announcement on February 3, 2020. Following the +Announcement, the price of NAPCO shares decreased by approximately 22% from the prior +day’s close on significantly higher volume. Analysts’ reports around that time noted revenues +had missed expectations and the decrease in equipment sales. As a result of his trades, Schettino +avoided losses of $198,566. + +9. Schettino knew, consciously avoided knowing, or was reckless in not knowing +that the information he possessed concerning NAPCO’s financial results as of January 17, 2020 +was material and nonpublic. Schettino also knew, consciously avoided knowing, or was reckless +in not knowing that by trading while in possession of the confidential information about +NAPCO’s financial results that he learned in the course of his employment, he breached his duty +of trust and confidence and duty of confidentiality owed to NAPCO. + +Violations + +10. As a result of the conduct described above, Schettino willfully violated Section +10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in +connection with the purchase or sale of securities. + +Findings + +11. Based on the foregoing, the Commission finds that Schettino willfully violated +Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + +Disgorgement and Civil Penalties + +12. The disgorgement and prejudgment interest ordered in paragraph IV.D. is +consistent with equitable principles, does not exceed Respondent’s net profits from his +violations, and returning the money to Respondent would be inconsistent with equitable +principles. Therefore, in these circumstances, distributing disgorged funds to the U.S. Treasury is +the most equitable alternative. The disgorgement and prejudgment interest ordered in paragraph +IV.D. shall be transferred to the general fund of the U.S. Treasury, subject to Section 21F(g)(3) +of the Exchange Act. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Schettino’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + + +5 + A. Schettino shall cease and desist from committing or causing any violations and any +future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + + B. Schettino is prohibited from acting as an officer or director of any issuer that has a +class of securities registered pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l] or that is +required to file reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)]. + + C. Schettino is denied the privilege of appearing or practicing before the Commission +as an accountant. + + D. Schettino shall, within 30 days of the entry of this Order, pay disgorgement of +$198,566, prejudgment interest of $38,815, and a civil money penalty in the amount of $198,566 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 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 + +(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 Robert J. +Schettino 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 Thomas P. Smith, Jr., Division of +Enforcement, Securities and Exchange Commission, 100 Pearl Street, Suite 20-100, New York, +NY 10004-2616. + + 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 + + +6 +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/2024/AAER-4512.txt b/raw/aaer/2024/AAER-4512.txt new file mode 100644 index 0000000000000000000000000000000000000000..030575fc99f7bf8bff6b7f3dfba748674e3f1b42 --- /dev/null +++ b/raw/aaer/2024/AAER-4512.txt @@ -0,0 +1,1218 @@ +1 + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11296 / August 9, 2024 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 100684 / August 9, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4512 / August 9, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-21988 + + +In the Matter of + +IDEANOMICS, INC. (f/k/a +SEVEN STARS CLOUD +GROUP, INC.), +ALFRED POOR, AND +FEDERICO TOVAR. + +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, IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Section +8A of the Securities Act of 1933 (“Securities Act”), Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice2 against Ideanomics, Inc. (f/k/a Seven Stars Cloud Group, Inc.) (“Ideanomics” or “the +Company”), Alfred P. Poor (“Poor”), and Federico Tovar (“Tovar”) (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 integr ity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided and +abetted the violation of, any provision of the securities laws or the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + +2 + + + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondents consent +to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings +Pursuant to Section 8A of the Securities Act of 1933, Sections 4C and 21C of the Securities +Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making Findings, +Imposing Remedial Sanctions and a Cease-and-Desist Order (the “Order”). + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +SUMMARY + +1. These proceedings involve multiple acts of accounting and disclosure fraud by +Ideanomics, a publicly traded company, and its senior management. Beginning in at least 2017 +and continuing through at least 2019, Ideanomics and its senior executives engaged in the +following misconduct: + +• Ideanomics issued a false and misleading press release on November 13, 2017, in which it +provided $300 million revenue guidance for fiscal year 2017.4 At the time this press +release was issued, there were numerous facts known to Company management indicating +that the Company would not be able to meet this guidance. + +• In December 2017 and March 2019, Ideanomics’s then-Chairman Bruno Wu was +substantively involved in negotiating agreements between Ideanomics and Tiger Sports +Media, Ltd. (“Tiger Sports”) and Beijing Financial Holdings, Ltd. (“Beijing Financial”), +Hong Kong-based entities, relating to transactions that benefited Wu personally. Wu +falsely told Company management that those entities were not related to him or his +companies, and Company management failed to properly investigate Wu’s connection to +those entities. In fact, Wu exercised control over Tiger Sports and Beijing Financial and +used cash and other assets from those companies for his personal benefit. In addition, + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before +it . . . to any person who is found . . . (iii) 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. + +4 Ideanomics’s fiscal year is concurrent with the calendar year. +3 + + +Ideanomics overstated the value of assets acquired in connection with these agreements. +As a result, Ideanomics did not disclose in public filings that Tiger Sports and Beijing +Financial were related parties and improperly overstated the value of its investments. + +• Ideanomics fraudulently and materially misstated the financial statements in its 2017 and +2018 Form 10-K filings, as well as its Form 10-Q filings for the first, second, and third +quarters of 2018, by failing to impair the value of certain licensed video content that it +valued at $17 million. Ideanomics supported the value of the video content with a non- +binding letter of intent to acquire the assets from a shell company. Ideanomics failed to +record any impairment of the asset despite having recognized minimal revenue, if any, +from the licensed content since 2015. Ideanomics’s misstatements resulted from the +deliberate actions of Wu, as well as the failure of the Company’s then-CFO, Federico +Tovar. + +• Ideanomics materially misstated revenue in its 2018 Form 10-K, as well as its Form 10-Q +filings for the first three quarters of 2018, by improperly accounting for oil transactions on +a gross, rather than net, basis. Ideanomics improperly accounted for the transactions as a +principal even though it purchased and sold the oil simultaneously and had little or no +discretion over the purchase or sale prices. Ideanomics’s misstatements resulted from +Tovar’s failure to understand Ideanomics’s oil trading business and the propriety of the oil +trading accounting. + +• Ideanomics materially misstated revenue in its financial statements for the first and second +quarters of 2019 by improperly recognizing revenue totaling $40.7 million in a transaction +with Counterparty A. Wu told Tovar the amount of profit to report in those quarters, an +amount which eliminated the potential tax liability. Tovar knew, or should have known, +that this approach was not consistent with U.S. GAAP. Additionally, CEO Alfred Poor +certified the first and second quarter Form 10-Q filings even though he knew or should +have known of problems related to the underlying assets received from Counterparty Athat +would affect their value and the amount of Ideanomics’s reported revenue. + +• Ideanomics falsely stated in its 2018 Form 10-K that its principal executive and principal +financial officers, Poor and Tovar, had performed evaluations of the Company’s internal +control over financial reporting (“ICFR”) even though the evaluation of ICFR was +incomplete. Given their roles and responsibilities as CEO and CFO respectively, Poor and +Tovar knew or should have known that these statements were false. + +• Ideanomics’s Form 10-Q for the second quarter of 2019 was signed by Carla Zhou as +interim CFO and attached to it were two SOX certifications that were purportedly signed +by Zhou as interim CFO, which Poor facilitated. In fact, Zhou could not speak or read +English and had not actually reviewed or signed the Form 10-Q or the certifications prior to +the filing. Poor knew or should have known that the certifications purportedly signed by +Zhou were inaccurate and that Zhou did not have a chance to review and approve of the +Form 10-Q before it was filed. + +4 + + +RESPONDENTS + + 2. Ideanomics, Inc., is a company incorporated in the State of Nevada, with its +principal executive offices in New York, New York. In 2016 and 2017, Ideanomics’s principal +executive offices were in Beijing, China. Ideanomics is listed on the NASDAQ stock exchange +under the ticker symbol “IDEX,” and its securities are registered with the Commission under +Section 12(b) of the Exchange Act. Ideanomics makes required filings, including annual reports +on Form 10-K, with the Commission. + + 3. Alfred Poor, 54, has been Chief Executive Officer of Ideanomics since February 20, +2019. Poor previously served as Chief Operating Officer of Ideanomics from September 2018 to +February 2019, and as Chief Administrative Officer of Ideanomics from August 2018 to +September 2018. He is not registered with the Commission in any capacity. Poor currently resides +in Montclair, New Jersey. + + 4. Federico Tovar, 50, served as Chief Financial Officer of Ideanomics from June 1, +2018, to April 30, 2019. Tovar currently resides in Edgewater, NJ. He is not registered with the +Commission in any capacity. + +OTHER RELEVANT INDIVIDUAL AND ENTITY + +5. Zheng (Bruno) Wu, 57, served as Chairman of the Board of Directors of +Ideanomics from January 12, 2016, to November 12, 2018, and from February 20, 2019, to +December 31, 2020. Wu also served as CEO of Ideanomics from October 9, 2017, to November +12, 2018. At all relevant times, Wu was also the Co-Chairman and CEO of privately held media +and investment company located in China, which was the largest investor and shareholder of +Ideanomics. Wu resides in China but is an American citizen with a residence in New York. He is +not registered with the Commission in any capacity. + +6. Beijing Financial Holdings Limited (f/k/a Tiger Sports Media Limited) is a Hong +Kong based entity, established in 2012. Its principal activity originally was the promotion of +mixed martial arts events. The entity had minimal operations from 2012 through August 2017, +when it was sold by an entity controlled by Wu to a business associate of Wu’s located in China +for approximately $15. Notwithstanding the formal change in ownership, Wu exercised control +over the company from 2017 through at least 2020. + +FACTS + +A. Background on Ideanomics + +7. Since its inception in 2004, Ideanomics has sought to engage in a variety of +business activities. From 2010 through 2017, Ideanomics’s primary line of business was providing +video-on-demand services under the brand name “You-on-Demand,” with its primary operations in +China. Starting in early 2017, the Company changed its name several times, first to “Wecast +Network, Inc.,” then to “Seven Stars Cloud Group, Inc.,” and finally to Ideanomics. It also +changed its business model several times, including attempting to develop petroleum trading +5 + + +products, artificial intelligence, and financial technology. In 2020, the Company pivoted to its +current business model, which is to assist businesses and governments transition their fleets from +gas to electric vehicles. + +8. At all relevant times, Ideanomics offered and sold securities, including by issuing +Ideanomics shares as compensation to certain employees, permitting employees to exercise stock +options, and by using Company shares to acquire assets. + +B. In November 2017, Ideanomics Issued False and Misleading Revenue +Guidance for Fiscal Year 2017 + +9. On November 13, 2017, Ideanomics issued a press release reporting its third quarter +revenue and reiterating the fiscal year 2017 revenue guidance of $300 million that it had stated in +press releases in March, May, and August 2017. In this press release, then-Chairman and CEO +Bruno Wu stated that Ideanomics was “on track to reach its top-line revenue guidance of $300 +million.” In a conference call with investors held on November 13, Wu reiterated that the +Company would meet the $300 million revenue forecast. + +10. In each of the two prior fiscal years 2015 and 2016, Ideanomics’s annual revenue +was approximately $4.6 million. In the November 13, 2017, press release Ideanomics reported $30 +million in revenue for the quarter, and a total of $107 million through the first three quarters of +2017. Thus, to meet the guidance, the Company would have needed to obtain an additional $193 +million in revenue in the fourth quarter of 2017, nearly double what it had achieved in the first +three quarters of the year combined. + +11. The vast majority of Ideanomics’s revenue in 2017 was projected to come from two +sources: (1) an electronics components trading business run through Ideanomics’s subsidiary Amer +Global Technology Ltd. (“Amer”), a Hong Kong company, and (2) a newly established crude oil +trading joint venture called Seven Stars Energy Pte. Ltd. (“SSE”), a Singapore company. At the +time Wu and the Company reiterated the $300 million forecast in November 2017, they were +aware of material adverse facts relating to each of these revenue sources that would potentially +prevent – and in fact did prevent – Ideanomics from achieving its revenue guidance. + +12. Specifically, as of November 2017, Amer was the only revenue-generating vehicle +for Ideanomics, as SSE had not yet begun operations. However, during the summer of 2017, +Amer’s bank accounts in Hong Kong and China had been frozen by governmental authorities, +which significantly limited Ideanomics’s ability to generate revenue from this business. Wu was +aware of the frozen Amer accounts prior to the issuance of the November 2017 press release and +knew that the freezing of the accounts had a material adverse effect on the Company’s revenue. + +13. In addition, at the time the November 2017 press release was issued, Wu and other +senior personnel at the Company were aware that there had been significant delays in setting up +SSE, the entity that was expected to earn much of the revenue in the third and fourth quarters of +2017. As a result of these delays, SSE had not begun to generate any revenue as of mid-November +2017. On November 10, 2017, just three days before the press release was issued, Wu sent a +WeChat message to Ideanomics board members and senior executives informing them that SSE’s +6 + + +bank accounts were still in the process of being set up and that the delays in setting up the joint +venture had “cost [the Company] dearly.” + +14. Moreover, in the days leading up to issuance of the November 2017 press release, +senior Ideanomics personnel had concerns about the revenue guidance. During a November 9, +2017, board meeting, senior personnel discussed the Company’s $300 million revenue guidance, +and the consensus of the board was to recommend to Wu that the guidance be lowered because of +the facts discussed above. Although Ideanomics’s President and Chief Revenue Officer advised +Wu that he did not believe the Company should issue guidance, Wu decided to keep the $300 +million guidance in place. + +15. Despite knowledge of the material adverse facts discussed above, which were not +disclosed to investors, Ideanomics and Wu reiterated the $300 million forecast in the November 13 +press release and conference call. In light of such knowledge, Wu knew or should have known that +Ideanomics’s and Wu’s November 13, 2017, statements were misleading because they omitted +material information indicating that Ideanomics would not achieve the $300 million revenue +forecast for 2017. + +16. Ultimately, on February 23, 2018, Ideanomics announced that it expected that it +would miss the guidance by a wide margin, resulting in a 39% decrease in the price of +Ideanomics’s stock. On March 30, 2018, the Company reported $144 million in revenue for 2017, +a shortfall of $156 million. + +C. Ideanomics Failed to Disclose and Improperly Accounted for Related Party +Transactions Involving Entities Controlled by Wu + +17. In October 2017, Ideanomics created a joint venture whose ownership was shared +amongst Tiger Sports Media Limited (“Tiger Sports”), Ideanomics, and a third-party, with interests +of 20%, 40% and 40% respectively (the “JV”). The JV was established to provide financial data +services and transactional trading platforms for global commodity and energy clients. +18. In December 2017, Ideanomics entered into an agreement with Tiger Sports in +which Ideanomics purchased Tiger Sports’ 20% interest in the JV for approximately $9.8 million, +comprised of $2 million in cash and three million Ideanomics shares valued at approximately $7.8 +million. Wu signed the agreement on behalf of Ideanomics and presented the Tiger Sports +transaction to Ideanomics’s Board of Directors for approval. +19. Ideanomics’s 2017 Form 10-K and 2018 Form 10-Q filings, which discussed +Ideanomics’s acquisition of Tiger Sports’ interest in the JV, failed to identify Tiger Sports as a +related party as required by U.S. GAAP. Additionally, Ideanomics’s 2018 and 2019 Form 10-K +filings, which also discussed Ideanomics’s acquisition of Tiger Sports’ interest in the JV, referred +to Tiger Sports as an unrelated party. Further, Ideanomics overstated the value of the acquired +20% interest in its June 30, 2018 Form 10-Q by failing to record an other than temporary loss in +value as required by U.S. GAAP. None of the JV partners had contributed the monetary capital to +the JV identified in the JV agreement. The JV had no legal rights to the intellectual property being +7 + + +developed. Wu signed Ideanomics’s 2017 Form 10-K and its Form 10-Qs for the first, second, and +third quarters of 2018. +20. Although Wu had nominally transferred his ownership interest in Tiger Sports to a +third party for $15 just prior to the creation of the joint venture, Wu continued to exercise control +over Tiger Sports. For example, under Wu’s direction, employees of another Wu-owned entity +maintained sole signature authority over Tiger Sports’ bank accounts and performed Tiger Sports’ +bookkeeping. Of the $2 million cash that Ideanomics paid to Tiger Sports pursuant to the +December 2017 transaction, more than $1 million was promptly transferred by Tiger Sports at +Wu’s direction and for his benefit, including to Wu’s associates, controlled entities and affiliates, +and creditors. Tiger Sports made additional payments to certain of Wu’s creditors from 2018 +through 2020. Moreover, Wu retained the voting rights over the Ideanomics shares transferred to +Tiger Sports and advised Tiger Sports to transfer some of these shares to investors in Wu’s private +businesses. + +21. In 2019, Tiger Sports changed its name to Beijing Financial. In March 2019, Wu +was substantively involved with a transaction on behalf of Ideanomics in which Ideanomics paid +Beijing Financial 12.2 million Ideanomics shares, valued at approximately $25 million, in +exchange for Beijing Financial’s interest in a Malaysian entity (the “March 2019 Transaction”). +Prior to Ideanomics’s announcement of the March 2019 Transaction, Wu had agreed to purchase +the interest in the Malaysian entity on behalf of Beijing Financial for less than $1 million. Once +again Ideanomics improperly failed to recognize the other than temporary decrease in value of its +investment purchased from Beijing Financial as required by U.S. GAAP when filing its Form 10-Q +for the third quarter of 2019 by failing to consider the fair value paid for the interest by Wu and +other relevant factors. + +22. Both before and after the March 2019 Transaction, Wu continued to exercise +control and influence over Beijing Financial. In addition, some of the proceeds from Beijing +Financial’s sale of Ideanomics shares went to pay Wu’s debt to various entities, including +consultants and lawyers who had provided services to Wu. + +23. Ideanomics’s 2019 Forms 10-K and 10-Q filings discussed the March 2019 +Transaction. Despite Wu’s continued control and significant influence over Beijing Financial, +Ideanomics failed to disclose it as a related party in its 2019 Form 10-K and Form 10-Q filings. As +Chairman of Ideanomics’s Board of Directors, Wu was responsible for providing accurate +information that was critical to the preparation of these filings, including details about the +transaction with Beijing Financial. However, Wu caused the filings to contain false information by +telling Ideanomics management that Beijing Financial was not a related party even though he knew +that it was under his control. + +24. Item 404(a) of Regulation S-K requires disclosure in Forms 10-K and proxy +statements of any transaction or series of transactions exceeding $120,000 in which the registrant is +a party and in which any director, executive officer, or any member of their immediate families has +a direct or indirect material interest. In its 2017, 2018 and 2019 proxy filings, which were filed on +December 14, 2018, December 13, 2019, and September 18, 2020, respectively, Ideanomics and +Wu failed to disclose Wu’s relationship with, and material direct and indirect benefit from, +8 + + +Ideanomics’s transactions with Tiger Sports and Beijing Financial, in contravention of Item 404(a) +of Regulation S-K. + +D. Ideanomics Misstated Its 2017 and 2018 Financial Statements Due to +Improper Accounting Treatment of Licensed Content Assets + +25. In November 2015, Ideanomics acquired the non-exclusive rights to broadcast a +catalog of video on-demand titles (the “Licensed Content”) from Wu’s private entity, Beijing Sun +Seven Stars Culture Development Ltd., in exchange for Ideanomics shares that were then valued at +$17.7 million. Over the next three years, the Licensed Content generated no more than $800,000 +in total revenue for Ideanomics. By December 31, 2017, Ideanomics was in the process of exiting +the Licensed Content business and no longer focused on generating revenue from the asset. + +26. In early March 2018, Ideanomics’s independent auditor informed the Company’s +Director of Finance of its view that the Licensed Content should be written off as impaired in the +year-end 2017 financial statement unless the Company could produce a signed letter of intent from +a qualified buyer. The Director of Finance promptly informed Wu of this view. Shortly thereafter, +Wu caused Ideanomics to provide the independent auditor with a purported letter of intent (the +“LOI”), indicating that a Canadian entity would purchase the Licensed Content, along with other +assets, for $32 million. + +27. In fact, the LOI was part of a fraudulent effort by Wu to avoid having to impair the +Licensed Content. On or about March 10, 2018, Wu contacted a Canadian business associate and +asked him to do him a favor and sign an LOI provided by Wu so that Ideanomics would not have +to impair the Licensed Content. Wu told the associate that the LOI should come from a shell +company unrelated to Wu. Wu reassured the business associate that the LOI would be non- +binding, provided him with the draft of the LOI, and determined the $32 million price. Wu was +aware that the purported purchaser of the Licensed Content was a shell company that did not have +any assets, that the business associate did not know specifically which assets were involved, and +that the purchaser had not conducted any due diligence. The business associate returned a signed +LOI to Wu, who subsequently caused it to be provided to Ideanomics’s independent auditor. + +28. In its financial statement for the year-end 2017, Ideanomics valued the Licensed +Content at $17.0 million, when under U.S. GAAP, it should have been written down to its fair +value of $0. In accordance with U.S. GAAP, the Company should have tested the asset for +recoverability when indicators of impairment existed, such as a lack of revenue from the asset and +the Company’s decision to move away from that line of business. Once deemed non-recoverable, +the Company should have written down the asset to its fair value of $0 at least as of December 31, +2017. As CEO, Wu signed Ideanomics’s 10-K for 2017, which falsely understated Ideanomics’s +operating loss and overstated its assets by approximately $17 million. This amount represented +62% of Ideanomics’s year-end 2017 operating loss and 27% of Ideanomics’s year-end 2017 total +assets. When he signed the filing, Wu knew, or was reckless in not knowing, that the financial +statements were false. + +9 + + +29. In June 2018, Federico Tovar joined Ideanomics as CFO. In that role, Tovar had +responsibility for the financial accuracy of the Company’s second quarter, third quarter, and year- +end 2018 financial statements. + +30. Soon after joining the Company, Tovar learned that Ideanomics received little to no +revenue from the Licensed Content, which indicated that the Licensed Content might not be +recoverable. Tovar knew that U.S. GAAP stated the asset should be tested for recoverability when +indicators of impairment existed, yet he failed to do this in either the second or third quarter of +2018. Additionally, although Tovar received a copy of the LOI in June 2018, he was aware that +the proposed acquisition still had not occurred as of the date of each of the Company’s quarterly +filings for the second and third quarters of 2018, filed on August 13, 2018, and November 14, +2018, respectively. + +31. For year-end 2018, Tovar commissioned a valuation report of the Licensed Content +in connection with its impairment assessment. In preparing its valuation, the valuation firm relied +upon a new cash flow forecast provided to it by Ideanomics. However, the cash flow forecast, +which projected twenty years’ worth of significant revenue from the Licensed Content, was +unsupported as Ideanomics had no substantive business plan to achieve the projected revenues. +Tovar failed to obtain an understanding of how Ideanomics’s cash flow forecasts were prepared, +despite knowing that the Company had reported material weaknesses in its ICFR in 2017 and 2018 +related to cash flow forecasts for the Licensed Content. The Company then relied upon this +valuation report to conclude that there was no impairment to the Licensed Content for year-end +2018. + +32. As a result of the false LOI and the failure to test and impair the Licensed Content +throughout 2018, Ideanomics’s financial statements for the first, second, and third quarters of +2018, and year-end of 2018, all were materially misstated. Specifically, each financial statement +overstated Ideanomics’s total assets by approximately $17 million or over 10%. As CFO, Tovar +signed the 2018 Form 10-K and Form 10-Qs for the second and third quarters. Tovar knew or +should have known that the financial statements in those public filings were false. + +33. Wu signed management representation letters that Ideanomics provided to its +independent auditor in connection with the year-end 2017 audit and its reviews of the first three +quarters of 2018. Those letters represented that the LOI had been provided by a third party +interested in buying the Licensed Content, and that the potential buyer was qualified to close the +deal. These representations were false and misleading, as the purported buyer had no intent to +purchase the Licensed Content and, since it had no assets or operations, was not qualified to close +the deal. Wu knew, or was reckless in not knowing, that the letters were false, and that the +independent auditor would rely upon the LOI and his letters of representation in assessing the +value of the Licensed Content and whether it should be impaired. + +34. In connection with the independent auditor’s quarterly reviews for the second and +third quarters of 2018, relying on Wu, Tovar signed management representation letters +representing to Ideanomics’s independent auditor that the LOI was from a third-party buyer +interested and qualified to make the purchase, and that the LOI, along with a valuation report +prepared by a third-party firm, provided support for the Company’s decision not to impair the +10 + + +Licensed Content. However, Tovar did not conduct any diligence to verify that the buyer was +interested and qualified. Tovar knew or should have known that the statements in the management +representation letters were false. + +E. Ideanomics Overstated Its 2018 Revenue by 220% Based on Improper +Treatment of Oil Trading Revenue + +35. As discussed above, SSE began operations in November 2017. Ideanomics’s 49% +minority partner in SSE was an experienced crude oil trader who owned several oil tankers through +his private companies. Ideanomics’s role was to purchase crude oil from the minority partner and +simultaneously record a sale at substantially the same price to buyers located in Asia. Ideanomics +never took physical possession of the crude oil, nor did it handle the financing for the purchase or +the transportation of the oil. Further, Ideanomics’s 2018 Form 10-K stated that SSE did not enter +the oil trading business to generate profits, but rather to learn the business in order to develop an +artificial intelligence (“AI”) and blockchain-enabled platform for logistics management. +Ideanomics exited the oil trading business in the fourth quarter of 2018. + +36. The proper accounting treatment of Ideanomics’s 2018 oil trading revenue is +governed by U.S. GAAP standard ASC 606 “Revenue from Contracts with Customers.” Under +ASC 606, factors such as primary responsibility for providing goods and services, inventory risk, +and price discretion are considered when determining if an entity is acting as a principal or agent in +the transaction. ASC 606 specifically states, “An entity does not necessarily control a specified +good if the entity obtains legal title to that good only momentarily before legal title is transferred to +a customer.” Ideanomics had neither inventory risk nor price discretion because it purchased and +sold inventory simultaneously and set the customer price of oil at substantially the same price +charged by its supplier and did not have other evidence that would support a conclusion that it +acted as a principal. Therefore, Ideanomics acted as an agent rather than a principal with regard to +the oil trading transactions. + +37. Under U.S. GAAP, a principal recognizes revenue on a gross basis, but an agent +should recognize revenue on a net basis. Ideanomics, as an agent and not a principal in the oil +trading transactions, should have deducted the cost of oil purchases from the sales amounts and +reported revenue on a net basis. +38. However, for year-end 2018, Ideanomics recognized the oil trading revenue on a +gross basis, determining that Ideanomics was a principal in the transactions. On this improper +basis, Ideanomics reported oil trading revenue of $260 million, which constituted 67% of +Ideanomics’s total revenue for that year, when it should have reported $0 since it earned no net +revenue on these transactions. + +39. As a result of its improper accounting, Ideanomics overstated its 2018 revenue by +$260 million, or 220%. Ideanomics also overstated its revenue in its Form 10-Qs for the first +quarter of 2018 by $178 million (2,292%) and second quarter of 2018 by $81.9 million (160%). + +40. Despite his role as CFO and responsibility for the accuracy of Ideanomics’s +financial statements, Tovar failed to take additional steps sufficient to understand the specific role +11 + + +of Ideanomics’s joint venture partner in the pricing, purchase, financing, and delivery of oil, and +how its role impacted the agent versus principal considerations under ASC 606. Additionally, +Tovar was made aware in 2018 that Ideanomics’s former independent auditor had raised concerns +the previous year about the recognition of revenue relating to the oil trading business and wanted to +perform additional audit procedures. + +41. Nevertheless, Tovar signed multiple management representation letters stating that +the 2018 financial statements were in accordance with U.S. GAAP and signed the Form 10-Qs for +the second and third quarters of 2018 and the 2018 Form 10-K. Tovar knew or should have known +that the financial statements were not prepared in accordance with U.S. GAAP and that the revenue +was improperly stated in Ideanomics’s financial statements and public filings. + +F. Ideanomics Made Material Misstatements Regarding Its Internal Control +Over Financial Reporting for 2018 + +42. Ideanomics made material misstatements in its 2018 Form 10-K regarding the +company’s assessments of its internal control over financial reporting (“ICFR”). First, +Ideanomics’s Form 10-K represented that “management assessed the effectiveness of ICFR,” and +that “management used the framework set forth” under the 2013 framework of the Committee of +Sponsoring Organizations (COSO). Tovar signed the 2018 Form 10-K and accompanying +certifications as CFO, and Poor signed the 2018 Form 10-K and certifications as CEO. Poor and +Tovar signed certifications to Ideanomics’s 2018 Form 10-K, which stated that the signers +“disclosed, based on our most recent evaluation of internal control over financial reporting, to the . +. . registrant’s auditors and the audit committee of the registrant’s board of directors (or persons +performing the equivalent functions)…1) All significant deficiencies and material weaknesses … +b) Any fraud, whether or not material, that involves management …” + +43. Ideanomics did not attempt to assess the effectiveness of ICFR until October 2018 +at the earliest when Tovar assigned the responsibility of assessing the effectiveness of ICFR to +Ideanomics’s Corporate Controller. However, even after the Corporate Controller was assigned +this responsibility, she did not identify or test key controls, as she believed that Tovar had +responsibility for those areas. + +44. At the time he signed the 2018 Form 10-K and certification on April 1, 2019, Tovar +knew or should have known that the filing was inaccurate and the evaluation of ICFR was +incomplete. + +45. Poor became familiar with the accounting and record-keeping problems at +Ideanomics when he became CEO in February 2019. In his view, the record-keeping done for +Ideanomics, which included tracking the source of all 2018 revenue through a series of Excel +spreadsheets, was not appropriate for a public company. Nevertheless, he signed Ideanomics’s +2018 Form 10-K which represented that Ideanomics management had evaluated the effectiveness +of ICFR, relying solely on his belief that Tovar and the Company’s audit committee had performed +an evaluation of ICFR. As the Company’s CEO with responsibility over ICFR, Poor should have +conducted more diligence than relying on Tovar and the audit committee’s representations, +especially in light of the known weaknesses in the Company’s accounting and record-keeping. As +12 + + +a result, Poor knew or should have known that disclosures stating that management had assessed +the effectiveness of ICFR in the 2018 Form 10-K were false. + +G. Ideanomics’s Financial Statements for the First and Second Quarters of 2019 +were Materially Misstated Due to Improper Accounting for the Counterparty +A Transaction + +46. In March 2019, Ideanomics entered into an agreement with Counterparty A. +Created as a digital technology company in 2014, Counterparty A launched a crypto token shortly +before its agreement with Ideanomics. At the time it entered into its agreement with Ideanomics, +the two were related parties because Counterparty A was a minority shareholder of Ideanomics. + +47. The March 2019 agreement, signed by Wu on behalf of Ideanomics, provided that +Ideanomics would assist Counterparty A in developing and marketing its token on an exclusive +basis for three years. In exchange, Counterparty A would pay Ideanomics 7,083,333 tokens in +advance. The contract stipulated a token value of $24 per token for a purported total contract value +of $170 million. The contract also provided that Ideanomics would receive an annual service fee +equal to 3% of the market value of all tokens. Ideanomics claimed in a March 2019 press release +that the total market value of tokens was over $90 billion, and therefore the 3% annual service fee +would generate $2.7 billion of annual revenue for the Company. + +48. After the agreement was signed, Ideanomics devised a plan to change the terms of +the agreement to allow for accelerated revenue recognition as opposed to deferred revenue over +time. Pursuant to U.S. GAAP, the type of contractual services provided over the three-year +consulting period would generally be recognized ratably over this period, as such services are +performed. + +49. To accelerate the revenue, Tovar suggested defining some initial services that could +be provided on day one. As a result, Poor, with Tovar and Wu’s knowledge, sent Counterparty A a +supplemental agreement that stated consulting, advisory and management services had been +provided to Counterparty A’s satisfaction. Ideanomics planned to recognize the entirety of the +contract’s stipulated $170 million value as revenue in the first quarter of 2019. + +50. Shortly thereafter, Ideanomics’s tax advisor informed Ideanomics management that +this revenue would trigger a corresponding tax liability of $38.7 million, payable in cash, even +though the crypto tokens received in payment were not readily convertible to cash. This proved +problematic for Ideanomics because as of December 31, 2018, the Company only had +approximately $3.1 million in cash on its balance sheet. + +51. Upon learning of the potential tax liability, Wu instructed Ideanomics management, +including Poor and Tovar, to restructure the deal. On April 20, 2019, after speaking with Wu, the +corporate controller wrote to Poor and Tovar, “[Wu] wants to lower the total revenue in Q1 to +offset our NOL (tax net operating loss), so we do not need to pay any taxes.” Ideanomics’s NOL +for 2018 was approximately $38 million. Ultimately, through consultation with its tax and +13 + + +accounting advisors, Ideanomics management determined to discount the value of the tokens that +Ideanomics had received from Counterparty A. + +52. To calculate the discount, at the recommendation of independent accounting +advisers, a put option pricing model was used to determine the appropriate discount rate, whereby +such a model would account for the lack of token marketability as the tokens were not widely +traded. Such a model would also account for the token’s volatility, as volatility was an input into +the model. + +53. Through this approach, Ideanomics manipulated the revenue from its services +agreement to recognize as much revenue as it could without incurring any tax liability. On April +29, 2019, three days prior to the filing of the Form 10-Q for the first quarter of 2019, Wu told +Tovar that the Company should book profit from Counterparty A of $20 million and $18 million, +respectively, in the first and second quarters of 2019, to offset the $38 million tax loss +carryforward. He further told Tovar that “all you needed to do is to adjust the discount to the +tokens,” and that he “listen[ed] too much to professionals who do not really know [the] company. . +.” Wu then left Tovar a voice message in which he told him not to book exactly $20 million profit +in the first quarter, but rather to book $19.8 million and leave the remainder for the second quarter. +Tovar replied by telling Wu that the Company could adopt a scenario in which pre-tax profit would +be $19.8 million. Tovar knew or should have known that the pre-tax profit number was +manipulated, yet he then sent a memo to Ideanomics’s corporate controller that included an amount +in revenue from the Counterparty A transaction that would result in the $19.8 million pre-tax profit +that Wu and Tovar had discussed. Tovar resigned prior to the filing of the Form 10-Q, but the +numbers he provided to the corporate controller were incorporated into the filing. On May 2, +2019, the Company reported the $19.8 million pre-tax profit, which was fully offset by +Ideanomics’s tax loss carryforward. + +54. In assessing the fair value of the crypto tokens for purposes of recognizing revenue, +Ideanomics assumed it could successfully convert the tokens into fiat currency. Ideanomics, +however, never obtained the crypto keys for the wallet in which its tokens were held, without +which Ideanomics could not convert its tokens into fiat. Poor knew the tokens were held in a +wallet owned by Counterparty A and not by Ideanomics. Accordingly, Poor knew or should have +known that Ideanomics lacked the current ability to successfully convert the tokens to fiat. + +55. Despite the Company’s difficulty obtaining ownership of the tokens and effecting +conversion, in the earnings call for the second quarter of 2019, Poor stated that Ideanomics planned +to convert the tokens to fiat in the second half of the year and told investors that he did not foresee +any problems in making the tokens tangible assets. Ideanomics was never successful in obtaining +access to the wallet or in converting any of its tokens. Without Ideanomics having the ability to +convert the tokens to fiat, they had little or no value. + +56. By engaging in the conduct described above, Ideanomics materially overstated the +revenue reported in its financial statements for the first and second quarters of 2019 by $40.7 +million. Poor signed both filings as CEO and knew, or should have known, that the revenue was +overstated because he knew that Ideanomics lacked the ability to convert the tokens to fiat. Poor +also signed multiple auditor representation letters representing that the Counterparty A transaction +14 + + +was properly accounted for and disclosed. Eventually, in the fourth quarter of 2019, Ideanomics +fully impaired the carrying value of its tokens. + +H. Ideanomics Filed the False Certification of Interim CFO Carla Zhou + +57. Ideanomics’s Form 10-Q for the second quarter of 2019 identified Carla Zhou as +the Company’s interim CFO, and Zhou purportedly signed the filing and two attached SOX +certifications as interim CFO. Among other things, those certifications stated that Zhou had +reviewed the quarterly report, that the report did not contain any untrue statement of a material +fact, and that the report fairly presented the financial condition and results of operations of +Ideanomics. + +58. In fact, Zhou had not reviewed the Form 10-Q or its attachments prior to the filing. +Shortly before filing, Poor realized that the Company’s then-interim CFO would be unable to +review and sign the Form 10-Q because she was on maternity leave. Poor contacted Wu and asked +whether Zhou, who had been the chief revenue officer for Ideanomics and financial controller of +one of Wu’s privately-owned entities, could act as interim CFO for purposes of the filing. Wu +represented to Poor that she would do so. However, Poor knew that Zhou could not speak or read +English. + +59. Shortly thereafter, the Company filed the Form 10-Q, without having sent it to +Zhou for her review and signature. Poor did not confirm with Zhou that she had reviewed and +approved the Form 10-Q before it was filed. Poor knew or should have known that the +certifications purportedly signed by Zhou were inaccurate and that Zhou did not have a chance to +review and approve of the Form 10-Q before it was filed. + +VIOLATIONS + +60. Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5 prohibits, in +connection with the purchase or sale of any security, the use of any “device, scheme, or artifice to +defraud, ” “[mak]ing any untrue statement of a material fact or [omission of] a material fact +necessary in order to make the statements made, in the light of the circumstances under which they +were made, not misleading,” and any “act, practice or course of business which operates or would +operate as a fraud or deceit upon any person.” As a result of conduct described above, Ideanomics +violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + +61. Section 17(a)(1) of the Securities Act prohibits “any device, scheme, or artifice to +defraud” in the offer or sale of securities. As a result of conduct described above, Ideanomics +violated Section 17(a)(1) of the Securities Act. + +62. Section 17(a)(2) of the Securities Act prohibits any person from directly or +indirectly obtaining money or property in the offer or sale of securities by means of any untrue +statement of a material fact or any omission to state a material fact necessary in order to make the +statements made, in light of the circumstances under which they were made, not misleading. +Negligence is sufficient for liability under Section 17(a)(2). As a result of conduct described +15 + + +above, Ideanomics violated, and Poor and Tovar caused Ideanomics’s violation of, Section +17(a)(2). + +63. Section 17(a)(3) of the Securities Act prohibits any person from directly or +indirectly engaging in any transaction, practice, or course of business which operates or would +operate as a fraud or deceit upon the purchaser in the offer or sale of securities. Negligence is +sufficient for liability under Section 17(a)(3). As a result of conduct described above, Ideanomics +and Poor violated, Tovar willfully violated,5 and Poor and Tovar caused Ideanomics’s violation of, +Section 17(a)(3). + +64. Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 +promulgated thereunder, require public issuers to file annual and quarterly reports with the +Commission, and mandate that such reports contain such further material information necessary to +make the required statements not misleading. As a result of conduct described above, Ideanomics +violated, and Poor and Tovar caused Ideanomics’s violations of Section 13(a) of the Exchange Act +and Rules 13a-1, 13a-13, and 12b-20 thereunder. + +65. Section 13(b)(2)(A) of the Exchange Act requires reporting companies to make and +keep books, records and accounts which, in reasonable detail, accurately and fairly reflect their +transactions and dispositions of their assets. As a result of conduct described above, Ideanomics +violated, and Poor and Tovar caused Ideanomics’s violation of Section 13(b)(2)(A) of the +Exchange Act. + +66. Section 13(b)(2)(B) of the Exchange Act requires reporting companies to devise +and maintain a system of internal accounting controls sufficient, among other things, to permit +preparation of financial statements in conformity with U.S. GAAP or any other criteria applicable +to such statements. Exchange Act Rules 13a-15(a) and (c) require issuers to maintain and evaluate +the effectiveness of internal control over financial reporting. As a result of conduct described +above, Ideanomics violated, and Poor and Tovar caused Ideanomics’s violation of, Section +13(b)(2)(B) of the Exchange Act and Exchange Act Rules 13a-15(a) and (c). + +67. Section 14(a) of the Exchange Act makes it unlawful for any person to solicit any +proxy with respect to any security registered pursuant to Section 12 of the Exchange Act in +violation of Commission rules and regulations. Rule 14a-9 prohibits the use of proxy statements +containing materially false or misleading statements or materially misleading omissions. As a +result of conduct described above, Ideanomics violated Section 14(a) of the Exchange Act and +Rule 14a-9 thereunder. + + +5 “Willfully,” for purposes of imposing relief under Exchange Act Section 4C and Rule 102(e)(1)(iii), +“‘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). The decision in The Robare Group, Ltd. v. SEC, which construed the term “willfully” for purposes of a +differently structured statutory provision, does not alter that standard. 922 F.3d 468, 478-79 (D.C. Cir. 2019) +(setting forth the showing required to establish that a person has “willfully omit[ted ]” material information from a +required disclosure in violation of Section 207 of the Advisers Act). +16 + + +68. 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). As a result of conduct described above, Poor violated, and Tovar +willfully violated, Rule 13b2-1. + +69. Rule 13b2-2 under the Exchange Act prohibits officers and directors from making +(or causing to be made) materially false or misleading statements to an accountant in connection +with any audit, review, or examination of a company’s financial statements or in connection with +the preparation or filing of any document with the Commission. As a result of conduct described +above, Poor violated, and Tovar willfully violated, Rule 13b2-2. + +70. Rule 13a-14 under the Exchange Act provides that an issuer’s annual and quarterly +reports shall include certain certifications signed by the principal executive and principal financial +officer of the issuer. As a result of conduct described above, Poor violated, and Tovar willfully +violated, Rule 13a-14. + +FINDINGS + +71. Based on the foregoing, the Commission finds that Ideanomics violated Section +17(a) of the Securities Act and Sections 10(b), 13(a), 14(a), 13(b)(2)(A) and 13(b)(2)(B) of the +Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13a-15(a), 13a-15(c), and 14a-9 +thereunder. + +72. Based on the foregoing, the Commission finds that Poor violated Section 17(a)(3) +of the Securities Act; Exchange Act Rules 13a-14, 13b2-1, and 13b2-2; and caused Ideanomics’s +violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act; Sections 13(a), 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 13a-15(a), and 13a-15(c) +thereunder. + +73. Based on the foregoing, the Commission finds that Tovar willfully violated Section +17(a)(3) of the Securities Act; Exchange Act Rules 13a-14, 13b2-1, and 13b2-2; and caused +Ideanomics’s violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act; Sections 13(a), +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 13a-15(a), and +13a-15(c) thereunder. + +UNDERTAKINGS + +Respondent Ideanomics has undertaken to: + +74. Retain, within ninety (90) days of the date of entry of the Order, at its own expense, +a qualified independent consultant (the “Consultant”) not unacceptable to the Commission staff, to +review Respondent’s internal accounting controls and internal control over financial reporting. The +Consultant’s review and evaluation shall include an assessment of the following: + +a. the sufficiency of Ideanomics’s internal accounting controls in light of +Ideanomics’s business strategy. The review shall include, but not be limited to, a review of +17 + + +Ideanomics’s policies, procedures, and controls, relating to (i) revenue recognition and (ii) +the assessment and testing of assets for impairment; + +b. Ideanomics’s compliance with Commission requirements related to internal +control over financial reporting, including but not limited to, the adequacy of Respondent +Ideanomics’s control environment and risk assessment based upon criteria established in +the Internal Control – Integrated Framework (2013) by the Committee of Sponsoring +Organizations of the Treadway Commission (“COSO”); + + c. Ideanomics’s employment of a sufficient number of accounting and finance +personnel with an understanding of U.S. GAAP and financial reporting requirements, as +well as the reporting lines of accounting and finance personnel to management and the +Board of Directors; and + +d. Ideanomics’s training of its employees on matters related to U.S. GAAP as +well as financial reporting requirements. + +75. Provide, within 105 days of the issuance of this Order, a copy of the engagement +letter detailing the Consultant’s responsibilities to Stacy Bogert, Associate Director, Division of +Enforcement, Securities and Exchange Commission, 100 F Street, N.E., Washington, DC 20549. + +76. Require the Consultant, at the conclusion of the review, which in no event shall be +more than 180 days after the entry of the Order, to submit a report of the Consultant to the +Respondent Ideanomics and the Commission staff. The report shall address the Consultant’s +findings and shall include a description of the review performed, the conclusions reached, and the +Consultant’s recommendations for changes or improvements. + +77. Adopt, implement, and maintain all policies, procedures and practices +recommended in the report of the Consultant within 120 days of receiving the report from the +Consultant. As to any of the Consultant’s recommendations about which the Respondent +Ideanomics and the Consultant do not agree, such parties shall attempt in good faith to reach +agreement within 180 days of the date of the entry of the Order. In the event that the Respondent +Ideanomics and the Consultant are unable to agree on an alternative proposal, the Respondent +Ideanomics will abide by the determination of the Consultant and adopt those recommendations +deemed appropriate by the Consultant. + +78. Cooperate fully with the Consultant in its review, including making such +information and documents available as the Consultant may reasonably request, and by permitting +and requiring the Respondent Ideanomics’s employees and agents to supply such information and +documents as the Consultant may reasonably request, subject to any applicable privilege. + +79. To ensure the independence of the Consultant, the Respondent Ideanomics (i) shall +not have received legal, auditing, or other services from, or have had any affiliations with, the +Consultant during the two years prior to the issuance of this Order; (ii) shall not have the authority +to terminate the Consultant without prior written approval of the Commission staff; and (iii) shall +18 + + +compensate the Consultant for services rendered pursuant to the Order at their reasonable and +customary rates. + +80. Require the Consultant to enter into an agreement that provides that for the period +of engagement and for a period of two years from completion of the engagement, the Consultant +shall not enter into any employment, consultant, attorney-client, auditing or other professional +relationship with Respondent Ideanomics, 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 Commission staff, enter into any +employment, consultant, attorney-client, auditing or other professional relationship with +Respondent Ideanomics, 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. + +81. The reports by the Consultant 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 objectives of +the reporting requirement. For these reasons, among others, the reports and the contents thereof +are intended to remain and shall remain non-public, except (1) pursuant to court order, (2) as +agreed to by the parties in writing, (3) to the extent that the Commission determines in its sole +discretion that disclosure would be in furtherance of the Commission’s discharge of its duties and +responsibilities, or (4) as otherwise required by law. + +82. Require the Consultant to report to the Commission staff on its activities as the staff +may request. + +83. Respondent Ideanomics agrees that the Commission staff may extend any of the +dates set forth above at its discretion. + +84. 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 request for further evidence of compliance, and the Respondent agrees +to provide such evidence. The certification and reporting material shall be submitted to Stacy +Bogert, Associate Director, Division of Enforcement, Securities and Exchange Commission, 100 F +Street, N.E., Washington, DC 20549, with a copy to the Office of the Chief Counsel of the +Division of Enforcement, no later than thirty (30) days from the date of the completion of the +undertakings. + +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. + +19 + + +Accordingly, pursuant to Section 8A of the Securities Act, Sections 4C and 21C of the +Exchange Act, and Rule 102(e) of the Commission’s Rules of Practice, it is hereby ORDERED +that: + + A. Respondent Ideanomics 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 (B), and 14(a) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13a- +15(a) and (c), and 14a-9 thereunder. + + B. Respondents Poor and Tovar 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 (B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-13, 13a-14, 13a- +15(a) and (c), 13b2-1, and 13b2-2 thereunder. + + C. Respondent Ideanomics shall comply with the undertakings enumerated in +Paragraphs 74-84 above. + + D. Respondent Ideanomics shall pay civil penalties of $1,400,000 to the Securities and +Exchange Commission. Payment shall be made in the following installments: + + $280,000 shall be paid by September 5, 2024; + An additional $102,000 shall be paid by October 15, 2024; + An additional $102,000 shall be paid by November 15, 2024; + An additional $102,000 shall be paid by December 15, 2024; + An additional $102,000 shall be paid by January 15, 2025; + An additional $102,000 shall be paid by February 15, 2025; + An additional $102,000 shall be paid by March 15, 2025; + An additional $102,000 shall be paid by April 15, 2025; + An additional $102,000 shall be paid by May 15, 2025; + An additional $102,000 shall be paid by June 15, 2025; + An additional $102,000 shall be paid by July 15, 2025; +An additional $100,000, plus all accrued interest, shall be paid within 365 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 Ideanomics shall contact the +staff of the Commission for the amount due. If Respondent Ideanomics 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. + + E. Respondent Poor shall pay civil penalties of $75,000 to the Securities and Exchange +Commission. Payment shall be made in the following installments: + + $20,000 shall be paid within 30 days of the entry of this Order; +20 + + + An additional $5,000 shall be paid by October 15, 2024; + An additional $5,000 shall be paid by November 15, 2024; + An additional $5,000 shall be paid by December 15, 2024; + An additional $5,000 shall be paid by January 15, 2025; + An additional $5,000 shall be paid by February 15, 2025; + An additional $5,000 shall be paid by March 15, 2025; + An additional $5,000 shall be paid by April 15, 2025; + An additional $5,000 shall be paid by May 15, 2025; + An additional $5,000 shall be paid by June 15, 2025; + An additional $5,000 shall be paid by July 15, 2025; +An additional $5,000, plus all accrued interest, shall be paid within 365 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 Poor shall contact the staff of +the Commission for the amount due. If Respondent Poor 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. Respondent Tovar shall pay civil penalties of $75,000 to the Securities and +Exchange Commission. Payment shall be made in the following installments: + + $30,000 shall be paid within 30 days of the entry of this Order; + An additional $7,500 shall be paid within 180 days of the entry of this Order; + An additional $7,500 shall be paid within 270 days of the entry of this Order; and + An additional $30,000, plus all accrued interest, shall be paid within 365 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 Tovar shall contact the staff +of the Commission for the amount due. If Respondent Tovar 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. + +G. 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 +21 + + + +(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 +Ideanomics, Alfred Poor, or Federico Tovar 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 +Stacy Bogert, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + +H. Monies paid in this proceeding may be combined with any other Distribution Fund +or Fair Fund in a related proceeding arising out of the same underlying facts, including but not +limited to, the related action captioned In the Matter of Zheng (Bruno) Wu, for the purposes of +distribution, if feasible, to harmed investors. + +I. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for the penalties referenced in Paragraph IV.D. through IV.F., above. Amounts ordered to be paid +as civil money penalties pursuant to this Order shall be treated as penalties paid to the government +for all purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +each Respondents agrees that in any Related Investor Action, they shall not argue that they are +entitled to, nor shall they benefit by, offset or reduction of any award of compensatory damages by +the amount of any part of any Respondents’ payments of a civil penalty in this action (“Penalty +Offset”). If the court in any Related Investor Action grants such a Penalty Offset, each Respondent +agrees to, within 30 days after entry of a final order granting the Penalty Offset, notify the +Commission's counsel in this action and pay the amount of the Penalty Offset to the Securities and +Exchange Commission. Such a payment shall not be deemed an additional civil penalty and shall +not be deemed to change the amount of the civil penalty imposed in this proceeding. For purposes +of this paragraph, a "Related Investor Action" means a private damages action brought against any +Respondent by or on behalf of one or more investors based on substantially the same facts as +alleged in the Order instituted by the Commission in this proceeding. + +J. Respondent Tovar is denied the privilege of appearing or practicing before the +Commission as an accountant. + +K. After two years from the date of the Order, Respondent Tovar may request that the +Commission consider his reinstatement by submitting an application to the attention of the Office +of the Chief Accountant. + +22 + + +L. In support of any application for reinstatement to appear and practice before the +Commission as a preparer or reviewer, or a person responsible for the preparation or review, of +financial statements of a public company to be filed with the Commission, other than as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Exchange Act, Respondent +Tovar shall submit a written statement attesting to an undertaking to have Respondent’s work +reviewed by the independent audit committee of any public company for which Respondent works +or in some other manner acceptable to the Commission, as long as Respondent practices before the +Commission in this capacity and will comply with any Commission or other requirements related +to the appearance and practice before the Commission as an accountant. + + M. In support of any application for reinstatement to appear and practice before the +Commission as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Exchange Act, as a preparer or reviewer, or as a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission, Respondent +Tovar shall submit a statement prepared by the audit committee(s) with which Respondent Tovar +will be associated, including the following information: + +1. A summary of the responsibilities and duties of the specific audit committee(s) +with which Respondent Tovar will be associated; + +2. A description of Respondent Tovar’s role on the specific audit committee(s) +with which Respondent Tovar will be associated; + +3. A description of any policies, procedures, or controls designed to mitigate any +potential risk to the Commission by such service; + +4. A description relating to the necessity of Respondent Tovar’s service on the +specific audit committee; and + +5. A statement noting whether Respondent Tovar will be able to act unilaterally on +behalf of the Audit Committee as a whole. + + N. In support of any application for reinstatement to appear and practice before the +Commission as an independent accountant (auditor) before the Commission, Respondent Tovar +must be associated with a public accounting firm registered with the Public Company Accounting +Oversight Board (the “PCAOB”) and Respondent Tovar shall submit the following additional +information: + +1. A statement from the public accounting firm (the “Firm”) with which +Respondent Tovar is associated, stating that the firm is registered with the +PCAOB in accordance with the Sarbanes-Oxley Act of 2002; + +2. A statement from the Firm with which the Respondent Tovar is associated that +the Firm has been inspected by the PCAOB and that the PCAOB did not +identify any criticisms of or potential defects in the Firm’s quality control +23 + + +system that would indicate that Respondent Tovar will not receive appropriate +supervision; and + +3. A statement from Respondent Tovar indicating that the PCAOB has taken no +disciplinary actions against Respondent Tovar since seven (7) years prior to the +date of the Order other than for the conduct that was the basis for the Order. + +O. If Respondent Tovar is licensed as a certified public accountant (“CPA”), then in +support of any application for reinstatement, Respondent Tovar shall provide documentation +showing that Respondent Tovar’s license is current and that Respondent Tovar has resolved all +other disciplinary issues with any applicable state boards of accountancy. If Respondent Tovar’s +CPA licensure is dependent upon reinstatement by the Commission, then Respondent Tovar shall +provide documents reflecting this requirement. If Respondent Tovar has never been licensed as a +CPA, then Respondent Tovar shall submit a signed affidavit truthfully stating under penalty of +perjury that Respondent Tovar has never been licensed as a CPA. + +P. In support of any application for reinstatement, Respondent Tovar shall also submit +a signed affidavit truthfully stating, under penalty of perjury: + +1. That Respondent Tovar has complied with the Commission suspension Order, +and with any related orders and undertakings, including any orders in this +proceeding, or any related Commission proceedings, including any orders +requiring payment of disgorgement or penalties; + +2. That Respondent Tovar undertakes to notify the Commission immediately in +writing if any information submitted in support of the application for +reinstatement becomes materially false or misleading or otherwise changes in +any material way while the application is pending; + +3. That Respondent Tovar, since the entry of the Order, has not been convicted of +a felony or a misdemeanor involving moral turpitude that would constitute a +basis for a forthwith suspension from appearing or practicing before the +Commission pursuant to Rule 102(e)(2); + +4. That Respondent Tovar, since the entry of the Order: + +(a) has not been charged with a felony or a misdemeanor involving +moral turpitude as set forth in Rule 102(e)(2) of the +Commission’s Rules of Practice, except for any charge +concerning the conduct that was the basis for the Order; + +(b) has not been found by the Commission or a court of the United +States to have committed a violation of the federal securities +laws, and has not been enjoined from violating the federal +securities laws, except for any finding or injunction concerning +the conduct that was the basis for the Order; +24 + + + +(c) has not been charged by the Commission or the United States +with a violation of the federal securities laws, except for any +charge concerning the conduct that was the basis for the Order; + +(d) has not been found by a court of the United States (or any +agency of the United States) or any state, territory, district, +commonwealth, or possession, or any bar thereof to have +committed an offense (civil or criminal) involving moral +turpitude, except for any finding concerning the conduct that +was the basis for the Order; and + +(e) has not been charged by the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, civilly or criminally, with having committed an act +of moral turpitude, except for any charge concerning the conduct +that was the basis for the Order. + +5. That Respondent Tovar’s conduct is not at issue in any pending +investigation of the Commission’s Division of Enforcement, the PCAOB’s +Division of Enforcement and Investigations, any criminal law enforcement +investigation, or any pending proceeding of a State Board of Accountancy, +except to the extent that such conduct concerns that which was the basis for +the Order. + +6. That Respondent Tovar has complied with any and all orders, undertakings, +or other remedial, disciplinary, or punitive sanctions resulting from any +action taken by any State Board of Accountancy, or other regulatory body. + +Q. Respondent Tovar shall also provide a detailed description of: + +1. Respondent Tovar’s professional history since the imposition of the Order, +including: + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for +entities regulated by the Commission, and the persons to whom +Respondent reported for such work; and + +2. Respondent Tovar’s plans for any future appearance or practice before the +Commission. + + R. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +25 + + +S. If Respondent Tovar provides the documentation and attestations required in this +Order and the Commission (1) discovers no contrary information therein, and (2) determines that +Respondent Tovar truthfully and accurately attested to each of the items required in Respondent +Tovar’s affidavit, and the Commission discovers no information, including under Paragraph R, +indicating that Respondent Tovar has violated a federal securities law, rule or regulation or rule of +professional conduct applicable to Respondent since entry of the Order (other than by conduct +underlying Respondent Tovar’s original Rule 102(e) suspension), then, unless the Commission +determines that reinstatement would not be in the public interest, the Commission shall reinstate +the respondent for cause shown. + +T. If Respondent Tovar is not able to provide the documentation and truthful and +accurate attestations required in this Order or if the Commission has discovered contrary +information, including under Paragraph R, the burden shall be on the Respondent Tovar to provide +an explanation as to the facts and circumstances pertaining to the matter setting forth why +Respondent Tovar believes cause for reinstatement nonetheless exists and reinstatement would not +be contrary to the public interest. The Commission may then, in its discretion, reinstate +Respondent Tovar for cause shown. + +U. If the Commission declines to reinstate Respondent Tovar pursuant to Paragraphs S +and T, it may, at Respondent Tovar’s request, hold a hearing to determine whether cause has been +shown to permit Respondent Tovar to resume appearing and practicing before the Commission as +an accountant. + +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 Tovar and Poor, and further, any debt for disgorgement, prejudgment +interest, civil penalty or other amounts due by Respondents Tovar and Poor 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 Tovar and Poor 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/2024/AAER-4513.txt b/raw/aaer/2024/AAER-4513.txt new file mode 100644 index 0000000000000000000000000000000000000000..9738740e40a550cf150ef3770096cf6727cdba41 --- /dev/null +++ b/raw/aaer/2024/AAER-4513.txt @@ -0,0 +1,1371 @@ + + + + + + + + + + + + + + + + SEC.gov | SAExploration Holdings, Inc., et al. + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/969266","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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SAExploration Holdings, Inc., et al. , No. 20-CV-08423 (S.D.N.Y., filed Oct. 8, 2020) + + + + SEC Obtains Final Judgments Against Former Executives for Their Roles in $100 Million Accounting Fraud + + + + On August 14, 2024, the U.S. District Court for the Southern District of New York entered final judgments against Brent Whiteley and Michael Scott for their roles in a multi-year accounting fraud they engaged in while they were senior executives of Houston-based seismic data company SAExploration Holdings, Inc. (SAE). The SEC’s complaint alleges that Whiteley, Scott and two other former SAE executives falsely inflated the revenue of SAE by approximately $100 million and concealed their theft of millions of dollars from the company. The SEC’s complaint further alleges that Whiteley separately stole additional company funds through a fictitious invoice scheme. + + Without denying the SEC’s allegations, Whiteley consented to the entry of a final judgment permanently enjoining him from violating Section 17(a)(1) and (3) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13a-14(a), 13b2-1, and 13b2-2 thereunder, and Section 304(a) of the Sarbanes-Oxley Act of 2002; and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 3(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. The final judgment also orders Whiteley to pay $7,054,221 in disgorgement plus $1,039,382 in prejudgment interest, for a total of $8,093,603, which shall be deemed satisfied by the restitution order in the Judgment entered against Whiteley in the criminal case of United States v. Whiteley , No. 1:20-cr-534 (S.D.N.Y.). Whiteley was also ordered to reimburse SAE $1,114,303 pursuant to Section 304(a) of the Sarbanes-Oxley Act. Whiteley previously consented to the aforementioned injunctions and an officer-and-director bar, ordered by the Court on June 29, 2021, and to a suspension from appearing and practicing before the SEC as an attorney or as an accountant, ordered by the Commission on July 6, 2021. + + Without denying the SEC’s allegations, Scott consented to the entry of a final judgment permanently enjoining him from violating Section 17(a)(1) and (3) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5(a) and (c) and 13b2-1 thereunder; and from aiding and abetting 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. The final judgment also orders Scott to pay $219,940 in disgorgement plus $41,763 in prejudgment interest, for a total of $261,703, which shall be deemed satisfied by the restitution order in the Amended Judgment entered against Scott the criminal case of United States v. Scott , No. 1:20-cr-534 (S.D.N.Y.). Scott previously consented to the aforementioned injunctions and an officer-and-director bar, ordered by the Court on June 29, 2021. + + On December 17, 2020, the Court entered a final consent judgment against SAE. The Court entered final consent judgments against additional former SAE executives on April 21, 2023 and November 15, 2023. + + The SEC’s case was handled by Peter Lallas, Yael Berger, Nicholas Margida, Dean M. Conway, Christopher Bruckmann, Pei Chung, and Stacy Bogert. + + + + + + + + + + + + + + + + + + + + + + + + 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/2024/AAER-4514.txt b/raw/aaer/2024/AAER-4514.txt new file mode 100644 index 0000000000000000000000000000000000000000..b4007ac6059acd1ccc95fda65858769454d187b2 --- /dev/null +++ b/raw/aaer/2024/AAER-4514.txt @@ -0,0 +1,410 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 100845 / August 28, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4514 / August 28, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22037 + + +In the Matter of + +National Energy Services +Reunited Corp., + +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 National Energy Services Reunited +Corp. (“National Energy,” or the “Company,” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an +Offer of Settlement (the “Offer”), which the Commission has determined to accept. Solely for +the purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 2 +Summary + +1. This matter involves financial reporting, accounting, and controls failures by +National Energy, a former special purpose acquisition company (“SPAC”). National Energy +became an operating company in 2018 when it acquired two oilfield-services companies located +in the Middle East and North Africa (collectively, the “target companies” or National Energy’s +wholly owned “subsidiaries”). Several years later, National Energy identified significant +deficiencies in the target companies’ accounting and controls, which led to a multi-year +restatement of the Company’s consolidated financial statements concerning, among other things, +previously reported accrued liabilities, cost of services, and net income. + +2. In March 2022, National Energy identified potentially significant accounting errors +in its expense accruals and accounts payable, and unsupported balances in other accounts, after +completing a global transition to new accounting software. National Energy’s Audit Committee +formed an independent committee to investigate the accounting errors and lead the Company’s +restatement process. On March 14, 2022, National Energy publicly disclosed that its financial +statements for 2018 through 2020 should no longer be relied upon. The independent committee’s +investigation found that National Energy’s accounting errors were caused by pervasive, systemic +deficiencies in the Company’s systems, processes, controls, and resources, including supply chain, +finance, and accounting. The deficiencies primarily traced back to the original target companies +and their legacy practices before National Energy acquired them in 2018. Their investigation also +found that National Energy failed to properly assess these legacy practices before the Company +relied upon them for financial reporting. Several factors aggravated these deficiencies after the +acquisitions, including National Energy’s rapid business growth, high rates of employee turnover, +and management pressure to meet internal performance expectations. + +3. In March 2023, National Energy started implementing a formal remediation plan +while it continued the restatement process. On December 29, 2023, National Energy filed a multi- +year restatement that primarily increased the Company’s accrued liabilities and cost of services, +and significantly decreased net income, for the restated periods. National Energy disclosed that the +Company had failed to properly account for its accounts payable and accrued liabilities, failed to +properly classify and report certain operating expenses as cost of services, and failed to properly +classify and report certain private warrants as liabilities. The Company also disclosed numerous +material weaknesses in its internal control over financial reporting (ICFR), and ineffective +disclosure controls and procedures (DCP). National Energy has made significant progress in its +remediation plan, but the process is not complete, and the Company’s material weaknesses have +not been fully remediated. + +4. As a result of this conduct, National Energy violated Sections 13(a), 13(b)(2)(A), +and 13(b)(2)(B) of the Exchange Act, and Rules 13a-1, 13a-15(a) – (c), and 13a-16 thereunder. + +Respondent + +5. National Energy Services Reunited Corp. is a British Virgin Islands corporation +headquartered in Houston, Texas. The Company provides products and services to the oil and + 3 +natural gas industry in the Middle East and North Africa (MENA) and Asia-Pacific (APAC) +regions. National Energy’s common stock and warrants are registered with the Commission under +Section 12(g) of the Exchange Act. The common stock and warrants were delisted from Nasdaq +on April 28, 2023, and currently trade on the OTC PINK Market under the symbols “NESR” and +“NESRW.” + +Company Background + +6. National Energy was originally formed as a SPAC in 2017 to pursue investments in +global-oilfield services. The Company became an operating entity in June 2018 when it acquired +two oilfield-services companies located in the MENA region: (1) NPS Holdings Limited (“NPS”); +and (2) Gulf Energy S.A.O.C. (“Gulf Energy”). National Energy prepares its financial statements +under U.S. Generally Accepted Accounting Principles (GAAP). The Company’s first consolidated +annual report, including NPS and Gulf Energy, concerned the fiscal year ended December 31, +2018. As a foreign private issuer, National Energy files annual reports on Form 20-F, and +furnishes quarterly and other periodic reports on Form 6-K. + +National Energy Identified Significant Accounting Errors in March 2022 + +7. After National Energy acquired NPS and Gulf Energy in 2018, the Company relied +upon its new subsidiaries’ legacy accounting practices and systems for operations and financial +reporting. National Energy planned to integrate these disparate systems into a single accounting +software program, but the process was delayed by pandemic-era restrictions in the Middle East, +and the Company did not complete its global integration and implementation of the new software +until January 2022. + +8. In early February 2022, the Company’s auditor raised questions about the +completeness and accuracy of accounts payable and accrued expenses in Saudi Arabia as part +of its routine audit procedures. During this same period, management identified significant +unreconciled balances at its regional headquarters in the United Arab Emirates (UAE), which +became evident after the global integration. Given the significant account discrepancies, and +related audit questions, management began to question the accuracy of National Energy’s historical +accounting records. + +9. National Energy’s management reported these issues to the Company’s Audit +Committee on February 7, 2022. Over the next six weeks, management examined the scope and +breadth of the Company’s potential accounting issues, which included testing all account balances +at all locations. In March 2022, management identified potentially significant accounting errors in +Saudi Arabia and the UAE concerning expense accruals and accounts payable, and potentially +unsupported balances in other accounts. + +National Energy Disclosed Accounting Errors and Future Restatement + +10. In response to management’s findings, National Energy’s Board of Directors and +management concluded that the Company must restate its prior financial statements. On March + 4 +11, 2022, the Company formed an independent subcommittee of the Audit Committee (the +“Committee”) to investigate the accounting errors and oversee the restatement process. On March +14, 2022, National Energy furnished a Form 6-K and publicly disclosed that: (1) the Company’s +2018, 2019, and 2020 annual financial statements “contain errors primarily related to accounts +payable reconciliations and accrued liabilities,” and should no longer be relied upon, pending +a restatement; (2) “[b]ased on a preliminary analysis,” the Company believed the aggregate +restatement “. . . will be in the range of $60 to 90 million;” and (3) members of the Company’s +Audit Committee were leading a process to address these issues. + +Committee’s Investigation Found Pervasive and Systemic Deficiencies + +11. The Committee’s investigation found that National Energy’s material +misstatements were caused by pervasive, systemic deficiencies in the Company’s accounting +and controls, including its supply-chain, finance, and accounting functions. The issues mostly +impacted operations in Saudi Arabia and the UAE, and primarily traced back to the target +companies’ legacy practices before the acquisitions in 2018. These pre-existing deficiencies +included: (1) inadequate legacy accounting systems and processes; (2) inadequate recording and +processing of transactional documents; (3) inadequate internal controls; and (4) inadequate staffing +and resources in the finance and accounting functions. The systemic problems involved countless +employees and affected thousands of transactions and entries, which undermined the reliability of +the subsidiaries’ accounting records, and in turn, undermined the reliability of National Energy’s +consolidated financial statements. + +12. The investigation also found that National Energy had failed to properly assess +these legacy practices before the Company relied upon them for financial reporting. As a result, +National Energy did not identify the accounting and controls deficiencies during the Restatement +Period.1 Additionally, the Company was unaware of any material misstatements until March 2022, +after the Company completed its global integration, when management identified significant errors +in certain accounts. + +13. The investigation also found that several factors aggravated the Company’s pre- +existing deficiencies after the acquisitions: (1) National Energy’s rapid business growth; (2) high +rates of employee turnover; (3) structural weaknesses within the newly formed Company; and +(4) management pressure on employees to meet internal budgets. The investigation did not find +evidence of fraud, or any practice of earnings management within the Company. + +National Energy’s Restatement + +14. On December 29, 2023, National Energy filed the restatement and its delayed +2021 and 2022 financial statements in a single Form 20-F filing. The Company disclosed that its +prior financial statements had material errors primarily related to the completeness of accounts + +1 The “Restatement Period” generally refers to the time period in which the Company filed: (1) annual, +quarterly, and other periodic reports (earnings releases) for 2018 after the de-SPAC transaction; and +(2) annual, quarterly, and other periodic reports for 2019 and 2020. + + 5 +payable and accrued liabilities in Saudi Arabia and the UAE. Additionally, certain operating +expenses in its field locations had been incorrectly classified and reported as selling, general, and +administrative expenses (SG&A). The restatement reclassified and reported these expenses as cost +of services. The Company also disclosed that it failed to properly classify certain private warrants, +which had been previously reported as additional paid in capital (equity). The restatement +reclassified the private warrants as liabilities, and included related adjustments to net income +and retained earnings. + +15. The restated financial statements generally increased National Energy’s accrued +liabilities and cost of services, and significantly decreased net income. As of December 31, 2020, +the Company’s total current liabilities increased by approximately 21.3%, from a previously +reported balance of $359.4 million to a restated balance of $435.9 million. Additionally, the +Company’s retained earnings, as of December 31, 2020, decreased by approximately 75.6%, +from a previously reported balance of $117.7 million to a restated balance of $28.7 million. + +National Energy’s Controls Deficiencies and Material Weaknesses + +16. In the restatement, National Energy also disclosed that the Company’s ICFR and +DCP were not effective due to numerous material weaknesses: + +The Company did not design and maintain an effective control environment +commensurate with our financial reporting requirements. Our senior +management failed to set an appropriate tone at the top sufficient to ensure a +culture of compliance with the Company’s accounting, finance and internal +control policies, including through: + +• Lack of an effective organizational structure to promote effective internal +control; + +• Lack of effective communication protocols to ensure timely escalation +and resolving of accounting issues; and + +• Insufficient technical accounting resources with an appropriate level of +accounting knowledge, experience and training commensurate with our +structure and financial reporting requirements to appropriately analyze, +record and disclose accounting matters timely and accurately in accordance +with U.S. GAAP. + +. . . The material weakness described above contributed to the following +additional material weaknesses: + +• The Company’s period-end financial reporting controls, specifically those +over account reconciliations, were not effectively designed and +implemented to detect potential misstatements and correct identified +misstatements to period-end financial statements. + + 6 +• The Company did not design and maintain effective controls over certain +accounts payable functions. Specifically, we did not maintain effective +controls over the creation of purchase orders, the matching of goods [and] +services received against purchase orders, and/or the review of the +completeness and accuracy of accounts payable and accrued liabilities. + +• The Company did not design and maintain effective information +technology general controls over financial reporting as privileged access +users were not appropriately provisioned and inadequate monitoring +controls were in place to enforce appropriate system access and segregation +of duties. + +. . . [T]hese material weaknesses contributed to material errors which +resulted in the restatement of our previously issued financial statements. + +Violations + +17. As a result of the conduct described above, National Energy violated Section 13(a) +of the Exchange Act and Rules 13a-1 and 13a-16 thereunder, which require every foreign issuer +of a security registered under Section 12 of the Exchange Act to file or furnish the Commission +with current reports in accordance with all applicable rules and regulations. + +18. In addition, as a result of the conduct described above, National Energy violated +Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep +books, records and accounts which, in reasonable detail, accurately and fairly reflect their +transactions and dispositions of their assets. + +19. In addition, as a result of the conduct described above, National Energy 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 conformity +with GAAP or any other criteria applicable to such statements. + +20. In addition, as a result of the conduct described above, National Energy violated +Exchange Act Rules 13a-15(a) – (c), which require reporting companies to maintain and evaluate +the effectiveness of: (i) disclosure controls and procedures that are designed to ensure that +information required to be disclosed by the issuer in the reports that it files or submits under the +Exchange Act is recorded, processed, summarized and reported, within the time periods +specified in the Commission’s rules and forms, and that such information is accumulated and +communicated to the issuer’s management to allow timely decisions regarding required +disclosure; and (ii) internal control over financial reporting to provide reasonable assurance +regarding the reliability of financial reporting and the preparation of financial statements for +external purposes in accordance with GAAP. Under Item 15 of Form 20-F, management must +provide an annual report that discloses management’s assessment of the effectiveness of ICFR +and any material weakness in ICFR, and management is not permitted to conclude that the + 7 +registrant’s ICFR is effective if there are one or more material weaknesses in the registrant’s +ICFR. + +National Energy’s Remedial Efforts + +21. In determining to accept National Energy’s Offer, the Commission considered +remedial acts promptly undertaken by the Company and cooperation afforded the Commission +staff. Specifically, National Energy prepared and began implementing a formal remediation plan +in March 2023, which includes the following remedial measures: (i) restructuring the Company’s +financial-reporting organization and processes; (ii) enhancing policies and procedures to strengthen +the Company’s overall control environment, and develop proper monitoring controls designed +to timely evaluate and communicate internal control deficiencies to appropriate personnel; +(iii) installing quarterly balance-sheet reconciliations and automated account reconciliations; +(iv) enhancing documentation, identifying control attributes, and developing spreadsheet controls +checklists to improve the completeness and accuracy of data used to operate controls in the +financial-reporting process; (v) hiring new personnel with industry experience to strengthen the +Company’s finance, accounting, and operations roles, including a new corporate controller, +treasurer, financial-systems manager, director of internal audit, finance and reporting manager, +tax director, and new country-level controllers; (vi) strengthening the Company’s “procurement- +to-pay” processes through technology investments, additional procedures, and consultants; +(vii) providing company-wide training to ensure that new processes and procedures are properly +implemented, including controllers’ conferences, compliance workshops and programs, formal +monthly training programs, and formal training concerning requirements under The Sarbanes– +Oxley Act of 2002; (viii) acquiring new software programs and systems to enhance accounting and +controls processes; (ix) revising compensation policies to explicitly link employee bonuses to the +successful achievement of compliance initiatives; and (x) seeking additional independent members +of the Company’s Board of Directors who can provide support to the Audit Committee. National +Energy has made significant progress in its remediation plan, but the process is not complete, and +the Company’s material weaknesses have not been fully remediated. + +Undertakings + +22. Respondent has undertaken to: + +a. Fully remediate its material weaknesses in ICFR, and ineffective DCP, within +one year from the date of this Order. + +b. Publicly disclose, within one year from the date of this Order, whether in +management’s opinion, National Energy has fully remediated its material +weaknesses in ICFR and ineffective DCP, and has effective ICFR and DCP. + +c. Certify, in writing, compliance with the undertakings set forth above. +The certification shall be made by National Energy’s CEO and identify +the undertakings, provide written evidence of compliance in the form of a +narrative, and be supported by exhibits sufficient to demonstrate compliance. + 8 +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 James E. Etri, +Assistant Director, with a copy to the Office of Chief Counsel of the +Enforcement Division, no later than sixty (60) days from the date of the +completion of the undertakings. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the agreed +sanctions in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent National Energy 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-16, and 13a-15(a) – (c) +thereunder. + + B. Respondent shall comply with the undertakings enumerated in Paragraph 22 above. + + C. Respondent shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $400,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + + D. If Respondent fails to comply with the undertakings enumerated in Paragraph 22 +above, Respondent shall, within ninety (90) days after one year from the date of this Order, pay +an additional civil money penalty in the amount of $1,200,000 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. + +E. Payment(s) must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + + 9 +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payment(s) by check or money order must be accompanied by a cover letter identifying National +Energy 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 B. David Fraser, Division of +Enforcement, Securities and Exchange Commission, 801 Cherry Street, Suite 1900, Fort Worth, +Texas 76102. + + 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 any 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/2024/AAER-4515.txt b/raw/aaer/2024/AAER-4515.txt new file mode 100644 index 0000000000000000000000000000000000000000..2ed997dd566c7fb36f26f9df7192891fb32eabce --- /dev/null +++ b/raw/aaer/2024/AAER-4515.txt @@ -0,0 +1,250 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 100917 / September 4, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4515 / September 4, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22065 + + +In the Matter of + +Portland General Electric +Company, + +Respondent. + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Portland General Electric Company +(“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 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 the failure of Portland General Electric Company, a +publicly-traded regional utility company based in Oregon, to devise and maintain a system of +internal accounting controls sufficient to reasonably assure that Respondent’s derivatives and +regulatory accounting transactions were recorded as necessary to permit preparation of its financial +statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) or to +maintain accountability for its assets. Relatedly, Respondent’s books and records did not accurately +and fairly reflect its regulatory assets. Respondent also lacked disclosure controls and procedures to +ensure that information required to be disclosed by Regulation S-K was captured and assessed by +management and disclosure personnel. +2. In August 2020, Respondent disclosed that it suffered $127 million in losses from +energy trading involving financial derivatives. These losses represented 115 percent and 45 percent, +respectively, of the utility’s total net income for the third quarter and full year 2020. Since at least +2018 and leading up to the trading losses, Respondent’s internal accounting and disclosure controls +did not sufficiently record, process, summarize and report information about the nature, purpose, +objective, context, volume, and market risk of its trading activity in derivatives within the time +periods specified in the Commission’s rules and forms. This information was necessary for +Respondent’s accounting personnel to determine how to account for and disclose derivatives trades +under GAAP, including Accounting Standards Codification (“ASC”) Topic 815, Derivatives and +Hedging, as well as regulatory assets and liabilities under ASC Topic 980, Regulated Operations. +The same information was necessary for Respondent’s management and Disclosure Committee to +determine what market risk disclosures needed to be made in Respondent’s filings with the +Commission pursuant to Item 305 of Regulation S-K. +3. As described in further detail below, Respondent’s deficient internal accounting +controls, inaccurate books and records, and deficient disclosure controls and procedures violated +Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rule 13a-15(a). +Respondent +4. Portland General Electric Company is a regulated electric power utility company +incorporated in Oregon and headquartered in Portland, Oregon. Respondent is engaged in, among +other things, the generation, wholesale purchase, transmission, distribution, and retail sale of +electricity to customers in Oregon. Respondent’s common stock is registered with the Commission +pursuant to Section 12(b) of the Exchange Act and trades on the New York Stock Exchange under + + +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 +the symbol “POR.” Respondent files periodic reports with the Commission pursuant to Section +13(a) of the Exchange Act and related rules thereunder. +Facts +5. Respondent trades in derivative instruments as one way to manage fluctuations in +the cost of providing electricity to its customers. For more than a decade leading up to the summer +of 2020, Respondent included in the market risk section of its periodic filings with the Commission +an identical disclosure about its derivatives trading that explained that Respondent utilized +derivative instruments to manage its exposure to commodity price and foreign exchange rate risks +in order to manage volatility in the cost of providing electricity to its customers. Respondent noted +that it may utilize derivative instruments as “economic hedges,” but maintained that it did “not +engage in trading activities for non-retail purposes.” +6. Historically, Respondent’s electricity derivatives trading strategy had been +primarily achieved by buying and selling electricity derivative instruments tethered to the Pacific +Northwest region of the United States, where Respondent physically operates. However, beginning +in early 2020, Respondent’s derivatives trading group began accumulating significant short +positions in electricity financial futures in the California and Desert Southwest power markets, +outside of Respondent’s operational footprint. Those short financial futures were intended to +economically offset Respondent’s growing long positions in the Pacific Northwest power market. +7. By August 2020, Respondent was net short in its electricity financial derivatives +positions and had material market price exposure to the Southwest region of the United States. +Around that time, a major heatwave struck that region and caused electricity prices to spike, +decreasing the market value of Respondent’s short futures. When Respondent closed out its Pacific +Northwest, California, and Desert Southwest derivatives positions, Respondent sustained losses of +$127 million, which it disclosed in a press release and filing with the Commission on August 24, +2020. +8. Since at least 2018, Respondent’s system of internal accounting controls was not +sufficient to reasonably assure that its derivatives transactions were recorded as necessary to permit +preparation of its financial statements in conformity with GAAP or maintain accountability for its +assets. ASC Topic 815, Derivatives and Hedging, requires entities to disclose material information +about the nature, purpose, and objective of using or holding derivative instruments, the context for +understanding those objectives, the strategies for achieving those objectives, and the volume of the +trading activity. However, Respondent’s accounting department did not have the disclosure +information set forth in ASC Topic 815 because Respondent’s internal accounting controls did not +require the derivatives trading group or its supervisors to capture and document that information and +convey it to the responsible accounting personnel. Instead, accounting personnel assumed that the +nature, purpose, and objective of the derivatives trading remained static over time. Because of the +lack of internal accounting controls, the accounting group was not able to contemporaneously +identify the significant shift in derivatives trading strategy that took place between the first and the +second quarters of 2020. +9. For many of the same reasons, Respondent’s internal accounting controls were also +not sufficient to reasonably assure that Respondent was properly accounting for and disclosing + + +4 +information about its regulatory assets and liabilities in conformity with GAAP. ASC Topic 980, +Regulated Operations, allows utilities to defer incurred costs, which may include unrealized +derivatives losses that would otherwise be charged to expense through the income statement. This +deferral effectively permits the company to capitalize losses as part of its regulatory assets. But +ASC 980 only permits the deferral of such unrealized gains and losses if the company determines +that it is probable that it will be allowed to recover those gains and losses from its customers. +10. Respondent’s state utility regulator allows Respondent to recover trading losses +only if the losses are incurred for the benefit of customers and are deemed prudent. To assess +whether trades are prudent, Respondent must determine – at the time trades are placed – that the +trades are objectively reasonable and that the trading strategy involves reasonable hedging goals, +methods, and targets. However, as explained above, Respondent’s accounting personnel did not +have information, either contemporaneously or subsequently, about the nature, purpose, objective, +context, volume, and strategy behind the company’s derivatives trades because of Respondent’s +deficient internal accounting controls. As a result, Respondent’s accounting personnel did not have +information to confirm that derivatives trade gains and losses were incurred for the benefit of +customers, were prudent and probable of recovery, and therefore, could be recognized as regulatory +assets. +11. Following the August 2020 losses, a senior manager at Respondent concluded that +the derivatives trades leading to the losses were imprudent. Respondent ultimately decided not to +seek recovery of the losses through its state utility regulator. Respondent also reversed any +previously recognized regulatory assets based on the same derivative instruments, thereby +correcting its books and records, and recognized the full $127 million of losses in its income +statement earnings. +12. Respondent also lacked disclosure controls and procedures designed to ensure that +information about its derivative instruments required to be disclosed under Regulation S-K was +recorded, processed, summarized and reported within the time periods specified in the +Commission’s rules and forms. Specifically, Item 305 of Regulation S-K required Respondent to +disclose material quantitative and qualitative information about the market risks associated with its +derivative instruments, including the trading purposes of the instruments and how management +managed the associated risks. However, Respondent did not have effective disclosure controls and +procedures to ensure that its derivatives market risk disclosures were materially accurate because it +failed to adequately accumulate and communicate information about its derivatives trading purposes +and strategy to management including its principal executive and principal financial officers, or +persons performing similar functions, as appropriate to allow timely decisions regarding required +disclosure. +13. Prior to August 2020, Respondent’s Disclosure Committee did not receive +sufficient information about the nature, purpose, objective, context, volume, market risk, or strategy +of Respondent’s derivatives trades. As noted above, there were no effective controls requiring the +derivatives trading group to document or provide this information to management. And, even +though the Disclosure Committee included the executive overseeing the derivatives trading group +(the “Power Operations executive”), that executive was primarily focused on operational physical +plant issues and had very little knowledge about derivative instruments or derivatives trading. +Respondent’s Risk Management Committee – which included the CEO, CFO, and Power + + +5 +Operations executive – did receive detailed volume reports about derivatives positions. However, +controls were not designed to ensure that the members of the Risk Management Committee +reviewed this information to determine what disclosures should be made. Moreover, none of these +reports conveyed information about the nature, purpose, objective, context, market risk, or strategy +of Respondent’s derivatives trades. Accordingly, Respondent’s management, Disclosure +Committee, and Risk Management Committee did not have the information necessary to assess the +accuracy of Respondent’s long-standing disclosure about the market risk of its derivative +instruments, or to determine whether any additional disclosures were warranted. +Violations +14. As a result of the conduct described above, Respondent violated Sections +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. Section 13(b)(2)(A) of the Exchange Act requires +issuers with a security registered pursuant to Section 12 of the Exchange Act to make and keep +books, records, and accounts which, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of the assets of the issuer. Section 13(b)(2)(B) of the Exchange Act +requires such issuers, among other things, to devise and maintain a system of internal accounting +controls sufficient to provide reasonable assurances that transactions are recorded as necessary to +permit preparation of financial statements in accordance with GAAP and to maintain accountability +for assets. +15. Additionally, as a result of the conduct described above, Respondent violated +Exchange Act Rule 13a-15(a), which requires issuers of a security registered pursuant to Section 12 +of the Exchange Act, such as Respondent, to maintain disclosure controls and procedures designed +to ensure that information required to be disclosed by an issuer in reports it files or submits under +the Exchange Act is recorded, processed, summarized, and reported within the time periods +specified in the Commission’s rules and forms. +Respondent’s Cooperation and Remedial Efforts +16. In determining to accept the Offer, the Commission considered the substantial +cooperation provided by Respondent throughout the Commission’s investigation and the extensive +remedial measures undertaken by Respondent. In particular, Respondent’s remedial measures +included: (1) promptly forming an independent special committee of its Board of Directors to +investigate the August 2020 losses and make recommendations; (2) revising its policies and +procedures to restrict employees from engaging in certain trading strategies, including trades placed +in energy markets outside of Respondent’s operational footprint, and to require employees to +document their trading strategies; (3) enhancing the information collected concerning derivatives +trades and improving the flow of that information to management and the appropriate accounting +personnel; (4) adding a manager to the accounting department to oversee the impact of derivatives +trading on regulatory accounting and review Respondent’s derivatives disclosures; and +(5) withholding incentive compensation for the 2020 fiscal year from the CEO, CFO, and Power +Operations executive. + + +6 +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act as well as Exchange Act Rule 13a-15(a). + + B. Respondent acknowledges that the Commission is not imposing a civil penalty +based upon its cooperation in a Commission investigation. If at any time following the entry of the +Order, the Division of Enforcement (“Division”) obtains information indicating that Respondent +knowingly provided materially false or misleading information or materials to the Commission, or +in a related proceeding, the Division may, at its sole discretion and with prior notice to the +Respondent, petition the Commission to reopen this matter and seek an order directing that the +Respondent pay a civil money penalty. Respondent may contest by way of defense in any resulting +administrative proceeding whether it knowingly provided materially false or misleading +information, but may not: (1) contest the findings in the Order; or (2) assert any defense to liability +or remedy, including, but not limited to, any statute of limitations defense. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4517.txt b/raw/aaer/2024/AAER-4517.txt new file mode 100644 index 0000000000000000000000000000000000000000..5706c048eed37581da3b6f3fe664fbf129a343b3 --- /dev/null +++ b/raw/aaer/2024/AAER-4517.txt @@ -0,0 +1,273 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 6691 / September 10, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4517 / September 10, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22104 + +In the Matter of + +HI2 INVESTMENT +MANAGEMENT, LLC + +Respondent. + + +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 Hi2 Investment Management, LLC (“Hi2 Manager” 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 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. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 2 +Summary + + 1. Between May 2016 and July 30, 2024, Hi2 Manager was a registered investment +adviser. Between 2018 and 2023, Hi2 Manager had custody of client assets in seven private funds +accounts it advised, but Hi2 Manager failed to comply with its obligations under Section 206(4) of +the Advisers Act and Rule 206(4)-2 thereunder (the “Custody Rule”) for five of those funds for +multiple years. Hi2 Manager failed to distribute to investors within the required time period +audited annual financial statements prepared in accordance with Generally Accepted Accounting +Principles (“GAAP”) and audited by a PCAOB-registered independent public accountant, and Hi2 +Manager otherwise failed to comply with the Custody Rule. In some instances, Hi2 Manager +failed to obtain or deliver annual financial statements audited by a PCAOB-registered independent +public accountant altogether, and in others, Hi2 Manager delivered audited annual financial +statements to investors years later, in response to the Staff’s investigation. In total, since 2018, Hi2 +Manager violated the Custody Rule on 17 occasions. Hi2 Manager also failed to adopt and +implement written policies and procedures reasonably designed to prevent the foregoing violations +of Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder, in violation of Rule 206(4)-7 +of the Advisers Act (the “Compliance Rule”). + +Respondent + + 2. Respondent Hi2 Manager is a Delaware limited liability company with its principal +office and place of business in New York, New York. Hi2 Manager was registered with the +Commission as an investment adviser between May 2016 and July 30, 2024. On July 30, 2024, +Hi2 Manager filed to become an exempt reporting adviser. At all relevant times, Hi2 Manager +owned the general partner of, and served as investment adviser to, each of the seven funds for +which Hi2 Manager had to comply with the Custody Rule: Hi2 GP, LLC; Hi2 Cayman Fund SPC +Series A; Hi2 Cayman Fund SPC Series B; Hi2 U.S. Fund, L.P. - Series A; Hi2 U.S. Fund, L.P. +Series B; Hi2 Venture Fund I LP; and Hi2 Venture Fund II LP (collectively, “the Hi2 Funds”). In +its most recent Form ADV filed on May 6, 2024, Hi2 Manager reported a total of approximately +$52 million in regulatory assets under management. Hi2 Manager is managed by its founder and +indirect owner, who also serves as Hi2 Manager’s Chief Compliance Officer. + +Facts + +3. Hi2 Manager was founded in 2015 and its primary investment strategy involves +lending to high-risk marketplaces. For example, Hi2 Manager lends to automobile inventory +lenders in New York City and to emerging markets in Southeast Asia and Africa. Hi2 Funds +investors purchase payment-dependent notes issued by a Hi2 Fund, the proceeds of which are +applied to make loans to platform lenders and the repayment of which is dependent upon the +platform lender repaying the Hi2 Fund. Platform lenders, like the automotive inventory lenders, in +turn make loans that are expected to generate returns sufficient to pay back the Hi2 Funds and +allow the Hi2 Funds to repay investors. Upon maturity of a payment-dependent note, to the extent +the Hi2 Fund received payment from the platform lender, investors can either receive their +principal back with interest, or they can elect to roll over the principal and interest into a new +investment loan with a platform lender. Hi2 Manager serves as the investment adviser to each of + 3 +the Hi2 Funds, and Hi2 Manager owns the general partner of each of the Hi2 Funds, which general +partner is controlled by Hi2 Manager’s founder, indirect owner, and Chief Compliance Officer. +Hi2 Manager receives a two percent management fee from investors and is entitled to a 20% +performance fee. The Hi2 Funds accounted for virtually all of Hi2 Manager’s regulatory assets +under management. + +4. The Custody Rule is designed to protect investment advisory clients from the +misuse or misappropriation of their funds and securities. It requires that registered investment +advisers who have custody of client funds or securities implement an enumerated set of +requirements to prevent loss, misuse, or misappropriation of those assets. + 5. An investment adviser has custody of client assets if it holds, directly or indirectly, +client funds or securities, or if it has any authority to obtain possession of those assets, including, +among other things, by acting as a managing member of a limited liability company or a general +partner of a limited partnership. See Rule 206(4)-2(d)(2) of the Advisers Act. The Custody Rule +also considers an adviser to have custody of client assets if a related person of the adviser has +custody, such as when an adviser owns or serves as the general partner of a partnership that holds +client assets, provided that the partnership or corporation’s custody is in connection with the +advisory services provided by the adviser. See Rule 206(4)-2(a)(6), (b)(6)(i). Hi2 Manager owned +the general partner of each of the Hi2 Funds. Hi2 Manager therefore had custody of the assets of +the seven Hi2 Funds. + + 6. Pursuant to the Custody Rule, an investment adviser who has custody of client +assets must, among other things: (1) ensure that a qualified custodian maintains the client assets; +(2) notify the client in writing of accounts opened by the adviser at a qualified custodian on the +client’s behalf; (3) 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 liability company or a limited +partnership for which the adviser or a related person is a managing member or general partner, the +account statements must be sent to each member or limited partner; and (4) 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 (i.e. a surprise +examination). See Rules 206(4)-2(a)(1) – (5). + + 7. The Custody Rule provides an alternative to complying with the requirements of +Rules 206(4)-2(a)(2), (3) and (4) for investment advisers to limited partnerships, limited liability +companies, or other pooled investment vehicles, such as the Hi2 Funds. 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 account statements +delivery requirements with respect to a fund if the fund is subject to audit at least annually and +“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. See Rule 206(4)- +2(b)(4)(ii). An investment adviser to a pooled investment vehicle that fails to meet the +requirements of the Audited Financials Alternative would need to satisfy all of the requirements of + 4 +Rule 206(4)-2(a)(2) – (4), including a surprise examination, in order to avoid violating the Custody +Rule. + +8. Since fiscal year 2018, Hi2 Manager has repeatedly failed to provide timely +annual audited financial statements for five Hi2 Funds or otherwise comply with the +requirements of the Custody Rule. In some cases, Hi2 Manager failed to obtain and provide +annual audited financial statements from a PCAOB-registered independent public accountant +altogether, and in other cases, Hi2 Manager failed to provide investors with audited financial +statements within 120 days of the end of the fund’s fiscal year. For example, between fiscal +years 2018 and 2021, Hi2 GP, LLC was audited by a public accountant that was not registered +with the PCAOB. As another example, between fiscal years 2019 and 2022, audited financial +statements for Hi2 Cayman Fund SPC Series B were delivered to investors between 171 and +1,266 days late, depending on the specific fiscal year. In total, between fiscal years 2018 and +2023, Hi2 Manager violated the Custody Rule on 17 occasions with respect to five Hi2 Funds. + + 9. In addition, Hi2 Manager 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 violations of the Advisers Act and the rules thereunder. +See Rule 206(4)-7(a). Hi2 Manager’s written policies and procedures never referenced the +Custody Rule, despite the fact that it had custody of all of its clients’ funds and securities. As such, +Hi2 Manager’s written policies and procedures failed to describe any measures that Hi2 Manager +needed to implement to comply with its obligations under the Custody Rule, which is a violation of +the Compliance Rule. + +Violations + + 10. 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 may be +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). + + 11. Rule 206(4)-2 provides that it is a fraudulent, deceptive, or manipulative act, +practice or course of business within the meaning of Section 206(4) for a registered investment +adviser to have custody of client assets unless the adviser complies with the Custody Rule. Among +other things, Rule 206(4)-2 requires registered investment advisers with custody of client funds or +securities to have independent public 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. + + 12. 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. + + 5 + 13. As a result of the conduct described above, Hi2 Manager willfully violated Section +206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-7 thereunder. + + +Hi2 Manager’s Remedial Efforts + + 14. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded the Commission staff, including +timely completion and distribution of audited financial statements for fiscal year 2023 for all +currently active Hi2 Funds but one, the retention of a compliance consultant to amend its written +policies and procedures to increase compliance with the Custody Rule, and prompt adoption of +changes to Hi2 Manager’s policies and procedures in an effort to prevent future violations. + +IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Hi2 Manager’s Offer. + + Accordingly, pursuant to Sections 203(e) and 203(k) of the Advisers Act, it is hereby +ORDERED that: + + A. Respondent Hi2 Manager cease and desist from committing or causing any +violations and any future violations of Section 206(4) of the Advisers Act and Rules 206-4(2) and +206-4(7) promulgated thereunder; + +B. Respondent Hi2 Manager is censured. + + C. Respondent Hi2 Manager shall, within 21 days of the entry of this Order, pay a civil +money penalty in the amount of $75,000.00 to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. +§3717. + +Payment 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: + + + 6 +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 Hi2 +Manager 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 Tejal Shah, Division of Enforcement, +Securities and Exchange Commission, 100 Pearl Street, Suite 20-100, New York, NY 10019. + + 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. + + + +Vanessa A. Countryman + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4518.txt b/raw/aaer/2024/AAER-4518.txt new file mode 100644 index 0000000000000000000000000000000000000000..9214e5f4c2368b5002e02da5b168d47c68c70ef8 --- /dev/null +++ b/raw/aaer/2024/AAER-4518.txt @@ -0,0 +1,453 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 100984 / September 10, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4518 / September 10, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22102 + + +In the Matter of + +DEERE & COMPANY, + +Respondent. + + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Deere & Company (“Deere” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Deere 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 bas is of this Order and R espondent’s Offer of Settlement, the Commission finds 1 +that: + +SUMMARY + +1. This matter concerns violations of the books and records and internal accounting +controls provisions of the Foreign Corrupt Practices Act of 1977 (the “FCPA”) by Deere, a global +agricultural machinery manufacturer, through its wholly owned subsidiary, Wirtgen Thailand. +From at least late 2017 through 2020, Wirtgen Thailand made improper payments to foreign +officials at multiple government entities, including the Royal Thai Air Force and the Department of +Highways, to win business, and during the same period also engaged in commercial bribery. + +2. The improper payments took various forms, including cash, sham consulting fees, +extravagant “factory visit” trips to foreign countries, meals, entertainment at massage parlors, and +others. The misconduct involved now former high level regional managers and employees and +occurred during a period in which Deere failed to complete the full integration of this acquired +subsidiary into its compliance program and overall control environment. As a result of this +misconduct, Deere obtained an improper benefit of approximately $4.3 million and violated the +books and records and internal accounting controls provisions of the FCPA. + +RESPONDENT + +3. Deere & Company (“Deere”) is a Delaware corporation with its principal place of +business in Moline, Illinois. Deere is a global manufacturer of agricultural machinery and heavy +equipment. Deere’s common stock is, and throughout the relevant period was, registered with the +Commission under Section 12(b) of the Exchange Act and trades on the New York Stock +Exchange under ticker symbol DE. + +OTHER RELEVANT ENTITIES + +4. Wirtgen Group (“Wirtgen”) was a privately held company headquartered in +Windhagen, Germany, and engaged in the business of manufacturing road equipment. In +December 2017, Wirtgen was acquired by and became a wholly owned subsidiary of Deere, and its +books and records are consolidated into the books and records of Deere. Deere conducts business +in Thailand through Wirtgen’s subsidiary, Wirtgen Thailand. + +5. Customer A is a private company that handles construction, project management, +and design of large-scale infrastructure projects in Thailand. + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any other +person or entity in this or any other proceeding. + + + 3 +6. Department of Rural Roads (“DRR”) is a department of the Thai government under +the Ministry of Transport. It oversees the maintenance of rural roads in Thailand. + +7. Department of Highways (“DOH”) is a department of the Thai government under +the Ministry of Transport. It is responsible for the maintenance of national highways in Thailand. + +8. Royal Thai Air Force (“RTAF”) was established in 1913 and is the air force of the +Kingdom of Thailand. + +FACTS + +Wirtgen Thailand was Awarded Multiple Government Tenders as a Result of Numerous +Bribery Schemes + +9. To win tenders with government agencies RTAF, DOH, and DRR, Wirtgen +Thailand engaged in bribery through several different mechanisms, including entertaining +government officials at massage parlors, hosting officials on elaborate sightseeing expeditions +disguised as “factory visit” trips, and making cash payments to officials both directly and through +the use of a third-party agent. These payments were in violation of company policies and were +falsely recorded on the company’s books and records as legitimate expenses. + +Bribery of RTAF, DOH, and DRR Through Improper Entertainment Expenses +10. From at least late 2017 through 2020, Wirtgen Thailand regularly entertained +foreign officials from RTAF, DOH, and DRR at several massage parlors in Thailand, in violation +of Wirtgen Group’s Code of Business Conduct prohibiting giving “absolutely anything” to +improperly influence a government official. Many of these massage parlor entertainment +expenses, which were submitted for approval by Wirtgen Thailand’s Managing Director and his +sales team, contained round number denominations and lacked specificity. In several instances, +names of additional Wirtgen Thailand employees were added to expense receipts to make the +expenses appear more reasonable, when in fact those employees were not present at the massage +parlors. These expenses reports were then routinely approved by Wirtgen’s Managing Director for +Southeast Asia or its Managing Director in Thailand, without regard for compliance with Deere’s +policies and procedures relating to entertainment of government officials and the true purpose for +the payments. + +11. Expense reports from at least November 2019 through March 2020 describe +expenses incurred at several massage parlors in Thailand in order to improperly influence officials +of the Royal Thai Air Force while bidding on tenders. Listed as an attendee at massage parlor +visits in December 2019, and again in March 2020, was a high level RTAF officer in charge of +drafting and awarding tenders. Other expense reports, submitted and approved in November 2019 +and February 2020, reflect massage parlor services provided to another high-ranking officer of the +RTAF. The company entertained RTAF officials at massage parlors in exchange for obtaining +information about the tender process and specific bidding requirements for tenders they were + 4 +actively bidding on. As a result, Wirtgen Thailand was awarded two RTAF tenders in March and +April 2020 for approximately $665,000. + +12. Similarly, Wirtgen Thailand incurred massage parlor expenses from at least 2017 +through 2019, to host representatives from DOH tender committees, including a March 9, 2017, +expense for “Department of Highway – Group of 15 persons from DOH Committee…” Another +expense report submitted for approval in July 2018, noted only “entertainment” of DOH. + +13. As with the RTAF tenders, this entertainment was provided by Wirtgen Thailand’s +Managing Director in order to improperly influence the outcome of an upcoming DOH tender. +The Managing Director noted in August 2018, “Finally, we have 1st succeed to step in this tender +since 3 years tried to add qualification to the DOH tender.” The “DOH Team” was again taken to +a massage parlor by the Wirtgen Thailand Managing Director in September 2018 and December +2018, and the subsequent expense reports noted only “entertainment” in round numbers. + +14. Wirtgen Thailand won multiple tenders from DOH during this time period, +including a December 2018 tender for $2,303,294, an October 2019 tender for $498,567, and a +November 2019, tender for $1,451,432. + +15. Wirtgen Thailand also provided improper benefits at massage parlors to officials of +the Department of Rural Roads in December 2019 in order to influence the award of tenders. +Wirtgen Thailand was subsequently awarded a tender by the DRR in April 2020, for $1,283,905. +Two of the four DRR signatories on that tender were recipients of entertainment by Wirtgen +Thailand at this December 2019 massage parlor visit. In an email to his supervisor, Wirtgen +Thailand’s Managing Director noted “after a few months fighting to get this deal done, I did +whatever channel and opportunities to turn back the tender result, we finally got the judgment to +agree with DRR decision.” + +16. The expenses incurred to provide massage parlor services to officials at RTAF, +DOH, and DRR between 2017 and 2020, were done to improperly influence tender awards, but +nonetheless were approved by Wirtgen Thailand’s Managing Director and Wirtgen’s Managing +Director for Southeast Asia. None of these over $58,000 in expenses complied with the company’s +policies and procedures relating to entertainment of government officials, none followed proper +approval processes for such interactions, and all were improperly booked as legitimate business +expenses. + +Bribery of DOH Through Sightseeing Trip Disguised as “Factory Visit” + +17. In October 2019, Wirtgen Thailand paid for four foreign officials from the +Department of Highways, including a member of the DOH procurement committee, and two of +their spouses, to travel to its facilities in Germany. This “factory visit” was allegedly for the +purpose of learning more about the company’s equipment. The invoice accompanying the +expenses for this trip described the purpose of the trip as being “to visit factory.” However, the +itinerary for this trip indicated that no factory visit took place. Instead, the trip solely consisted of +sightseeing in Switzerland, including travel to Interlaken, Zermatt, and Lake Lucerne, as well as + 5 +shopping and touring in the Alps, with stays in luxury hotels at each stop. Deere spent +approximately $47,500 entertaining DOH officials on this sightseeing spree to win lucrative +tenders. + +18. During the trip, which lasted for eight days, Wirtgen Thailand submitted a bid on a +DOH tender. On October 16, 2019, just after the sightseeing trip ended, Wirtgen was awarded that +tender, valued at approximately $498,567. Wirtgen was then awarded a second tender worth +$1,451,432 one month later, on November 20, 2019. + +19. During this period, Deere had policies governing visits by non-U.S. government +officials to its factories and facilities which required the provision of a variety of information in +connection with seeking approval. This included details regarding the purpose of each visit, an +agenda, names of government officials in attendance, whether any gifts or entertainment would be +provided, and information about overall accommodations and cost. Wirtgen Thailand did not +provide the required information and did not obtain prior authorization for the DOH trip. Instead, +the expenses associated with this trip were knowingly approved and justified by Wirtgen’s +Managing Director for Southeast Asia because the company needed to “gain information and build +rapport” with government customers. + +Bribery of Government Officials in Thailand Through Cash Payments and a Third-Party +Agent + +20. From 2018 to 2020, Wirtgen Thailand also made direct cash payments and +payments made through a third-party agent to bribe government officials at DOH, DRR, and +RTAF on numerous occasions to obtain business. + +21. For instance, in April 2019, Wirtgen Thailand’s Managing Director texted the +company’s Finance Manager “re DOH … will have candy money for you too, next week…. Re +DRR I will have to discuss it again.” With respect to these cash bribes, the Managing Director +instructed the Finance Manager to “Liaise with DOH…. Prepare 5 envelopes. And withdraw cash. +You may take THB 100,000 first. For use on the delivery date.” The Finance Manager +subsequently asked, “For the five envelopes should I go ahead and put [THB] 20,000 in each?” to +which the Managing Director replied that he would do it himself. + +22. In addition to directly paying cash bribes, Wirtgen Thailand used a third-party +consultant to assist in paying bribes to government officials at DOH and DRR in order to secure +four lucrative tenders for machine sales worth approximately $4.67 million. For each tender, +Wirtgen Thailand entered into a sham commission agreement with the third-party consultant, +which provided no legitimate services and was simply a conduit for paying bribes to the Thai +government officials. + +23. The sham commission agreements authorized payments of approximately $285,129 +and were signed by the Managing Director of Wirtgen Thailand. Wirtgen Thailand’s Finance +Manager also signed the sham commission agreement related to the DRR tender. Prior to the + 6 +signing of the commission agreements, Wirtgen Thailand’s Managing Director submitted +Applications for Approval of Commissions to another Manager in Thailand. + +24. Communications between Wirtgen Thailand’s Managing Director and its Finance +Manager refer to a series of bribe payments made by the third-party consultant on Wirtgen’s behalf +to numerous government officials, including cash bribes to the new director of DOH, the former +director of DOH, and a set of golf clubs given to the deputy director of DRR. All of these +improper payments were made in connection with a 2020 DRR tender. + +25. Wirtgen Thailand’s commission agreement with the third-party consultant in +connection with the DRR tender contained bank account information on where to direct the +commission payment. The account holder was a senior official of DOH who, along with his wife, +had also gone on the nine-day sightseeing and “factory visit” trip to Germany, Prague and Austria +in October 2019, and this same official was entertained in December 2018 at a massage parlor as +described above. + +26. In 2018, this same third-party consultant was used to facilitate the sale of machinery +outside of the tender process to SKT, an organization that operated as a dealer in the sale to DOH. +Wirtgen Thailand paid the third-party approximately $46,205 and obtained the sale of 10 units of +pneumatic tire rollers for approximately $924,104. + +27. Between 2018 through 2020, as a result of bribes made through the third-party +consultant, Wirtgen Thailand obtained illicit profits of approximately $2.7 million on sales of +machinery to SKT, DOH and DRR. + +Commercial Bribery of Customer A + +28. During this same time period, Wirtgen Thailand engaged in commercial bribery of +Customer A by employing a similar scheme to secure sales of large industrial machines, which +required the subsequent purchase of spare parts to keep them operational. The bribes occurred in +at least 2018 and 2019, and included improper gift and entertainment expenses, extravagant +sightseeing vacations under the guise of “factory visit” trips and making cash payments disguised +as “brokerage fees” to Customer A employees involved in procurement. Wirtgen Thailand +benefited from Customer A’s purchases of spare parts required to service machines purchased as a +result of the bribe scheme through 2023. + +29. For instance, Wirtgen Thailand made cash payments to Customer A employees in +2018 and 2019 totaling approximately $35,000, which it recorded on its books and records as 3% +“brokerage payments” and “sales commissions.” This included cash for one Customer A employee +who, along with three of his family members, was treated to several days of sightseeing in France +and Germany as part of a “factory visit” trip to the Bauma construction machinery trade fair in +April 2019. Another cash payment was made to Customer A’s head of procurement. The +payments, which were arranged by Wirtgen Thailand’s Managing Director and approved by its +Managing Director for Southeast Asia, were paid to Customer A’s employees as a thank you for +their “support” on purchases of machines from Wirtgen Thailand. + 7 + +30. Throughout 2018 and 2019, Wirtgen Thailand continued its bribery of Customer A +employees by spending hundreds of thousands of dollars on “factory visit” trips where Wirtgen +Thailand hosted representatives from Customer A and sometimes representatives of other +companies and government agencies, ostensibly for the purpose of visiting its factory in Germany. +Wirtgen Thailand had an unwritten practice of improperly rewarding foreign officials and +employees of commercial customers that purchased spare parts at certain benchmarks with +“factory visits” that included substantial sightseeing elements. + +31. For instance, in April 2018, two Customer A employees, one of whom received a +cash bribe in connection with the 2018 machine sales, were treated to an eight-day sightseeing trip +in Germany and Switzerland. Wirtgen Thailand also paid for an executive of Customer A, a parts +manager, to travel to Germany, Switzerland, and Italy over eight days in October 2018. The +company’s documentation for this trip referenced Customer A’s recent purchases of machines +from Wirtgen and noted, “we still have potential for next project will [be] coming soon.” + +32. In April 2019, the same Customer A employee who received a cash bribe related to +Customer A machine sales and attended the April 2018 sightseeing trip, was again treated to +several days of sightseeing, this time in Germany and France. Three of his family members were +included on the trip. + +33. Finally, two Customer A representatives participated in a 9-day tour of Germany, +the Czech Republic, and Austria ostensibly as part of a “factory visit” trip in October 2019. + +34. In April 2019, Wirtgen Thailand also paid an employee of Customer A THB 70,000 +(approximately $2,000) for a “touring cost” related to an upcoming trip and promised to arrange +“as much as” it could in future payments related to tours. Wirtgen Thailand’s Managing Director +sent the company’s Finance Manager a screenshot of a text message confirming the THB 70,000 +cash payment and indicating it was more than the THB 30,000 cash bribe he had paid to the +Customer A employee the last time. At the instruction of the Managing Director for Wirtgen +Thailand, the Finance Manager deposited the cash bribe into the bank account of the Customer A +employee. + +35. Wirtgen Thailand also entertained Customer A employees, including the same +Customer A parts manager treated to a sightseeing trip in October 2018, at massage parlors +throughout 2018 to 2020, spending approximately $2,661. + +36. As a result of these bribes paid through cash, gifts, entertainment, and travel, +Wirtgen Thailand made profits of approximately $1.5 million on $5.3 million in gross sales of +machines and spare parts to Customer A from 2018 to 2023. + +LEGAL STANDARDS AND VIOLATIONS + +37. 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 + 8 +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. + +38. The books and records provision of the FCPA, Section 13(b)(2)(A) of the Exchange +Act, requires every issuer with a class of securities registered pursuant to Section 12 of the +Exchange Act or which is required to file reports under Section 15(d) of the Exchange Act, to +make and keep books, records, and accounts which, in reasonable detail, accurately and fairly +reflect their transactions and disposition of their assets. 15 U.S.C. § 78m(b)(2)(A). + +39. As described above, the improper payments were inaccurately recorded in Deere’s +books and records as legitimate commissions and other business expenses, and its records further +lacked sufficient detail and support to record payments to agents in Thailand as legitimate +commissions and business expenses. As a result, Deere violated Exchange Act Section +13(b)(2)(A). + +40. Section 13(b)(2)(B) of the Exchange Act 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. 15 U.S.C. § 78m(b)(2)(B). + +41. Deere’s failure to fully integrate Wirtgen Thailand into its existing internal control +system contributed to its failure to devise and maintain a sufficient system of internal accounting +controls with respect to employee expense reimbursements, third party payments, and gifts, travel, +and entertainment. As illustrated by the conduct described above, those controls were insufficient +to detect or prevent these improper payments that occurred for a period of several years. By this +conduct, Deere violated Exchange Act Section 13(b)(2)(B). + +DISGORGEMENT AND CIVIL PENALTIES + +42. The disgorgement and prejudgment interest ordered in Section IV below is +consistent with equitable principles, does not exceed Respondent’s net profits from its violations, +and returning the money to Respondent would be inconsistent with equitable principles. +Therefore, in these circumstances, distributing disgorged funds to the U. S. Treasury is the most +equitable alternative. The disgorgement and prejudgment interest ordered in Section IV below +shall be transferred to the general fund of the U. S. Treasury, subject to Section 21F(g)(3) of the +Exchange Act. + 9 +COOPERATION AND REMEDIATION + +43. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded the Commission staff. +Respondent’s cooperation included providing translations of certain relevant documents, making +current and former employees available to the Commission staff, including witnesses located +overseas, and timely providing the details of facts developed during its internal investigation, +including the sharing of forensic accounting analysis, relevant emails and company documents, +and information pertaining to current and former employees. + +44. Respondent’s remediation included termination of employees responsible for the +misconduct and initiating significant improvements to its internal audit and compliance programs. +Respondent revised its Code of Business Conduct, including its anti-bribery and corruption and +travel policies, and introduced new compliance initiatives, including the circulation of a +companywide bi-monthly compliance newsletter and a new podcast dedicated to discussion of +compliance issues. Respondent also increased training on anti-bribery issues. Respondent has also +undertaken an analysis of its compliance program and continues to make improvements utilizing +anticorruption risk assessments, internal audits and enhanced internal accounting controls related to +third party management. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. + +B. Respondent shall, within fourteen days of the entry of this Order, pay disgorgement +of $4,343,401 and prejudgment interest of $1,086,954, and a civil monetary penalty +in the amount of $4,500,000 for a total of $9,930,355 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 on the disgorgement and prejudgment interest +pursuant to SEC Rule of Practice 600, and on the civil monetary penalty 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. + + 10 +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Deere & Company 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. 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/2024/AAER-4519.txt b/raw/aaer/2024/AAER-4519.txt new file mode 100644 index 0000000000000000000000000000000000000000..121d21672dea43ce79196e3de97bef9b70b93c3d --- /dev/null +++ b/raw/aaer/2024/AAER-4519.txt @@ -0,0 +1,513 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11302 / September 12, 2024 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101014 / September 12, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4519 / September 12, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22111 + + +In the Matter of + +FIRSTENERGY CORP., + +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 FirstEnergy Corp. (“FirstEnergy” 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 to 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 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 + +These proceedings arise out of FirstEnergy’s participation in a multi-year political +corruption scheme. Between 2017 and 2020, FirstEnergy and FirstEnergy Solutions (“FES”), +through FirstEnergy Service Company, made payments totaling approximately $60 million to +Generation Now (“GenNow”) in exchange for specific official action for the benefit of +FirstEnergy and FES. GenNow, an Internal Revenue Code Section 501(c)(4) entity, was +controlled by Larry Householder (“Householder”), a member of the Ohio House of +Representatives who was elected as its speaker in January 2019. FirstEnergy made payments to a +501(c)(4) entity to help conceal the source of the payments. On July 23 and 24, 2020, +FirstEnergy violated the antifraud provisions of the Securities Act and the Exchange Act by +making misrepresentations about its role in the political corruption scheme to investors in an +earnings call and in a filing with the Commission. Additionally, FirstEnergy failed to disclose +material related party transactions with respect to payments FirstEnergy made to a 501(c)(4) +organization funded and controlled in part by certain former FirstEnergy executives. FirstEnergy +also failed to keep accurate books and records and to devise and maintain an adequate system of +internal accounting controls with respect to payments to organizations organized under Section +501(c)(4) of the Internal Revenue Code and the identification and disclosure of material related +party transactions. +Respondent + +1. FirstEnergy, an Ohio corporation with its principal place of business in Akron, +Ohio, is a public utility holding company that trades on the New York Stock Exchange under the +symbol “FE.” FirstEnergy entered into a deferred prosecution agreement (“DPA”) with the +United States Attorney’s Office for the Southern District of Ohio (“U.S. Attorney’s Office”) on +July 22, 2021, in which it admitted information in a related statement of facts and paid a $230 +million criminal penalty. USA v. FirstEnergy Corp., No. 1:21-cr-00086-TSB (S.D. Ohio). + +Other Relevant Entities + +2. FirstEnergy Service Company is a subsidiary of FirstEnergy, which provided +financial and other corporate support services to FirstEnergy and its subsidiaries. + +3. FirstEnergy Solutions (“FES”) was a subsidiary of FirstEnergy. As of +November 16, 2016, FES maintained a separate and independent Board of Directors from +FirstEnergy and, on March 31, 2018, FES filed for Chapter 11 bankruptcy protections. On +February 27, 2020, FES emerged from bankruptcy as Energy Harbor, an independent company. + + +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. Partners for Progress (“PFP”) was a 501(c)(4) organization. Certain former +FirstEnergy executives directed the formation of PFP in February 2017. According to +FirstEnergy’s DPA, “[a]lthough Partners for Progress appeared to be an independent 501(c)(4) +on paper, in reality, it was controlled in part by certain former FirstEnergy Corp. executives, who +funded it and directed its payments to entities associated with public officials.” + +Other Relevant Individuals +5. Charles Jones, age 68, resides in Akron, Ohio. He served as the chief executive +officer of FirstEnergy from 2015 until his termination, which was announced on October 29, +2020. He also served as president of FirstEnergy from 2015 until May 2020. From 2015 to 2016, +Jones also served as a director and executive officer of FES. + +6. Larry Householder, age 64, is in federal custody at the Federal Correctional +Institution, Elkton, located in Lisbon, Ohio. From January 2001 through December 2004, and +from January 7, 2019 to July 30, 2020, he served as the Speaker of the Ohio House of +Representatives. He was convicted by a jury in a parallel criminal proceeding on March 9, 2023 +and sentenced to a prison term of 20 years. U.S. v. Householder et al., 1:20-CR-00077 (S.D. +Ohio). + +Facts + +A. Background + +7. In 2016, FirstEnergy reported a bleak outlook with respect to its energy +generation business, citing “[d]epressed prices in the wholesale energy and capacity markets,” +poor forecasted demand, and hundreds of millions of dollars in losses, particularly from its +nuclear energy affiliate, FES. + +8. Following Householder’s election as Speaker of the Ohio House of +Representatives in January 2019, FirstEnergy executives worked directly with Householder to +draft nuclear legislation that would ultimately become House Bill 6. At the time, FirstEnergy +sought the nuclear legislation both to further the interests of its subsidiaries, including FES, and +itself because the potential legislation would allow FirstEnergy to decouple its energy rates. +Additionally, in exchange for Jones’s agreement to wire $10 million to GenNow, FES’s +Executive Chairman promised Jones that FES would pay additional funds to FirstEnergy in +connection with the transfer of real estate to FirstEnergy after FES’s bankruptcy. + +9. FirstEnergy’s participation in a political corruption scheme to pay millions of +dollars to GenNow in exchange for specific official action was composed of four distinct +components. FirstEnergy paid GenNow to: (1) help Householder get elected as the Speaker of +the Ohio House of Representatives; (2) help Householder gather support for House Bill 6; (3) +defeat a referendum effort aimed at placing House Bill 6 on the ballot; and (4) fund a term-limit +initiative led by Householder, which would potentially have allowed him to remain in power for +up to sixteen additional years. + + +4 + + + +B. The Political Corruption Scheme + +i. Payments to GenNow to Assist Householder’s Campaign for Ohio House +Speaker + +10. Between 2017 and 2020, FirstEnergy and FES, through FirstEnergy Service +Company, made payments totaling approximately $60 million ($16,904,330.86 attributed to +FirstEnergy and $43,092,505 attributed to FES) to GenNow. Between 2018 and 2020, certain +former FirstEnergy executives directed PFP to make payments to GenNow, which helped +conceal FirstEnergy as the source of the payments from the public. +11. Central to FirstEnergy’s state solution strategy were payments for Householder’s +benefit to a 501(c)(4) organization he controlled, GenNow. FirstEnergy’s payments began in +2017, as Householder pursued the Ohio House speakership. + +12. FirstEnergy’s payments to GenNow were consistent with FirstEnergy’s “preferred +manner of giving,” as outlined in an internal presentation explaining that 501(c)(4) groups “are +considered ‘dark money’ because they are not required to disclose where the donations come +from.” +13. In 2017, FirstEnergy, through FirstEnergy Service Company, wired $1,000,000 to +GenNow in four quarterly payments for Householder’s benefit. The purpose of these payments +was to contribute to Householder’s speakership campaign and allowed him to support other +candidates for the Ohio House of Representatives that would in turn support his speakership. In +exchange for these payments, FirstEnergy expected and intended that Householder would further +FirstEnergy’s efforts to save its nuclear power plants in Ohio. + +14. In 2018, FirstEnergy continued to contribute to GenNow to assist Householder’s +pursuit of the speakership. Rather than send the money directly from FirstEnergy to GenNow, +FirstEnergy began routing its payments through PFP, to conceal from the public that FirstEnergy +was the source of the payments. PFP was controlled in part by certain former FirstEnergy +executives, and two of PFP’s directors were FirstEnergy lobbyists. PFP was funded exclusively +by FirstEnergy, through payments from FirstEnergy Service Company, with payments totaling +approximately $25 million between 2017 and 2019, approximately $15 million of which was +paid to GenNow for Householder’s benefit. + +15. FirstEnergy continued to fund Householder’s campaign for Speaker leading up to +the fall 2018 general election. On August 16, 2018, following a meeting between Jones and +Householder, FirstEnergy wired $500,000 from PFP to GenNow for Householder’s benefit. + +16. In October 2018, FES paid GenNow $500,000 for Householder’s benefit. +17. FirstEnergy’s plan proved successful when Householder was elected Speaker on +January 7, 2019. The day of his election, Householder texted Jones, “[t]hank you for everything +it was historical.” +5 + +ii. Payments to GenNow to Pass House Bill 6 + +18. After Householder was elected Speaker, FirstEnergy executives and +representatives worked directly with Householder to draft nuclear legislation, which was +introduced in April 2019 as House Bill 6. + +19. From April 2019 to July 2019, FirstEnergy worked directly with FES to support +Householder through payments to GenNow with the intent and for the purpose that, in return, +Householder would take specific official action relating to the passage of House Bill 6, including +pressuring and advising public officials to support the passage of House Bill 6, supporting the +decoupling provision, and supporting an extension of the term of the nuclear subsidy duration to +ten years. + +20. Ultimately, FirstEnergy’s efforts were successful. On July 23, 2019, House Bill 6 +was signed into law with the decoupling provision included, although, ultimately, the duration of +the nuclear subsidy was not extended to ten years. + +iii. Payments to GenNow to Defeat the Ballot Referendum + +21. FirstEnergy and FES also agreed to pay millions of dollars to GenNow in return +for and in connection with Householder’s efforts to defeat the ballot referendum to overturn +House Bill 6. In October 2019, at Householder and FES’s request, FirstEnergy executives routed +$13 million from PFP to GenNow for Householder’s benefit. FirstEnergy used PFP to conceal +the payments to Householder. + +22. In exchange for the payments, Householder engaged in efforts to defeat the +referendum effort. Had the ballot initiative gathered the required signatures, Householder +planned to advance alternative legislation clarifying that House Bill 6 was a tax, so that it could +not be challenged via a ballot referendum. + +23. During the period of April 2019 to October 2019, FES paid over $40 million to +GenNow for Householder’s benefit. FirstEnergy paid over $13 million, via PFP, to GenNow +during this period. + +iv. Payment to GenNow to Support Householder’s Term Limit Ballot Initiative + +24. In February 2020, Householder and his team approached FirstEnergy about +funding a term limits ballot initiative championed by Householder. The term limit initiative +(which was never placed on the ballot in Ohio) would have changed Ohio law to increase term +limits for Ohio public officials, allowing Householder to potentially remain as Speaker for up to +sixteen additional years; thereby giving Householder additional time to further FirstEnergy’s +interests through official action. +25. On March 2, 2020, FirstEnergy wired $2 million from PFP to GenNow to +advance Householder’s term limits initiative. + + +6 + +C. FirstEnergy and Its CEO Made Material Misstatements to Investors Following the +Unsealing of the Criminal Complaint Against Householder + +26. On July 21, 2020, Householder was arrested and the U.S. Attorney’s Office +unsealed a complaint filed against Householder for his role in the political corruption scheme. + +27. On July 23 and 24, 2020, FirstEnergy and its then CEO made a series of +misrepresentations to investors about FirstEnergy’s role in the political corruption scheme. First, +on July 23, 2020, FirstEnergy issued a press release, filed with the Commission as part of an +interim report on Form 8-K, in which Jones stated, in reference to the U.S. Attorney’s Office’s +investigation of Householder: “I believe that FirstEnergy acted ethically in this matter. At no +time did our support for Ohio’s nuclear plants interfere with or supersede our ethical obligations +to conduct our business properly.” + +28. In addition, during a July 24, 2020 earnings call, Jones made the following +statements: + +• “I believe that FirstEnergy acted properly in this matter and we intend to +cooperate fully with the investigation . . .” + +• “[L]et me be clear[,] at no time[,] does our support for nuclear plants in Ohio +interfere or supersede our ethical obligations to conduct our business +properly.” + +• “I can tell you this, in every meeting, every phone call, every text message +that I participate in, I’ve talked about our obligations to conduct our business +transparently, ethically, professionally. I have no worries that I did anything +that wasn’t that way. And we let the merits of our arguments carry the day +when we are operating in the political environment.” + +29. These statements by Jones on July 23 and 24 were false and misleading because, +as described in detail above, Jones knew, as the then-CEO and former president of FirstEnergy, +that he and FirstEnergy had not acted properly or ethically. As the then-CEO and former +president of FirstEnergy, Jones was involved in and facilitated corrupt payments to GenNow, +and was aware of those payments at the time of these statements. +30. In addition, in the same July 24 earnings call, Jones made false and misleading +statements about his involvement with FES, including the following: +• “FES separated fiduciarily, financially and operationally from being a part of +FirstEnergy. They put in place an independent board, and from November +[20]16, I’ve had no input into any of the decisions they’ve made.” + +• “We were not involved in any way in the decisions made by FES.” +31. These statements about Jones’ input into and involvement in FES’ decision +making were false and misleading because, after the separation between FES and FirstEnergy, +7 + +Jones continued to regularly communicate with FES executives. Jones also assured Householder +that he would “push[] FES to engage” in the fight to support House Bill 6. For example, in April +2019, Householder and Jones discussed purchasing advertisements to support House Bill 6. +Jones told Householder he would talk to FES about paying for the advertisements. Jones +confirmed to Householder via text that he “spoke to FES creditor rep,” and that “[t]hey will step +in and help.” Further, as noted in more detail above, Jones agreed to use FirstEnergy funds to +help Householder defeat the House Bill 6 referendum effort in return for future transfers of real +estate from FES to FirstEnergy after FES emerged from bankruptcy. + +D. FirstEnergy Failed to Disclose Material Related Party Transactions in Its 2019 +Annual Report on Form 10-K + +32. Generally Accepted Accounting Principles (“GAAP”), and specifically +Accounting Standards Codification (“ASC”) 850, Related Party Disclosures, require issuers to +disclose material related party transactions. ASC 850 provides that financial statements shall +include disclosures of material related party transactions, including, among other things, the +nature of the relationship involved, a description of the transactions, the dollar amounts of the +transactions with related parties for each period an income statement is presented, amounts due +to or from related parties as of the date of each balance sheet, and, if necessary to the +understanding of the relationship, the name of the related party.2 ASC 850 defines “related +parties” as, among other things, “[o]ther parties with which the entity may deal if one party +controls or can significantly influence the management or operating policies of the other . . .” + +33. FirstEnergy admitted in the DPA that “[a]lthough [PFP] appeared to be an +independent 501(c)(4) on paper, in reality, it was controlled in part by certain former FirstEnergy +Corp. executives, who funded it and directed its payments to entities associated with public +officials. . . . Certain former FirstEnergy Corp. executives directed [PFP] to make payments in +2018, 2019, and 2020, including payments to Generation Now, which helped conceal +FirstEnergy Corp. as the source of the payments from the public.” + +34. FirstEnergy contributed a total of $20 million to PFP in October 2019. The +disclosure of these payments to a related party was material. + +35. At the time that FirstEnergy made these contributions to PFP, FirstEnergy did not +have disclosure controls and procedures designed to ensure entities under the control of directors +or executive officers of the company were identified for disclosure. + +36. FirstEnergy did not disclose the October 2019 transactions with PFP as related +party transactions within FirstEnergy’s 2019 10-K, filed on February 10, 2020, as required by +ASC 850. + + + + + +2 ASC 850-10-50-1 and 50-3. +8 + +E. FirstEnergy Failed to Devise and Maintain a Sufficient System of Internal +Accounting Controls + +37. FirstEnergy lacked sufficient controls to provide reasonable assurances that +payments made to 501(c)(4) organizations were executed in accordance with management’s +authorization. FirstEnergy also lacked internal accounting controls and disclosure controls and +procedures designed to ensure that entities incorporated and controlled by FirstEnergy executives +and lobbyists were reviewed for potential disclosure as material related party transactions, as +required by ASC 850. +F. FirstEnergy Failed to Make and Keep Books and Records That Accurately +Accounted for Payments Made to 501(c)(4) Organizations and Related Parties + +38. FirstEnergy failed to make and keep books and records that accurately reflected +payments made to GenNow. The descriptions of the payments to GenNow within FirstEnergy’s +accounting system were inconsistent with the illegal nature of the payments. +39. FirstEnergy also failed to make and keep books and records that accurately +reflected related party transactions. FirstEnergy processed two $10 million payments to PFP, a +related party, in October 2019. These payments were ultimately approved, processed, and +recorded within FirstEnergy’s accounting system with no indication that the payments were +made to a related party under ASC 850. +Legal Standard and Violations + +40. Under Securities Act Section 8A and 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 Securities Act and Exchange Act or any +regulation thereunder, and upon any person that is, was, or would be a cause of the violation, due +to an act or omission the person knew or should have known would contribute to such violation. +41. As a result of the conduct described above, Respondent violated Section 17(a) of +the Securities Act, which prohibits fraudulent conduct in connection with the offer or sale of +securities, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit +fraudulent conduct in connection with the purchase or sale of securities. + +42. As a result of the conduct described above, Respondent violated Section 13(a) of +the Exchange Act, and Rules 12b-20, 13a-1, and 13a-11 thereunder, which require issuers of +securities registered pursuant to Section 12 of the Exchange Act to file periodic and other reports +with the Commission, including annual and current reports, and mandate that those reports +contain any material information necessary to make the required statements made in the report +not misleading. + +43. As a result of the conduct described above, Respondent violated Exchange Act +Rule 13a-15(a), which generally requires issuers having a class of securities registered pursuant +to Section 12 of the Exchange Act to, among other things, maintain sufficient disclosure controls +and procedures as defined in Exchange Act Rule 13a-15(e). +9 + + +44. As a result of the conduct described above, Respondent violated Section +13(b)(2)(A) of the Exchange Act, which requires issuers of securities registered pursuant to +Section 12 of the Exchange Act to make and keep books, records, and accounts which, in +reasonable detail, accurately and fairly reflect their transactions and dispositions of their assets. + +45. As a result of the conduct described above, Respondent violated Section +13(b)(2)(B) of the Exchange Act, which requires issuers of securities registered pursuant to +Section 12 of the Exchange Act to devise and maintain a system of internal accounting controls +sufficient to provide reasonable assurances, among other things, that (i) transactions are executed +only in accordance with management’s general or specific authorization, and that (ii) +transactions are recorded as necessary to permit preparation of financial statements in accordance +with GAAP. + +Deferred Prosecution Agreement + +46. On July 22, 2021, Respondent entered into a DPA with the U.S. Attorney’s +Office. USA v. FirstEnergy Corp., No. 1:21-cr-00086-TSB (S.D. Ohio). Respondent +acknowledged in the DPA, among other things, that it was responsible for the actions of its +former and current officers, employees, and agents as charged in the Information filed in +connection with the DPA and as set forth in the Statement of Facts to the DPA. The DPA has a +term of three years and requires Respondent to meet certain obligations, as set forth in the DPA. + +Cooperation and Remediation + +47. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded to the Commission staff. + +48. Respondent provided substantial cooperation to the Commission’s staff +throughout its investigation, including by proactively sharing facts, providing regular updates +and analyses, and identifying key documents. + +49. Respondent also undertook multiple remedial measures, including: +(i) implementing a new compliance and ethics program; (ii) revising political activity and +lobbying/consulting policies, including requiring robust disclosures about lobbying activities; +(iii) terminating executives and employees, including Jones, who engaged in misconduct; and +(iv) hiring a new Chief Legal Officer, separating the Chief Legal Officer and Chief +Ethics/Compliance Officer functions, and hiring a new Chief Ethics and Compliance Officer. + +Undertaking + +50. Respondent has undertaken to assist the Commission staff in the administration of +a distribution plan, including any and all efforts to distribute to any affected investors the +monetary relief described in Section IV below. In connection with such assistance, Respondent +will produce, without service or notice of subpoena, any and all documents and other information +reasonably requested by the Commission staff. +10 + + +51. In determining whether to accept the Offer, the Commission has considered this +undertaking. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanctions agreed to in Respondent FirstEnergy’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent FirstEnergy cease and desist from committing or causing any violations and any +future violations of Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-15 +thereunder. + +B. Respondent FirstEnergy shall, within 14 days of the entry of this Order, pay a +civil money penalty in the amount of $100,000,000.00 to the Securities and Exchange +Commission. If timely payment is not made, additional interest shall accrue pursuant to 31 +U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +FirstEnergy as a Respondent in these proceedings and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Brian D. Fagel, Division of +Enforcement, Chicago Regional Office, Securities and Exchange Commission, 175 West +Jackson Blvd., Suite 1450, Chicago, Illinois 60604. +11 + + +C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for the penalty referenced in paragraph IV.B above. This Fair Fund may be combined with or +added to any fund established in any related action arising from the same conduct that is the +subject of this Order. Amounts ordered to be paid as civil money penalties pursuant to this Order +shall be treated as penalties paid to the government for all purposes, including all tax purposes. +To preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related +Investor Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction +of any award of compensatory damages by the amount of any part of Respondent’s payment of a +civil penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants +such a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount +of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + +D. Respondent acknowledges that the Commission is not imposing a civil penalty in +excess of $100,000,000.00 based upon its cooperation in a Commission investigation and its +agreement to cooperate in a 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 +Secretary + \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4520.txt b/raw/aaer/2024/AAER-4520.txt new file mode 100644 index 0000000000000000000000000000000000000000..215c85b4cd73b2f884a38928092d9a26ee01a8f1 --- /dev/null +++ b/raw/aaer/2024/AAER-4520.txt @@ -0,0 +1,1394 @@ + + + + + + + + + + + + + + + + SEC.gov | Prager Metis CPAs, LLC + + + + + + + + !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\/976761","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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Prager Metis CPAs, LLC, No. 1:24-cv-07025 (S.D.N.Y. filed Sept. 17, 2024) + + Audit Firm Prager Metis Settles SEC Charges for Negligence in FTX Audits + + + + The Securities and Exchange Commission today announced that Prager Metis CPAs, LLC (Prager) agreed to pay $745,000 to resolve an action alleging misconduct in its audits of the now-defunct crypto asset trading platform FTX Trading Ltd. (FTX). + + The SEC alleges that Prager misrepresented its compliance with auditing standards regarding FTX.  According to the SEC’s complaint, from February 2021 to April 2022, Prager issued two audit reports for FTX that falsely misrepresented that the audits complied with Generally Accepted Auditing Standards (GAAS). The SEC alleges that Prager failed to follow GAAS and its own policies and procedures by, among other deficiencies, not adequately assessing whether it had the competency and resources to undertake the audit of FTX. According to the complaint, this quality control failure led to Prager failing to comply with GAAS in multiple aspects of the audit—most significantly by failing to understand the increased risk stemming from the relationship between FTX and Alameda Research LLC, a crypto hedge fund controlled by FTX’s CEO. + + The SEC’s complaint charges Prager with violating Sections 17(a)(2) and (a)(3) of the Securities Act of 1933. Without admitting or denying the SEC’s findings, Prager agreed to permanent injunctions, to pay a $745,000 civil penalty, and to undertake remedial actions, including retaining an independent consultant to review and evaluate its audit, review, and quality control policies and procedures and abiding by certain restrictions on accepting new audit clients.  The settlement is subject to court approval. + + The SEC’s ongoing investigation as to Prager’s audits of FTX is being conducted by Amy Burkart, David D’Addio, Devlin N. Su, Brian Huchro, and Pasha Salimi. It is being supervised by Michael Brennan, Amy Flaherty Hartman, and Jorge Tenreiro of the Crypto Assets and Cyber Unit. + + + + + + + + + + Resources + + + + SEC Complaint + + + + Settlement + + + + + Judgment + + + + Press Release + + + + + + + + + + + + + + + + + + + + + + + + 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/2024/AAER-4521.txt b/raw/aaer/2024/AAER-4521.txt new file mode 100644 index 0000000000000000000000000000000000000000..e147e21d107b0bff6d3d5addabe2e09c4cc2b5cc --- /dev/null +++ b/raw/aaer/2024/AAER-4521.txt @@ -0,0 +1,431 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 6712 / September 20, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4521 / September 20, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22148 + + +In the Matter of + +CLOSED LOOP PARTNERS, LLC, + +Respondent. +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 Closed Loop Partners, LLC (“Closed Loop,” or the “Respondent”). + +II. + + In anticipation of the institution of these proceedings, the 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, the Respondent consents 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 the Respondent’s Offer, the Commission finds that: + +Summary + +1. Closed Loop, a registered investment adviser, failed to disclose certain conflicts +of interest to its private fund clients (“Funds”) in violation of Section 206(2) of the Advisers Act. +First, it caused an entity wholly owned by a Fund to obtain a short-term loan from Lender A +without disclosing that Closed Loop’s then Executive Director and Chief Compliance Officer, +who negotiated the loan for the Fund, sat on the board of directors of Lender A’s 50% owner. +Closed Loop failed to disclose the resulting conflict of interest to, and obtain prior consent to the +loan from, the Fund. Second, Closed Loop failed to disclose certain conflicts of interest related to +short-term loans that Closed Loop and a related entity made to two other Funds that Closed Loop +advised. Because Closed Loop and the related entity became creditors of the two Funds, Closed +Loop was required to disclose the resulting conflict of interest to, and obtain prior consent to the +loans from, those Funds. +2. Closed Loop also failed to timely distribute annual audited financial statements +prepared in accordance with generally accepted accounting principles (“GAAP”) to the investors +of four special purpose vehicle Funds and one single-limited partner Fund, the assets of which it +had custody, or otherwise ensure that client funds and securities were verified by actual +examination by an independent public accountant, for multiple fiscal years from 2020 through +2022, resulting in violations of Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder, +commonly referred to as the “custody rule.” +3. Finally, Closed Loop also failed to adopt and implement written policies and +procedures reasonably designed to prevent the foregoing violations of the Advisers Act and the +rules thereunder, resulting in a violation of Section 206(4) of the Advisers Act and Rule 206(4)-7 +thereunder, commonly referred to as the “compliance rule.” +Respondent + +4. Closed Loop is a Delaware limited liability company with its principal office and +place of business in New York, New York. Closed Loop has been registered with the +Commission as an investment adviser since March 2020. According to Closed Loop’s April 2024 +Form ADV, it has approximately $492 million in regulatory assets under management in 16 +private funds. + +3 +Facts + +Background +5. During the relevant period, a Closed Loop affiliate was the general partner of +Closed Loop Leadership Fund, L.P (“CLLF”), a private equity fund. +6. During the relevant period, a Closed Loop affiliate was the general partner of +Closed Loop Ventures, LP (“CLV”), a venture capital fund. +7. Similarly, Closed Loop affiliates were the general partners or managing members +of six other Funds: Closed Loop Ventures II LP (“CLV II”), a venture capital fund; Closed Loop +rPet Fund, LP, a private fund with a single limited partner (“rPet Fund”); Algramo CLV SPV +LLC, a co-investment vehicle (“Algramo SPV”); HBG CLV SPV LLC, a co-investment vehicle +(“HBG SPV”); CLV GP Co-Invest, LLC, a co-investment vehicle (“Co-Invest I”); and CLV GP +Co-Invest II, LLC, a co-investment vehicle (“Co-Invest II”). +8. In October 2019, Closed Loop formed CLLF BR Holding, LLC (“CLLF BR”) to +hold CLLF’s ownership interest in a CLLF portfolio company. CLLF owned 100% of CLLF +BR’s membership units until September 2021, when an unaffiliated third party, Lender A, +obtained membership units in CLLF BR by exercising warrants that it had obtained from CLLF +in 2020. During the relevant period, CLLF was the managing member of CLLF BR, and, as +noted above, a Closed Loop affiliate was the general partner of CLLF. +9. Closed Loop or an affiliate of Closed Loop was the investment adviser to each of +the Funds identified in paragraphs 5 through 8 above, and each of them invested in securities. +Undisclosed Conflicts of Interest + +10. As described below, Closed Loop caused three Funds to obtain loans that created +conflicts of interest for Closed Loop. In each case, Closed Loop was required to fully disclose +these conflicts of interest to the Fund and obtain the Fund’s consent before completing the +transactions. In order to do so, each Fund’s limited partnership agreement required Closed Loop +to disclose the conflict of interest to either a Limited Partner Advisory Committee (“LPAC”) or +to each of the Fund’s limited partners and to obtain the Fund’s prior consent. Closed Loop had +not yet formed an LPAC for these three Funds by the time of the relevant transactions and +because Closed Loop did not fully disclose the material facts concerning the conflicts to the +Funds’ limited partners, Closed Loop breached its fiduciary duty to the Funds and, as a result, +violated Section 206(2) of the Advisers Act. +11. In the first transaction, in 2019, Closed Loop caused CLLF BR, an entity then +wholly owned by CLLF, to obtain a short-term bridge loan from Lender A to finance an equity +investment in a CLLF portfolio company (“Portfolio Company”). Lender A was a company in +the same industry as Portfolio Company. Closed Loop had a conflict of interest because its then + +4 +Executive Director and Chief Compliance Officer was at the time of the loan a member of the +board of directors of Lender A’s 50% owner, and he negotiated the loan for CLLF. +12. To complete the Portfolio Company purchase, CLLF needed an additional $5 +million but did not have sufficient cash on hand. At the time, CLLF had already exhausted a line +of credit collateralized by the $18 million in capital commitments that the Fund had at the time. +After unsuccessfully attempting to obtain financing from other parties, Closed Loop caused +CLLF, through CLLF BR, to take out a short-term unsecured $5 million bridge loan from Lender +A at an annual interest rate of 24% (or a monthly rate of 2%). Under the terms of the bridge loan, +Lender A also received warrants allowing it to purchase an equity interest in CLLF BR for a +price of one dollar per share. CLLF BR repaid the loan eight months later, including a total of +$428,370 in interest, and Lender A subsequently exercised the warrants, diluting CLLF’s equity +interest in CLLF BR. When Portfolio Company was later sold, Lender A earned an additional +profit of $623,124 from the equity interest it had obtained in CLLF BR by exercising the +warrants. As a result of the combined value of the interest payments and the exercised warrants, +the loan generated a total of $1,051,494 in effective interest for Lender A, or more than 20% of +the initial principal, in an eight-month period. +13. Closed Loop was required to fully disclose this conflict and the terms of the +bridge loan to, and obtain prior consent for the loan from, its Fund. CLLF’s limited partnership +agreement specifically required that such disclosure be made to, and consent obtained from, an +LPAC. However, Closed Loop had not yet caused CLLF to form an LPAC and failed to fully +disclose the material facts concerning this conflict to CLLF’s limited partners and to obtain their +prior consent, thereby breaching Closed Loop’s fiduciary duty to CLLF. +14. In the second and third transactions, Closed Loop and a Closed Loop affiliate, of +which Closed Loop was a majority owner, made short-term, interest-free loans to two other +Closed Loop funds: an approximately $800,000 loan to CLV II in 2020 and a $750,000 loan to +rPet Fund in 2019. +15. Because Closed Loop controlled the parties on both sides of the loans to these +funds, these transactions were subject to inherent conflicts of interest that Closed Loop was +obligated to disclose. While Closed Loop and its affiliate did not charge interest on the loans, the +loans nevertheless gave rise to a conflict of interest between Closed Loop and the funds, because +Closed Loop and the related entity became creditors of the two funds until the loans were repaid. +16. CLV II’s limited partnership agreement specifically required Closed Loop to +disclose the conflict of interest and the terms of the loan to, and obtain prior consent to the loan +from, an LPAC. However, Closed Loop had not yet caused CLV II to form an LPAC and failed +to fully disclose the material facts concerning this conflict to the fund’s limited partners and +obtain their prior consent, thereby breaching Closed Loop’s fiduciary duty to the fund. +17. Similarly, Closed Loop was required to disclose the conflict of interest and the +terms of the loan to, and obtain prior consent to the loan from, rPet Fund’s single limited partner. +However, Closed Loop failed to fully disclose the material facts concerning this conflict to the + +5 +fund’s limited partner and obtain its prior consent, thereby breaching Closed Loop’s fiduciary +duty to the fund. +18. After the Commission’s enforcement staff completed its investigation in this +matter, Closed Loop made disclosures concerning these three loan transactions to, and the +transactions were ratified by, the relevant LPACs and rPet Fund’s sole limited partner. +Custody Rule Failures +19. The custody rule requires that registered advisers who have custody of client +funds or securities comply with an enumerated set of requirements to prevent loss, misuse, or +misappropriation of those assets. +20. An investment adviser has custody of client assets if it or a related person holds, +directly or indirectly, client funds or securities, or if it has the ability to obtain possession of, or +has access to, those assets, including, among other things, by acting as a managing member of a +limited liability company, a general partner of a limited partnership or a comparable position for +another type of pooled investment vehicle. See Rule 206(4)-2(d)(2). Because affiliates of Closed +Loop were the general partners or managing members of the Funds listed below, Closed Loop +had custody of the assets of each of those Funds as defined in Rule 206(4)-2. +21. A registered investment adviser who has custody of client assets must, among +other things: (1) ensure that a qualified custodian maintains the client assets; (2) notify the client +in writing of accounts opened by the adviser at a qualified custodian on the client’s behalf; (3) +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 liability company or a limited +partnership for which the adviser or a related person is a managing member, general partner, or +comparable position for another type of pooled investment vehicle, the account statements must +be sent to each member or limited partner; and (4) 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)- +(4). +22. 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 liability companies, limited +partnerships or other types of pooled investment vehicles, such as the two Closed Loop funds at +issue. 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 +account statements delivery requirements with respect to a fund if the fund is subject to audit at +least annually and “distributes [the fund’s] audited financial statements prepared in accordance +with generally accepted accounting principles to all limited partners (or members . . .) 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 liability + +6 +company or 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 Rules 206(4)-2(a)(2), (3), and (4) in order to +comply with the custody rule. +23. However, Closed Loop did not satisfy the requirements of the Audited Financials +Alternative or otherwise comply with the custody rule with respect to the five Funds listed +below, the assets of which it had custody as defined in Rule 206(4)-2. Closed Loop did not +engage an independent, PCAOB-registered accounting firm on a timely basis to conduct an +annual audit of the financial statements for any of the five Funds. As a result, Closed Loop did +not distribute audited financial statements to investors in the five Funds within 120 days of the +end of the relevant fiscal years, as set forth in the table below: + Fund End of Fiscal +Year +Date Distribution +Required +Date Audited Financial +Statements Distributed +Days +Late +rPet Fund December 31, +2020 +April 30, 2021 August 12, 2024 1,200 +rPet Fund December 31, +2021 +April 30, 2022 August 12, 2024 835 +Algramo +SPV +December 31, +2020 +April 30, 2021 August 12, 2024 1,200 +Algramo +SPV +December 31, +2021 +April 30, 2022 August 12, 2024 835 +HBG SPV December 31, +2020 +April 30, 2021 August 12, 2024 1,200 +HBG SPV December 31, +2021 +April 30, 2022 August 12, 2024 835 +Co-Invest +1 +December 31, +2020 +April 30, 2021 In progress +Co-Invest +1 +December 31, +2021 +April 30, 2022 In progress +Co-Invest +1 +December 31, +2022 +April 30, 2023 In progress +Co-Invest +2 +December 31, +2020 +April 30, 2021 In progress + +7 + Fund End of Fiscal +Year +Date Distribution +Required +Date Audited Financial +Statements Distributed +Days +Late +Co-Invest +2 +December 31, +2021 +April 30, 2022 In progress +Co-Invest +2 +December 31, +2022 +April 30, 2023 In progress + +24. Because Closed Loop did not satisfy the requirements of the Audited Financials +Alternative for the fiscal years listed above, Closed Loop was required to comply with each of +the provisions of Rules 206(4)-2(a)(2), (3), and (4), which it failed to do. For example, Closed +Loop did not ensure that funds and securities were 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, in accordance with Rule 206(4)-2(a)(4) with respect to any of the +foregoing private Funds during this period. +Compliance Rule Failures + +25. In addition, Closed Loop 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 violations of the Advisers Act and the rules +thereunder. See Rule 206(4)-7(a). While Closed Loop’s written policies and procedures generally +addressed the custody rule, they were not reasonably designed and implemented to prevent +violations of the rule. Similarly, although the compliance manual contained general language +regarding potential conflicts of interest, Closed Loop lacked written policies or procedures +reasonably designed and implemented to prevent violations of Sections 206(2) of the Advisers +Act with respect to transactions giving rise to the type of conflicts described above. +Remediation + +26. As of the date of this Order, Closed Loop has revised its compliance program, +policies and procedures to address the issues raised by the facts described above and taken the +remedial steps described above in paragraph 18. +Violations + +27. Section 206(2) of the Advisers Act makes it “unlawful for any investment adviser +. . . to engage in any transaction, practice, or course of business which operates as a fraud or +deceit upon any client or prospective client.” Scienter is not required to establish a violation of +Sections 206(2) of the Advisers Act; a finding of negligence is sufficient. SEC v. Steadman, 967 +F.2d 636, 643 n.5 (D.C. Cir. 1992) (citing SEC v. Capital Gains Research Bureau, Inc., 375 U.S. +180, 195 (1963)). + +8 +28. 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. Rule 206(4)-2 +provides that it is a fraudulent, deceptive, or manipulative act, practice or course of business +within the meaning of Section 206(4) for a registered investment adviser to have custody of +client assets unless the adviser complies with the custody rule. Among other things, Rule 206(4)- +2 requires registered investment advisers with custody of client funds or securities to have +independent public accountants conduct annual 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. +29. As a result of the conduct described above, Closed Loop willfully1 violated +Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-7 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in the Offer. + + Accordingly, pursuant to Sections 203(e) and 203(k) of the Advisers Act, it is hereby +ORDERED that: + + A. Respondent cease and desist from committing or causing any violations and any +future violations of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)- +7 thereunder. + +B. Respondent is censured. + + C. Respondent shall pay a civil monetary penalty 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). + +1 “Willfully,” for purposes of imposing relief under Sections 203(e) of the Advisers Act, “‘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). The decision in The Robare Group, Ltd. v. SEC, which construed the term +“willfully” for purposes of a differently structured statutory provision, does not alter that standard. 922 +F.3d 468, 478-79 (D.C. Cir. 2019) (setting forth the showing required to establish that a person has +“willfully omit[ted]” material information from a required disclosure in violation of Section 207 of the +Advisers Act). + + +9 + +Payment shall be made in the following installments: + +1. Due within 10 days of the entry of this Order: $75,000; +2. Due within 90 days of the entry of this Order: $60,000; +3. Due within 180 days of the entry of this Order: $60,000; and +4. Due within 270 days of the entry of this Order: $55,000. + +Payment 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. + + D. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Closed Loop 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 George Stepaniuk, Assistant +Regional Director, Securities and Exchange Commission, New York Regional Office, 100 Pearl +Street, Suite 20-100, New York, NY 10004. + + 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, + +10 +Respondent 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/2024/AAER-4522.txt b/raw/aaer/2024/AAER-4522.txt new file mode 100644 index 0000000000000000000000000000000000000000..c127ed7ff7649f19043f77a35172e6fd69cfeb1c --- /dev/null +++ b/raw/aaer/2024/AAER-4522.txt @@ -0,0 +1,310 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101119 / September 20, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4522 / September 20, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22152 + + + +In the Matter of + +MATTHEW C. McMURDO, +Esq. + +Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF 1934 AND +RULE 102(e) OF THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative proceedings be, and hereby are, instituted against Matthew C. McMurdo +(“Respondent” or “McMurdo”) pursuant to Section 4C1 of the Securities Exchange Act of 1934 +(“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found to be lacking in + +2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative Proceedings Pursuant to Section 4C of the Securities Exchange Act of 1934 and +Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. RESPONDENT + + Matthew C. McMurdo, age 52, is a resident of New Jersey. McMurdo +is an attorney who has been licensed to practice law in New York since 1998. Throughout +his career, McMurdo has practiced before the Commission. During the conduct at issue, +McMurdo was a sole practitioner located in New York City, New York. + +B. RELATED ENTITIES + + Enviro Impact Resources, Inc., f/k/a Industry Source Consulting, Inc. +(“INSO”), is a non-SEC reporting, microcap public company with multiple former +names, including Vega Biofuels, Inc. (“Vega”), that was based in Georgia during the +relevant period and incorporated in Wyoming on June 12, 2010. During the relevant +period, INSO’s common stock was quoted under the symbol “INSO” on OTC Link. + +C. FACTS + +1. From on or about July 18, 2016 to September 8, 2021, McMurdo was +engaged as special corporate counsel to Vega and as general corporate counsel to INSO. + + +character or integrity or to have engaged in unethical or improper professional +conduct. + +3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not + binding on any other person or entity in this or any other proceeding. + +3 + +2. From on or about July 18, 2016 to September 8, 2021, McMurdo signed and then +issued 10 legal letters (“Opinion Letters”) in which he opined on various annual and quarterly +disclosure reports issued by Vega and INSO. McMurdo addressed each of his Letters to OTC +Markets Group Inc. (“OTC Markets”). + +3. Vega and INSO used these Opinion Letters to be quoted on OTC Markets, +and to allow broker-dealers to quote the stock of Vega and INSO. + +4. McMurdo knew or should have known that his Opinion Letters contained +material false and/or misleading representations, including but not limited to: + + a. misidentifying who prepared the financial statements of Vega and INSO, +including false information provided by Vega and INSO that a certified public accountant prepared +certain of these financial statements, + + b. stating that the individuals who actually prepared these financial statements +were qualified to do so, and + + c. stating that neither INSO, nor any 5% or more holder of INSO’s securities, were +under investigation by any federal or state regulatory authority for any violation of federal or state +securities laws. + +5. During the relevant period, McMurdo observed inconsistencies and inaccuracies in +various Vega and INSO disclosure reports that made him feel uncomfortable, yet he continued to +issue and sign opinion letters on behalf of Vega and INSO. + +6. During 2017, McMurdo was verbally admonished by a clerk at OTC Markets +about the diligence undertaken, as Vega’s submitted balance sheet at the time did not properly +balance. + +7. In or around October 2021, McMurdo terminated his representation of INSO, but +failed to notify OTC Markets that he was no longer providing legal services to INSO, as he was +required to do pursuant to his signed OTC Markets’ Attorney Letter Agreement. + +8. McMurdo failed to conduct himself in a manner expected of an attorney when he +failed to independently verify information and when he failed to conduct further, adequate +inquiries when confronted with red flags that should have alerted him to inconsistencies and +inaccuracies regarding certain representations made in his Opinion Letters. + +Violations + +9. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules +of Practice state that the Commission may deny to any person the privilege of appearing or + +4 + +practicing before it if such person is found “to be lacking in character or integrity or to have +engaged in unethical or improper professional conduct.” + +Findings + +10. Based on the foregoing, the Commission finds that McMurdo 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, in that Respondent violated the +professional standards of the New York Rules of Professional Conduct, specifically: + +Rule 1.1 (Competence) states in relevant part: “A lawyer should provide competent +representation to a client. Competent representation requires the legal knowledge, skill, +thoroughness and preparation reasonably necessary for the representation.” + + Rule 1.3(a) (Diligence) states in relevant part: “A lawyer shall act with reasonable diligence +and promptness in representing a client.” + +Rule 8.4 (Misconduct) states in relevant part: “A lawyer or law firm shall not: … “(h) +engage in any other conduct that adversely reflects on a lawyer’s fitness as a lawyer.” + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent McMurdo’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. McMurdo is denied the privilege of appearing or practicing before the +Commission as an attorney. + +B. After one year from the date of the Order, Respondent may request that the +Commission consider Respondent’s reinstatement by submitting an application to the attention of +the Office of the General Counsel. + +C. In support of any application for reinstatement to appear and practice before the +Commission as an attorney, Respondent shall provide a certificate of good standing from each state +bar where Respondent is a member. + +D. In support of any application for reinstatement, Respondent shall also submit a +signed affidavit truthfully stating, under penalty of perjury: + +1. That Respondent has complied with the Commission suspension Order, and +with any related orders and undertakings or any related Commission + +5 + +proceedings, including any orders requiring payment of disgorgement or +penalties; + +2. That Respondent is not currently suspended or disbarred as an attorney by +a court of the United States (or any agency of the United States) or the bar +or court of any state, territory, district, commonwealth, or possession; + +3. That Respondent, since the entry of the Order, has not been convicted of a +felony or a misdemeanor involving moral turpitude that would constitute a +basis for a forthwith suspension from appearing or practicing before the +Commission pursuant to Rule 102(e)(2); + +4. That Respondent, since the entry of the Order: + +a. has not been charged with a felony or a misdemeanor involving moral +turpitude as set forth in Rule 102(e)(2) of the Commission’s Rules of +Practice, except for any charge concerning the conduct that was the +basis for the Order; + +b. has not been found by the Commission or a court of the United States to +have committed a violation of the federal securities laws, and has not +been enjoined from violating the federal securities laws, except for any +finding or injunction concerning the conduct that was the basis for the +Order; + +c. has not been charged by the Commission or the United States with a +violation of the federal securities laws, except for any charge concerning +the conduct that was the basis for the Order; + +d. has not been found by a court of the United States (or any agency of the +United States) or any state, territory, district, commonwealth, or +possession, or any bar thereof to have committed an offense (civil or +criminal) involving moral turpitude, except for any finding concerning +the conduct that was the basis for the Order; + +e. has not been charged by the United States (or any agency of the United +States) or any state, territory, district, commonwealth, or possession, +civilly or criminally, with having committed an act of moral turpitude, +except for any charge concerning the conduct that was the basis for the +Order; and + +f. has not been subject to disciplinary action by a bar, court or agency of +any state for violations of applicable rules of professional conduct, + +6 + +except for any charge concerning the conduct that was the basis for the +Order; + +5. That Respondent’s conduct is not at issue in any pending investigation of +the Commission’s Division of Enforcement or any criminal law +enforcement investigation. + +6. That Respondent is not the subject of any complaints to, or investigations +by, the bar or court of any state, territory, district, commonwealth, or +possession, except to the extent that such complaints concern the conduct +that was the basis for the Order. + +7. That Respondent has complied with any and all orders, undertakings, or +other remedial, disciplinary, or punitive sanctions resulting from any action +taken by the bar or court of any state, territory, district, commonwealth, or +possession, or other regulatory body; and + +8. That Respondent undertakes to notify the Office of General Counsel +immediately in writing if any information submitted in support of the +application for reinstatement becomes materially false or misleading or +otherwise changes in any material way while the application is pending. + +E. Respondent shall also provide a detailed description of: + +1. Respondent’s professional history since the imposition of the Order, including + +(a) all job titles, responsibilities and role at any employer; + +(b) the identification and description of any work performed for entities +regulated by the Commission, and the persons to whom Respondent +reported for such work; + +2. The circumstances under which Respondent’s membership in a state bar or any +court for which Respondent was a member has lapsed or otherwise is no longer +active and an explanation of why for each; and + +3. Respondent’s plans for any future appearance or practice before the +Commission. +F. The Commission may conduct its own investigation to determine if the foregoing +attestations are accurate. + +G. If Respondent provides the documentation and attestations required in this Order +and the Commission (1) discovers no contrary information therein, and (2) determines that + +7 + +Respondent truthfully and accurately attested to each of the items required in Respondent’s +affidavit, and the Commission discovers no information, including under Paragraph F, indicating +that Respondent has violated a federal securities law, rule or regulation or rule of professional +conduct applicable to Respondent since entry of the Order (other than by conduct underlying +Respondent’s original Rule 102(e) suspension), then, unless the Commission determines that +reinstatement would not be in the public interest, the Commission shall reinstate the respondent for +cause shown. + +H. If Respondent is not able to provide the documentation and truthful and accurate +attestations required in this Order or if the Commission has discovered contrary information, +including under Paragraph F, the burden shall be on the Respondent to provide an explanation as to +the facts and circumstances pertaining to the matter setting forth why Respondent believes cause +for reinstatement nonetheless exists and reinstatement would not be contrary to the public interest. +The Commission may then, in its discretion, reinstate the Respondent for cause shown. + + I. If the Commission declines to reinstate Respondent pursuant to Paragraphs G and +H, it may, at Respondent’s request, hold a hearing to determine whether cause has been shown to +permit Respondent to resume appearing and practicing before the Commission as an attorney. + + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4524.txt b/raw/aaer/2024/AAER-4524.txt new file mode 100644 index 0000000000000000000000000000000000000000..3d237503c8027989642e969b9f5134fb433bab27 --- /dev/null +++ b/raw/aaer/2024/AAER-4524.txt @@ -0,0 +1,105 @@ + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101199 / September 26, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4524 / September 26, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22206 + +In the Matter of +JAMES DOUGLAS MILLER, +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 James +Douglas Miller (“Respondent” or “Miller”) 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 + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over him and the subject matter of these proceedings, and the +findings contained in Section III.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. James Douglas Miller, age 62, was a certified public accountant licensed to practice +in the State of Oregon. He served as Vice President of Finance and Chief Financial Officer of +Barrett Business Services, Inc. (“BBSI”) from 2008 until March 2016. + +2. On September 11, 2024, the court entered an order permanently enjoining Miller +from future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 (“Securities +Act”) and Section 13(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”) and +Exchange Act Rules 13a-14, 13b2-1 and 13b2-2(b) 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 Exchange Act Rules 12b- +20, 13a-1, 13a-11, and 13a-13, as set forth in the judgment entered in the civil action entitled +Securities and Exchange Commission v. James Douglas Miller, Civil Action Number 3:18-cv- +05671, in the United States District Court for the Western District of Washington + +3. The Commission’s complaint alleged, among other things, that Miller, while CFO +of BBSI between 2012 and 2013, made accounting journal entries that did not comply with +Generally Accepted Accounting Principles. Specifically, the complaint alleged that Miller stopped +recognizing the full amount of BBSI’s workers’ compensation expense on the company’s income +statement. Instead, Miller allegedly allocated a portion of these expenses across several, unrelated +expense accounts. The complaint alleged that Miller made these misclassifications by making a +series of journal entries that transferred amounts between unrelated expenses accounts. The +complaint further alleged that, based on BBSI’s restated financial statements, BBSI underreported +workers’ compensation expense by $3.9 million in 2012 and $11.9 million in 2013. + + + 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 Miller’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Miller 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/2024/AAER-4525.pdf b/raw/aaer/2024/AAER-4525.pdf new file mode 100644 index 0000000000000000000000000000000000000000..f15a7b4c344b350789caa4913c69e413cfb3e828 Binary files /dev/null and b/raw/aaer/2024/AAER-4525.pdf differ diff --git a/raw/aaer/2024/AAER-4525.txt b/raw/aaer/2024/AAER-4525.txt new file mode 100644 index 0000000000000000000000000000000000000000..562824d5bda4d90e8b10b6acc787acf4279612b8 --- /dev/null +++ b/raw/aaer/2024/AAER-4525.txt @@ -0,0 +1,35 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101203 / September 27, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4525 / September 27, 2024 + +Admin. Proc. File No. 3-21139 + + +In the Matter of + +IRA S. VIENER, CPA + + +ORDER DISMISSING PROCEEDINGS + +On September 22, 2022, the Securities and Exchange Commission issued an order +instituting proceedings against Ira S. Viener, CPA, pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice.1 On +August 12, 2024, the Division of Enforcement filed a motion to dismiss the proceedings. +IT IS ORDERED that these proceedings are dismissed. +By the Commission. + + + + Vanessa A. Countryman + Secretary + +1 Ira S. Viener, CPA, Exchange Act Release No. 95884, 2022 WL 4445472 (Sept. 22, +2022). \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4526.pdf b/raw/aaer/2024/AAER-4526.pdf new file mode 100644 index 0000000000000000000000000000000000000000..4e1e90b9232f73c3df6abfbde2f0ecd93e30d919 Binary files /dev/null and b/raw/aaer/2024/AAER-4526.pdf differ diff --git a/raw/aaer/2024/AAER-4526.txt b/raw/aaer/2024/AAER-4526.txt new file mode 100644 index 0000000000000000000000000000000000000000..3e43ea386b2e51eba6928638fcf207475a0fd1e1 --- /dev/null +++ b/raw/aaer/2024/AAER-4526.txt @@ -0,0 +1,41 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101204 / September 27, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4526 / September 27, 2024 + +Admin. Proc. File No. 3-21241 + + +In the Matter of + +JASON JIANXUN TANG, CPA + + +ORDER TERMINATING ADDITIONAL PROCEEDINGS + +On November 17, 2022, the Securities and Exchange Commission issued an order +instituting proceedings (“OIP”) against Jason Jianxun Tang, CPA, pursuant to Sections 4C and +21C of the Securities Exchange Act of 1934 and Commission Rule of Practice 102(e)(1)(ii).1 +The OIP also made findings, imposed remedial sanctions and a cease-and-desist order, and +provided a notice of hearing.2 The OIP further provided for additional proceedings before an +administrative law judge to determine what, if any, civil penalties are appropriate under +Exchange Act Section 21C (the “Additional Proceedings”).3 On August 9, 2024, the Division +filed a motion to terminate the Additional Proceedings. + IT IS ORDERED that the Additional Proceedings against Jason Jianxun Tang are +terminated. +By the Commission. + + + Vanessa A. Countryman +Secretary + +1 Jason Jianxun Tang, CPA, Exchange Act Release No. 96347, 2022 WL 17080793 (Nov. +17, 2022). +2 Id. (imposing a cease-and-desist order and a bar from appearing or practicing before the +Commission as an accountant, with the right to reapply after three years). +3 Id. at *12, *15. \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4527.pdf b/raw/aaer/2024/AAER-4527.pdf new file mode 100644 index 0000000000000000000000000000000000000000..df42cea7e103ec18cfc9128b5488f4c99cdbc618 Binary files /dev/null and b/raw/aaer/2024/AAER-4527.pdf differ diff --git a/raw/aaer/2024/AAER-4527.txt b/raw/aaer/2024/AAER-4527.txt new file mode 100644 index 0000000000000000000000000000000000000000..63abcbe80f2a88c9c42f214a3df4d98f6c899452 --- /dev/null +++ b/raw/aaer/2024/AAER-4527.txt @@ -0,0 +1,34 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101205 / September 27, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4527 / September 27, 2024 + +Admin. Proc. File No. 3- 21314 + + +In the Matter of + +ALAN J. MARKOWITZ, CPA + + +ORDER DISMISSING PROCEEDINGS + +On February 28, 2023, the Securities and Exchange Commission issued an order +instituting proceedings against Alan J. Markowitz, CPA, pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice. +1 On +August 2, 2024, the Division of Enforcement filed a motion to dismiss the proceedings. +IT IS ORDERED that these proceedings are dismissed. +By the Commission. + + Vanessa A. Countryman + Secretary + +1 Alan J. Markowitz, CPA, Exchange Act Release No. 96995, 2023 WL 2299560 (Feb. 28, +2023). \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4528.pdf b/raw/aaer/2024/AAER-4528.pdf new file mode 100644 index 0000000000000000000000000000000000000000..07a47388690b9c831350370c08745dbbee015a68 Binary files /dev/null and b/raw/aaer/2024/AAER-4528.pdf differ diff --git a/raw/aaer/2024/AAER-4528.txt b/raw/aaer/2024/AAER-4528.txt new file mode 100644 index 0000000000000000000000000000000000000000..4a776fdb46e20cbde129847b2dd419b8a204a6e6 --- /dev/null +++ b/raw/aaer/2024/AAER-4528.txt @@ -0,0 +1,40 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 11310 / September 27, 2024 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101206 / September 27, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4528 / September 27, 2024 + +Admin. Proc. File No. 3-21831 + + +In the Matter of + +EDWARD F. HACKERT, CPA + + + +ORDER DISMISSING PROCEEDINGS + +On January 18, 2024, the Securities and Exchange Commission issued an order +instituting proceedings against Edward F. Hackert, CPA, 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.1 On August 8, 2024, the Division of Enforcement filed a +motion to dismiss the proceedings. +IT IS ORDERED that these proceedings are dismissed. +By the Commission. + + + Vanessa A. Countryman + Secretary + +1 Edward F. Hackert, CPA, Exchange Act Release No. 99384, 2024 WL 212152 (Jan. 18, +2024); see also Edward F. Hackert, CPA, Exchange Act Release No. 99716, 2024 WL 1091204 +(Mar. 12, 2024) (amending OIP). \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4530.pdf b/raw/aaer/2024/AAER-4530.pdf new file mode 100644 index 0000000000000000000000000000000000000000..5626de20c43afd3399b977689dd9d35e80975596 Binary files /dev/null and b/raw/aaer/2024/AAER-4530.pdf differ diff --git a/raw/aaer/2024/AAER-4530.txt b/raw/aaer/2024/AAER-4530.txt new file mode 100644 index 0000000000000000000000000000000000000000..d9819dc8199aeef6a46a8c32feba30e75f133d95 --- /dev/null +++ b/raw/aaer/2024/AAER-4530.txt @@ -0,0 +1,36 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101214 / September 27, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4530 / September 27, 2024 + +Admin. Proc. File No. 3-21298 + + +In the Matter of + +JIA ROGER QIAN WANG, CPA, and WANG +CERTIFIED PUBLIC ACCOUNTANT, P.C. + + + +ORDER DISMISSING PROCEEDINGS + +On February 8, 2023, the Securities and Exchange Commission issued an order +instituting proceedings against Jia Roger Qian Wang, CPA, and Wang Certified Public +Accountant, P.C., pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and +Rule 102(e) of the Commission’s Rules of Practice.1 On August 19, 2024, the Division of +Enforcement filed a motion to dismiss the proceedings. +IT IS ORDERED that these proceedings are dismissed. +By the Commission. + + Vanessa A. Countryman + Secretary + +1 Jia Roger Qian Wang, CPA, Exchange Act Release No. 96852, 2023 WL 1819154 (Feb. +8, 2023). \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4531.txt b/raw/aaer/2024/AAER-4531.txt new file mode 100644 index 0000000000000000000000000000000000000000..9de6ca1404f9d5c4c4159380c90d1cb3c99561af --- /dev/null +++ b/raw/aaer/2024/AAER-4531.txt @@ -0,0 +1,1380 @@ + + + + + + + + + + + + + + + + SEC.gov | Olayinka Temitope Oyebola and Olayinka Oyebola & Co. (Chartered Accountants) + + + + + + + + !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\/979901","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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(Chartered Accountants) + + + + + + + + + + + + Olayinka Temitope Oyebola and Olayinka Oyebola & Co. (Chartered Accountants) + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + + Litigation Release No. 26143 / September 30, 2024 + + Accounting and Auditing Enforcement Release No. 4531 / September 30, 2024 + + Securities and Exchange Commission v. Olayinka Temitope Oyebola and Olayinka Oyebola & Co. (Chartered Accountants) , No. 24-civ-7363 (S.D.N.Y. filed Sept. 30, 2024) + + SEC Charges Olayinka Oyebola and His Accounting Firm With Aiding and Abetting Massive Fraud + + The Securities and Exchange Commission today charged Olayinka Oyebola and his Public Company Accounting Oversight Board-registered accounting firm, Olayinka Oyebola & Co. (Chartered Accountants), with aiding and abetting a massive securities fraud perpetrated by Mmobuosi Odogwu Banye, also known as Dozy Mmobuosi, and three related U.S. companies that Mmobuosi controlled (the Tingo entities). The SEC recently obtained a $250 million final judgment against Mmobuosi and the Tingo entities.  + + The SEC’s complaint alleges that Oyebola and his firm deliberately failed to take action upon learning that businessman Mmobuosi and the Tingo entities created multiple fake audit reports bearing Oyebola’s signature and included them in SEC filings as though they were issued by Oyebola’s firm. Oyebola allegedly made material misstatements to the then-auditor of one of the Tingo entities, and Oyebola and the firm helped Mmobuosi conceal that the audit reports were fake, resulting in the auditor, investors, and regulators relying upon the misstatements and fake audit reports to their detriment. According to the SEC’s complaint, Oyebola and his firm’s assistance enabled Mmobuosi and the Tingo entities to carry out a multi-year scheme to inflate financial performance metrics and defraud investors worldwide. + + The SEC’s complaint, filed in the U.S. District Court for the Southern District of New York, charges Oyebola and his firm with aiding and abetting violations of the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, as well as Rule 10b-5 thereunder, by Mmobuosi and the three Tingo entities. The SEC also charged Oyebola with aiding and abetting Mmobuosi’s violation of the lying to auditors provisions of Exchange Act Rules 13b2-2(a) and (b). The complaint seeks civil penalties as well as permanent injunctive relief, including an order permanently barring Oyebola and his firm from acting as auditors or accountants for U.S. public companies or otherwise providing substantial assistance in the preparation of financial statements filed with the SEC. + + The SEC’s ongoing investigation is being conducted by Michael DiBattista, Christopher Mele, Jeremy Brandt, Gerald Gross, and Rebecca Reilly under the supervision of Tejal D. Shah. It is being litigated by David Zetlin-Jones and Mr. DiBattista under the supervision of Alexander Vasilescu, all of the New York Regional Office.  + + + + + + + + + + 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/2024/AAER-4532.txt b/raw/aaer/2024/AAER-4532.txt new file mode 100644 index 0000000000000000000000000000000000000000..24618e6e7fcf3d770dabd5c617a70c634cf35693 --- /dev/null +++ b/raw/aaer/2024/AAER-4532.txt @@ -0,0 +1,352 @@ + + +1 + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101307 / October 11, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4532 / October 11, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22237 + + +In the Matter of + + MOOG 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 Moog Inc. (“Moog” 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. This matter concerns violations of the books and records and internal accounting +controls provisions of the Foreign Corrupt Practices Act of 1977 (“FCPA”) by Moog Inc., a +global provider of technology used in the aerospace and defense markets, through its wholly +owned Indian subsidiary, Moog Motion Controls Private Limited (“MMCPL”). Between 2020 +and 2022, employees of the subsidiary bribed a variety of Indian foreign officials to win +business. These same employees also offered bribes to Indian foreign officials in an attempt to +cause public tenders in India to favor Moog’s products and exclude competitors. + +2. A variety of schemes were used to funnel the improper payments, including +through third-party agents and distributors. The improper payments were falsely recorded as +legitimate business expenses in Moog’s books and records, and the conduct went undetected as a +result of deficient internal accounting controls. As a result, Moog was unjustly enriched by +approximately $504,926. + +RESPONDENT + +3. Moog Inc. (“Moog”) is a worldwide designer and manufacturer of motion +controls systems for a broad range of applications in aerospace, defense, industrial and medical +markets. The company has four operating segments: military aircraft, commercial aircraft, space +and defense, and industrial. Moog is headquartered in East Aurora, New York and has sales, +engineering, and manufacturing facilities in twenty-six countries. Moog’s shares trade on the +New York Stock Exchange under the ticker symbols “MOG.A” and “MOG.B” and are registered +with the Commission pursuant to Section 12(b) of the Exchange Act. Moog files periodic +reports, including annual reports on Form 10-K, and quarterly reports on Form 10-Q, with the +Commission pursuant to Section 13(a) of the Exchange Act. + +OTHER RELEVANT ENTITIES + +4. Moog Motion Controls Private Limited (“MMCPL”) is a wholly owned +subsidiary of Moog that promotes and sells Moog’s products in India. MMCPL’s financial +statements are consolidated with those of Moog. + +5. Hindustan Aeronautics Limited (“HAL”) is an Indian public sector aerospace and +defense company headquartered in Bangalore, India. HAL is fully owned by the Indian +government and is part of the Department of Defense Production, Ministry of Defense. + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + 3 +6. South Central Railway (“SCR”) is one of the Indian railway zones, wholly owned +by the Indian government. India’s Railway Board oversees and manages the Indian railroad +network, including SCR, and approves policies and projects related to the Indian railways. The +Railway Board reports to the Ministry of Railways. + +7. Research Design and Standards Organization (“RDSO”) is the research and +development organization under the Ministry of Railways of the Indian government, which +functions as a technical advisor and consultant to the Railway Board with respect to the design +and standardization of railway equipment and problems related to railway construction, +operations, and maintenance. + +FACTS + +South Central Railway Contract + +8. Beginning in early 2020, MMCPL sought an award contract with SCR. To be +eligible to bid on an SCR project, approval is required by RDSO, SCR’s railway advisor. +Historically, MMCPL found it difficult to get on the approved supplier list with RDSO. + +9. To get on the RDSO supplier list, and obtain a contract with SCR, the employees +used a scheme that involved using third-party Agent A to make bribe payments to SCR officials. +Agent A was introduced to them by a third party following a May 2020 discussion of ways to +“start working in railways and will find some wayout [for SCR] to buy from Moog India.” + +10. In July 2020, MMCPL entered into a liaison agreement with Agent A, in which +Agent A agreed to assist MMCPL in obtaining business from SCR in exchange for 10% of any +contract value. + +11. In August 2020, shortly after engaging Agent A, the Moog brand was added to the +supplier list for an upcoming SCR tender notice. Agent A’s director relayed that “[f]urther to our +pursual [sic] with the [Railway Board] & SCR we are pleased to confirm that Moog brand has +been added as an acceptable brand in upcoming SCR tender.” The tender notice listed Moog, +along with one additional supplier, as potential suppliers for a specific part in the SCR tender. +MMCPL employees discussed engaging in additional misconduct to remove the competitor from +the supplier list, stating “my next target would be to remove them from railways.” + +12. In September 2020, MMCPL won the SCR contract for $34,323. In April 2022, +Agent A invoiced MMCPL for “commission charges,” which several MMCPL employees knew +included the improper payments to government officials to eliminate competition and win +contract awards. The payments were falsely recorded as legitimate contractor services. + + 4 +Hindustan Aeronautics Limited Contract + +13. In April 2021, HAL announced a public tender for aerospace actuators. The +contract value was over $1.3 million. + +14. By May 2021, MMCPL employees were discussing negotiations around the +amount and timing of a bribe payment to a HAL official, with one MMCPL employee explaining +that the HAL official is “…asking for 2.5 percent to be given …or one percent to be given +immediately…” The employees further discussed that the bribe payment would require a +“maximum of 1.5 percent [payment] and then two .75 percent [payments] …they will promise +that all the three people will be eliminated …” The employees also noted they would “have to +give by cash.” + +15. Internal discussions continued about the importance of winning the HAL tender +and having the HAL official help disqualify the other bidders. “By any means, we must take the +order of HAL,” and in response, “We need to eliminate everybody other than [a Moog +competitor]. For that, we need to make some commitment to [HAL official].” + +16. In November 2021, HAL awarded MMCPL a contract valued at $1,399,328 for +parts and services related to the April 2021 contract tender. + +17. Various cash generation schemes through inflated and false invoices and +connections to other entities were discussed to fund the bribe payment to the HAL official and +ultimately the MMCPL finance manager was directed to “Please inform [Distributor B] to raise +an invoice on MOOG …. Sale value can be INR 10 lakhs.” Ten lakhs was the amount of the +bribe payment agreed upon between MMCPL employees and the HAL official. + +18. Pursuant to that directive, in January 2022, Distributor B prepared a fabricated +invoice for MMCPL in the amount of INR 1,540,000. The purpose of the invoice was ostensibly +for the construction of a specialized table, yet MMCPL never requisitioned the table, and +Distributor B never delivered a newly constructed table and was not in fact capable of +constructing the table. The sham transaction was used to generate sufficient cash to pay the +promised bribe to the HAL government official. + +19. In January 2022, an instant message from a MMCPL employee instructed +MMCPL’s finance manager to “please close [Distributor B] offer … as he came upfront to help +us when we needed it.” In March 2022, MMCPL paid Distributor B approximately $18,614, +which was used to make the promised improper payment to the HAL official. The invoice was +falsely recorded as a legitimate expense, and falsely booked as a cost under the HAL contract. + + + 5 +Attempts to Improperly Influence Tenders + +20. In addition to the SCR and HAL tender bribe schemes, MMCPL employees +engaged in several other attempts to rig the tender bidding process for government contracts by +seeking to have Indian officials exclude competitors. As part of these efforts, they at times again +used Agent A and Distributor B to facilitate in their efforts. + +21. In one such attempt involving RDSO, an audio recording notes “three member +committee has agreed to remove [competitor] from the list.” Another employee responds, “our +agreement with him remains the same [as] what you initially discuss, right?” “Yes, the same +1%.” “I spoke to [Distributor B] and I aligned this without telling him the name of the customer +and the person or anything … we can manage it a little bit smartly so that we don’t want to you +know publicize this that we are approved taking this kind of approach.” + +22. In connection with a November 2020 tender for SCR, employees noted they “had +discussed with [Agent A and] he will try to disqualify” the other bidder. + +23. MMCPL employees and HAL officials discussed qualification criteria in advance +of additional tenders, noting in one October 2021 instance, “HAL also informed that if we want +to add any qualification criteria, same has to be communicated now so that they will look into +consideration in formal tender.” + +24. MMCPL employees also discussed bribing RDSO officials to eliminate +competitors on tenders, and the payment of 1% of the contract award as a bribe. One employee +noted his communication with an RDSO Official and the negotiation of the bribe, “I just had a +call with that guy, RDSO [Official]… so what he is talking about is one percent of the value…” +His colleague indicated he had informed their distributor of the scheme to funnel the payments to +RDSO Official. + +25. The employees further discussed the details of how the payment would be made +by MMCPL, stating, “It could be through invoicing or through one of [the distributor’s] existing +contracts. … so it is not going to be a problem.” + +26. Employees freely discussed their misconduct, which reflected a prevailing culture +to win business at any cost, including improper means. The widespread misconduct at MMCPL +reflected a breakdown in internal accounting controls, training, compliance, and tone at the top +of the subsidiary. + + 6 +LEGAL STANDARDS AND VIOLATIONS + +27. 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. + +28. The books and records provisions of the FCPA, Section 13(b)(2)(A) of the +Exchange Act, requires every issuer with a class of securities registered pursuant to Section 12 of +the Exchange Act or which is required to file reports under Section 15(d) of the Exchange Act, +to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly +reflect their transactions and disposition of their assets. 15 U.S.C. § 78m(b)(2)(A). As a result +of the conduct described above, including falsely recording the improper payments as legitimate +business expenses and commissions in its books and records, Moog violated Section 13(b)(2)(A) +of the Exchange Act. + +29. Section 13(b)(2)(B) of the Exchange Act 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. 15 U.S.C. § 78m(b)(2)(B). As a result of the conduct described above, Moog +violated Section 13(b)(2)(B) by failing to devise and maintain sufficient internal accounting +controls over third-party payments, which allowed these bribery schemes to continue undetected +over multiple years. + +DISGORGEMENT AND CIVIL PENALTIES + +30. The disgorgement and prejudgment interest ordered in Section IV below is +consistent with equitable principles and does not exceed Respondent’s net profits from its +violations, and returning the money to Respondent would be inconsistent with equitable +principles. Therefore, in these circumstances, distributing disgorged funds to the U.S. Treasury +is the most equitable alternative. The disgorgement and prejudgment interest ordered in Section +IV below shall be transferred to the general fund of the U.S. Treasury, subject to Section +21F(g)(3) of the Exchange Act. + + + 7 +COOPERATION AND REMEDIATION + +31. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded the Commission staff. Moog +initially reported certain misconduct to DOJ and subsequently provided SEC staff with facts +developed during its own internal investigation. Moog’s cooperation included identifying and +producing key documents and sharing witness statements. + +32. Moog’s remediation included the termination of employees and third parties +involved in the misconduct and enhancing its internal accounting controls over third-party +payments. Moog also strengthened its global compliance organization; enhanced its policies and +procedures regarding the due diligence process and the use of third parties; increased the +frequency of its audits and monitoring of distributor and intermediary activities; mandated +management approval for all distributor and reseller agreements; created new positions to +address potential risks; and increased training of employees on anti-bribery issues and tender- +specific procedures. + +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 Moog cease and desist +from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act. + + B. Respondent shall, within fourteen days of the entry of this Order, pay disgorgement +of $504,926, prejudgment interest of $78,889, and a civil monetary penalty in the amount of +$1,100,000, for a total payment of $1,683,815, 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 a civil money +penalty 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 + + + 8 +(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 +Moog 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 Tracy L. Price, Deputy Chief, FCPA +Unit, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, +DC 20549-5631. + + 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. + + + + Vanessa A. Countryman + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4533.txt b/raw/aaer/2024/AAER-4533.txt new file mode 100644 index 0000000000000000000000000000000000000000..278934fcf87fb420f2322247252e580c5b3ed5cf --- /dev/null +++ b/raw/aaer/2024/AAER-4533.txt @@ -0,0 +1,314 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11317 / October 11, 2024 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101308 / October 11, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4533 / October 11, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22238 + + +In the Matter of + +Robert H. Turner, + +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 21C of the Securities Exchange Act of 1934 (“Exchange Act”) +against Robert H. Turner (“Turner” 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 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 proceeding concerns Turner’s role in connection with accounting and +disclosure fraud by Pareteum Corporation (“Pareteum” or the “Company”), a telecommunications +company, spanning from 2018 through mid-2019 (the “Relevant Period”). During this time, +Pareteum’s public filings materially overstated revenue by approximately $12 million for fiscal year +2018 (60% of the ultimately restated revenue), and by approximately $30 million for the first and +second quarters of 2019 (91% of the ultimately restated revenue). Ultimately, Pareteum restated its +financial results for fiscal year 2018 on December 14, 2020, and restated its quarterly financial +results for the first half of 2019 on March 12, 2021. +2. Pareteum’s overstated revenue resulted from improper accounting practices, +whereby Pareteum’s finance department recognized revenue based on non-binding purchase orders +and prior to product shipment, contrary to generally accepted accounting principles (“GAAP”). +During the Relevant Period, Turner negligently reviewed, signed and certified Pareteum’s false +financial statements as Pareteum’s Principal Executive Officer. +3. Turner received a bonus during the 12-month period following the filings of the +financial results that were ultimately restated. Turner did not, however, reimburse Pareteum for his +bonus as required under Section 304(a) of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley +Act”), which mandates that the chief executive of a public company reimburse the company for any +bonus paid to him in the twelve month period following a financial report that ultimately requires +restatement due to misconduct, regardless of whether that bonus was causally related to the +misconduct. +4. As a result of the conduct described herein, Turner violated Sections 17(a)(2) and +17(a)(3) of the Securities Act and Section 304(a) of the Sarbanes-Oxley Act. +Respondent + +5. Robert H. Turner, age 76, is a resident of Columbia, South Carolina. From 2015 +to November 2019, Turner served as the Executive Chairman of Pareteum and during the Relevant +Period, as its Principal Executive Officer. From May 2019 to November 2019, Turner also held the +title of Chief Executive Officer (“CEO”). Turner signed Pareteum’s financial filings as the +Principal Executive Officer throughout the Relevant Period. + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + 3 +Other Relevant Entity + +6. Pareteum Corporation was incorporated in Delaware with a principal place of +business in New York, New York. Until November 2020, Pareteum’s common stock was +registered with the Commission pursuant to Section 12(b) of the Exchange Act, and prior to +November 12, 2020, traded on the NASDAQ exchange under the symbol “TEUM.” It then traded +under the same symbol on the OTC Markets Group Inc.’s Pink Open Market until filing for +bankruptcy on May 15, 2022. + +7. At all relevant times, Pareteum was a telecommunications and cloud software +company that offered various services such as SIM card services, Wi-Fi service, and a Cloud +platform. Pareteum’s customers were telecommunications businesses that contracted with +Pareteum for these services and related materials (such as SIM cards), and then marketed and sold +the services directly to downstream customers. +8. On September 2, 2021, Pareteum agreed to an Offer of Settlement and the +Commission instituted a settled cease-and-desist proceeding, finding that Pareteum violated +Section 17(a) of the Securities Act, and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the +Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and imposing a +$500,000 civil penalty. +Pareteum’s Improper Revenue Recognition Practices Based on +Non-Binding Purchase Orders +9. At all relevant times, in Pareteum’s Form 10-K and Form 10-Q reports filed with +the Commission, Pareteum represented that the financial statements included in those forms were +prepared in accordance with GAAP. As such, revenue from Pareteum’s contracts with customers +was to be recognized in accordance with ASC Topic 606 (“Revenues from Contracts with +Customers”) as of January 1, 2018, when Pareteum adopted the new revenue recognition +requirements that superseded the former ASC Topic 605 (“Revenue Recognition”). ASC 606 +requires that recognized revenue depict the transfer of promised goods or services to customers in +an amount that reflects the consideration to which the entity expects to be entitled in exchange for +those goods or services. + +10. In particular, ASC 606 requires entities to take the following steps to assess whether +and what revenue should be recognized: (1) identify the contract with a customer; (2) identify the +performance obligations in the contract; (3) determine the transaction price; (4) allocate the +transaction price to the corresponding performance obligations; and (5) recognize revenue when or +as the entity satisfies a performance obligation by transferring control of a promised good or +service to a customer. +11. Although Turner is not an accountant, he was aware of the general requirements of +ASC 606 and that it would need to be implemented in 2018. Turner understood that Pareteum must +have policies and procedures in place to ensure that revenue was recognized in accordance with +those requirements. In preparation for the Company’s implementation of ASC 606, in late 2017 + 4 +and early 2018, Turner directed senior management to work with the Company’s outside auditors +to develop appropriate policies. +12. In practice, however, during the Relevant Period, Pareteum’s finance department +recognized revenue based on non-binding purchase orders and without regard to whether the +requirements of ASC 606 had been satisfied. Specifically, while Pareteum’s senior management +had confirmed with outside auditors that ASC 606 had been properly implemented as to some +forms of contracts, the non-binding purchase orders were not assessed as part of that preparation. +Pareteum did not establish a process to verify that Pareteum’s performance obligations under these +purchase orders had been satisfied, as required by ASC 606, before the associated revenue was +recognized. +13. As such, for numerous customers, instead of recognizing revenue in accordance +with GAAP, Pareteum’s finance department recognized the entire amount of the customer’s initial +purchase order signed with Pareteum, even though these purchase orders included non-binding +forecasts of the customer’s purchases. Under GAAP, revenue should have been recognized only +when all revenue recognition criteria were met, including all of Pareteum’s performance +obligations and any contingencies in the purchase order (such as sales to an end customer). +14. As a result of this improper accounting practice, from 2018 through the first half of +2019, millions of dollars in revenue were prematurely and improperly recognized and Pareteum’s +accounts receivable balance ballooned. By August 2019, Pareteum had only collected a fraction of +these tens of millions in revenue. Turner was aware of these collection issues and Pareteum’s +rapidly increasing accounts receivable balance. +Turner’s Awareness of Warning Signs that Pareteum was Improperly Recognizing Revenue +15. Beginning in mid-2018, Pareteum’s accounts receivable balance increased +exponentially, and Turner became aware of the collection issues and the rapidly increasing +accounts receivable balance. In February 2019, Turner created a team to try to reduce the accounts +receivable balance, focusing on collection efforts. In the following months, the team was not +successful in collecting any significant amount of cash related to these accounts receivable. Indeed, +Pareteum’s accounts receivable balance continued to increase following the creation of this team. +16. As 2019’s second quarter was coming to a close in late June 2019, despite being +aware of the increasing accounts receivable and lack of collectability, Turner focused on pushing +Pareteum’s management team to achieve revenue amounts that would exceed analyst expectations +for the quarter, which resulted in millions of dollars of revenue being added in the final days before +the quarter closed. +17. In July and August 2019, after the second quarter closed and Pareteum reported that +it had met these aggressive revenue growth goals, Turner refocused on collecting the now-$45 +million in outstanding accounts receivable. He noted that in investor meetings the increasing +accounts receivable was the “single most focused on item.” +18. At the same time, Turner knew that Pareteum executives had been failing to collect +the millions of dollars in accounts receivable since at least February 2019. Turner also knew that + 5 +Pareteum’s accounts receivable balance was continuing to grow. Despite this, Turner did not take +reasonable steps to determine whether the uncollected accounts receivable was due to revenue +being improperly recognized. +Pareteum’s Misleading Filings + +19. Pareteum’s 2018 Form 10-K, filed on March 18, 2019, was materially misleading +as it overstated 2018 revenue by 60% ($12 million). Pareteum’s 2018 and 2019 Form 10-Q +quarterly reports were also materially misleading from at least November 14, 2018 through +August 9, 2019, as these filings also overstated revenue by up to 102% per quarter. As Executive +Chairman and the Principal Executive Officer of Pareteum during the Relevant Period, Turner +reviewed, signed and certified these filings. +20. Before each filing during the Relevant Period, Turner saw PowerPoint +presentations from Pareteum’s outside auditors relaying that they had done some review prior to +Pareteum’s Audit Committee meetings ahead of the filing, and that they did not have any +proposed adjustments to the financial statements. However, increasingly over the Relevant +Period, Turner was aware of signs that Pareteum’s revenue may be improperly recognized. +Despite these signs, he did not take reasonable steps to determine whether the uncollected +accounts receivable was due to revenue being improperly recognized. +21. On December 14, 2020, Pareteum filed a restated Form 10-K for 2018, including all +four quarters therein, reducing the full year revenue from $32.4 million to $20.3 million. On March +12, 2021, Pareteum restated is financial results for 2019, reporting a full year revenue of $62.05 +million, reducing its stated revenue for the first quarter of 2019 from $23.04 million to $13.07 +million, and for the second quarter of 2019 from $34.2 to $16.9 million. +22. Pareteum offered and sold securities during the Relevant Period, including a $40 +million registered direct offering of Pareteum stock led by Turner in September 2019. +Turner’s Bonus Payment +23. During the 12-month periods that followed the filings of the financial statements in +Pareteum’s Form 10-Q for the third quarter of 2018, filed November 14, 2018, and Pareteum’s +2018 Form 10-K, filed March 18, 2019, which both required a restatement, Turner received a +performance-based bonus in the amount of $267,118. Turner has not reimbursed this amount to +Pareteum. +Violations + +24. As a result of the conduct described above, Turner violated Section 17(a)(2) of the +Securities Act, which prohibits, in the offer or sale of a security, the receipt of “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.” + 6 +25. As a result of the conduct described above, Turner violated Section 17(a)(3) of the +Securities Act, which prohibits, in the offer or sale of a security, engaging “in any transaction, +practice, or course of business which operates or would operate as a fraud or deceit upon the +purchaser.” +26. As a result of the conduct described above, Turner violated Section 304 of the +Sarbanes-Oxley Act, which requires the chief executive officer or chief financial officer of any +issuer required to prepare an accounting restatement due to material noncompliance with the +securities laws as a result of misconduct to reimburse the issuer for (1) any bonus or other +incentive-based or equity-based compensation received by that person from the issuer during the +12-month periods following the false filings, and (2) any profits realized from the sale of securities +of the issuer during those 12-month periods. +IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Turner’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 Turner 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 304 of the Sarbanes- +Oxley Act. +B. Respondent Turner shall, within 14 days of the entry of this Order, pay a civil +money penalty in the amount of $75,000 to the Securities and Exchange Commission for transfer +to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. +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: + + 7 +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying the +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 Scott A. Thompson, Securities and Exchange +Commission, Philadelphia Regional Office, One Penn Center, 1617 John F. Kennedy Boulevard, +Suite 520, Philadelphia, PA 19103. + +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, 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 Turner shall, within 365 days of the entry of the Order, reimburse +Pareteum or its successor in interest for a total of $267,118 pursuant to Section 304(a) of the +Sarbanes-Oxley Act of 2002. Payment of the reimbursement shall be made in the following +installments: (1) a payment of $50,000 within 60 days of the entry of this Order; (2) a payment of +$50,000 within 90 days of the entry of this Order; (3) a payment of $50,000 within 180 days of the +entry of this Order; and (4) a payment of $117,118 due within 365 days of the entry of this Order. +Payments shall be deemed made on the date they are received by Pareteum or its successor in +interest. 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, 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. Payments made pursuant to this payment schedule shall be +sent to Pareteum or its successor in interest. Respondent shall simultaneously deliver proof of +satisfying this reimbursement obligation to Scott A. Thompson, Securities and Exchange +Commission, Philadelphia Regional Office, 1617 John F. Kennedy Boulevard, Suite 520, +Philadelphia, PA 19103. + + + + 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/2024/AAER-4534.txt b/raw/aaer/2024/AAER-4534.txt new file mode 100644 index 0000000000000000000000000000000000000000..4602b693952fa0559a718d75f17437d21bb96cbf --- /dev/null +++ b/raw/aaer/2024/AAER-4534.txt @@ -0,0 +1,1076 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101353 / October 16, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4534 / October 16, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22256 + + +In the Matter of + +RTX 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 RTX Corporation. (“RTX” 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 Respondent and the subject matter of these proceedings, and consents to the entry +of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities +Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as +set forth below. + + +2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: +SUMMARY + +1. 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”) by RTX +Corporation, formed after a merger and name change involving Raytheon Company and +Raytheon Technologies Corp. (collectively “Raytheon”). Raytheon Company was a +Massachusetts-headquartered company that provided aerospace and defense systems for +military, and government customers worldwide. From approximately 2011 through 2017, +Raytheon Company paid bribes of nearly $2 million to Qatari military and other foreign +officials through sham subcontracts with a supplier to obtain Qatari military defense contracts. +From the early 2000s into 2020, it paid over $30 million to a Qatari agent who was a relative of +the Qatari Emir and a member of the Council of the Ruling Family, in connection with +additional defense contracts, under circumstances that created a significant anticorruption risk, +leading to inaccurate records, and a wholesale breakdown of the company’s due diligence +process and internal accounting controls at Raytheon Company and later Raytheon +Technologies. The agent, who had no prior background in military defense contracting and +provided very little support for work performed, was allowed to operate in a covert manner, +and activity reports were ghost-written by a Raytheon employee until 2022. + +2. Raytheon lacked adequate internal accounting controls related to its payments to agents and +suppliers, and their books and records failed to accurately reflect, or contain reasonable detail +supporting, such payments. Raytheon Company employees and agents utilized the means and +instrumentalities of U.S. interstate commerce in furtherance of the bribe scheme, including +bribes paid in U.S. dollars, communications occurring in the U.S. and through U.S. email +accounts. As a result of this misconduct, Raytheon was unjustly enriched by approximately $37 +million. + +RESPONDENT + +3. RTX Corporation (“RTX”) is incorporated in Delaware and has its principal offices in +Arlington, Virginia. RTX is an aerospace and defense company that provides defense +systems and services for military and government customers worldwide. On April 3, 2020, +United Technologies Corp. (“UTC”) merged with Raytheon Company. Raytheon Company’s +shares traded on the New York Stock Exchange under the ticker symbol “RTN.” As a result +of the merger, Raytheon Company became a wholly owned subsidiary of UTC, which +changed its name to Raytheon Technologies Corp. In July 2023, Raytheon Technologies +Corp. changed its name to RTX Corporation. RTX Corporation employs approximately +180,000 people in more than 50 countries and offers services and products in approximately + +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 +180 countries worldwide. RTX Corporation reported revenue of $68.9 billion and net income +of $3.19 billion for the period ending on December 31, 2023. RTX has a class of securities +registered under Section 12(b) of the Exchange Act, and its shares trade on the New York +Stock Exchange under the ticker symbol “RTX.” + +OTHER RELEVANT ENTITIES AND INDIVIDUALS + +4. Joint Venture (“JV”) was a joint venture formed in 2000 between Raytheon Company and a +French company, each owning 50% of the joint venture. The JV was controlled by and reported +into Raytheon. The JV was based in Fullerton, California and subcontracted with a Qatari +supplier to perform sham defense studies to funnel illicit payments to foreign officials to win +contracts with the Qatari Emiri Air Force (“QEAF”). In 2016, the JV was restructured and +became a wholly owned subsidiary of Raytheon. + +5. GCC HAT The “GCC” is Cooperation Council for the Arab States of the Gulf and is +comprised of the following six member states: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, +and the United Arab Emirates. In 1998, the GCC contracted with a company later acquired by +Raytheon for an air defense system called Hizam Al-Taawun, also known as “HAT.” The +contracts at issue are referred to as the “GCC HAT” contracts. + +6. Supplier A is a Doha, Qatar, based company that was established in May 2012. Between 2012 +and 2017, Raytheon employees and Supplier A devised a scheme to funnel bribe payments to +Qatari military officials by entering into two sham supplier contracts for defense studies. A +Qatari royal family member and two QEAF military officials had an interest in Supplier A, and +the military officials and a director of Supplier A (“Supplier A Executive”) managed the +company. Supplier A has two wholly owned subsidiaries. + +7. Qatari Royal Family Member is the majority owner of Supplier A and an immediate family +member of the current Emir of Qatar. + +8. Qatari Military Official A was a high-level general with the QEAF, close associate of Qatari +Royal Family Member, and the Qatar GCC HAT chairman and program director of +procurement. During the relevant period, Qatari Military Official A held dual roles as both a +principal and board member of Supplier A and a member of the Qatari military. + +9. Qatari Military Official B was shareholder and board member of Supplier A, and an officer in +the QEAF for GCC HAT. Qatari Military Official B served as the Qatari Royal Family +Member’s representative in both government and commercial matters. + +10. Qatari Agent Company is a limited liability company registered in Doha, Qatar. Qatari Agent +Company served as an international representative for Raytheon in connection with sales of +systems and equipment to the Qatari military. Qatari Agent Company was owned and +controlled by Qatari Agent, a Royal Family member. + +4 +11. Qatari Agent is the chairman and majority owner of Qatari Agent Company. Qatari Agent is a +cousin of the Qatari Emir, at times advised the Emir on financial matters, and was a member of +the Qatari Council of the Ruling Family. Formerly, Qatari Agent was the chairman of a major +bank in Qatar. + +FACTS +Background + +12. In the early 2000s, Qatar started dramatically increasing its military capabilities, especially +after the 2013 transfer of the monarchy to Emir Tamim bin Hamad Al Thani. Given Qatar’s +large defense budget and desire for modern defense products, Raytheon, along with other +defense manufacturers, actively pursued defense contracts with the Qatar Armed Forces. + +13. Raytheon increased its business in Qatar primarily through two business lines: the Integrated +Defense Systems (IDS) business in Tewksbury, Massachusetts, and the JV business in +Fullerton, California. As part of their efforts, Raytheon employees, suppliers, and third-party +agents engaged in various bribe schemes to obtain lucrative contracts to sell defense systems +and capabilities to the Qatari military. + +14. Despite numerous known red flags of corruption in its operations and a lack of sufficient +controls that were known since the early 2000s, Raytheon failed to take prompt corrective +action. As a result, managers and employees were unchecked as they made or agreed to make +improper payments through a variety of schemes to funnel bribes to foreign officials through +third-party suppliers, including using sham supplier contracts, and falsifying and destroying +documents to obtain or retain business. Additionally, they paid millions in unsupported and +poorly documented payments to a wholly unqualified third-party agent, in connection with +the award of defense contracts. + +Sham Supplier Subcontracts + +15. From 2012 to 2017, Raytheon entered into two sham supplier agreements with Supplier A to +funnel nearly $2 million in bribes to a Qatari Royal Family Member and two QEAF officials +to assist Raytheon in winning four contracts with a value of at least $90 million. Supplier A +executive, along with several Raytheon managers and employees, carried out the scheme. +Raytheon was unsuccessful in its attempts to obtain one additional contract due to the Qatari +military’s restructuring of its defense program and the retirement of one of the bribed Qatari +military officials. + +Bribes to Obtain GCC HAT Contract Additions 20-22 + +16. Starting in at least 2011, Raytheon employees, including two senior managers in the U.S., +agreed to funnel payments to supplier companies owned by Qatari Military Officials A and B +and Qatari Royal Family Member to assist Raytheon in obtaining three contracts referred to +as the “HAT III” contracts, which were the HAT Additions 20, 21 and 22. The improper +payments were disguised as payments for what were sham defense studies. +5 + +17. Raytheon knew Qatari Military Official A was very influential over GCC HAT contract +awards and controlled certain payments. They also knew that Qatari Military Officials A and +B, as well as the Qatari Royal Family Member, were influential in winning military business. + +18. For example, Raytheon employees discussed the GCC HAT committee ambivalence in +moving forward with the Additions 20 and 22 contract awards and stated that Qatari Military +Official A: + +was the main person in the GCC … to bring the chiefs of staff approvals to HAT addition +20. He is the one who made all the briefings and behind the scenes lobbying from the +director ops levels to the J3s level to the COSs level. + +Regarding HAT 22, Raytheon employees stated that Qatari Military Official A: + +is putting utmost effort to secure addition 22 …Yesterday he re-convinced the AOC +commander and the QEAF director of operation with the benefits of Addition 22 will +bring to the QEAF. There is big support to go forward with 22 in the coming week. + +19. In another example, in 2014, Raytheon employees, including business development +managers, when discussing influence maps for Saudia Arabia, United Arab Emirates and +Qatar, noted that Qatari Military Official A “should be on the Qatar chart; … [Qatari Military +Official A] has brought hundreds of millions of dollars of contracts Raytheon’s way, and my +understanding is he is now head of procurement for the QEAF.” + +20. Likewise, in 2014, Raytheon managers, who were assessing the value of Supplier A for +future contracts, asked what Supplier A “brings to the table.” The first bullet point in the +response was “royal connection.” + +21. To carry out the bribery schemes, Qatari Military Official A told Raytheon to use a Qatari +supplier in which the official had ownership for the studies subcontract. Raytheon employees +and Qatari Military Official A prepared and submitted a preliminary version of the sham +studies subcontract for Raytheon approval. However, they determined the sham supplier was +so obviously unqualified for the job that it wouldn’t pass scrutiny during the initial due +diligence screening. Shortly afterward, another supplier, Supplier A, was formed and +registered as a Qatari company to serve as the supplier for the sham defense studies. Qatari +Military Official A put a Supplier A executive in position to interface with Raytheon +employees to carry out the bribery schemes. Raytheon employees were aware that both +Qatari Military Officials A and B were principals and board members of Supplier A, and +Qatari Royal Family Member was the majority owner. + +22. Raytheon employees and Qatari Military Official A negotiated an amendment to Addition 22 +to include a provision to fund the sham defense studies. Raytheon employees previously had +attempted to engage Supplier A as its Qatari country representative. However, country +representative agreements were subject to more extensive due diligence, so they +6 +recharacterized the agreement as a supplier engagement. Supplier A was a newly formed +company with little to no commercial experience and no technical expertise. To get Supplier +A approved as a supplier, Raytheon employees directed Supplier A to insert false and +misleading information about Supplier A’s work history, employees, financials, and defense +expertise in the Raytheon diligence paperwork. Despite red flags raised by switching +Supplier A from a country representative agreement to a supplier agreement, and the recent +formation of Supplier A, Supplier A was approved as its supplier for the defense studies. + +23. In 2013 and 2014, Raytheon employees met with Qatari Military Officials A and B as part of +a QEAF delegation related to GCC HAT meetings in Fullerton, California. During that same +period, the company’s due diligence process revealed that one of the Supplier A company +shareholders was Qatari Military Official B. However, no action was taken to resolve the +issue, and Raytheon continued to work with Supplier A. + +24. Raytheon employees communicated with Qatari Military Officials A and B using their U.S. +based personal computers and mobile devices, personal email, and other off-channel +communications in violation of Raytheon’s policies. + +25. In February 2014, Raytheon awarded Supplier A the first of the two subcontracts for the +defense studies. According to the subcontract, Supplier A was to draft defense studies in +Arabic and deliver them to the GCC HAT director for Qatar, who was Qatari Military +Official A. + +26. At the direction of Qatari Military Official A, Raytheon employees and managers agreed to +draft the defense studies called for under the subcontract. A Raytheon technical director +drafted three defense studies in Arabic and passed them off as studies conducted by Supplier +A, using his Raytheon computer in the U.S. Numerous red flags of the bribery were present, +including the fact that the studies were substantially similar to studies outlined and drafted by +the employee a year before Raytheon entered into the sham contract with Supplier A. The +technical director and a Raytheon program manager also falsely certified that Subcontractor +A had completed milestones in accordance with the terms of the subcontract to justify +payments to Supplier A, including providing study outlines and drafts to Raytheon for +review. Despite paying nearly $975,000 for the studies, Raytheon did not retain a copy of the +studies. In fact, Raytheon employees did not review the studies because they were written in +Arabic, and only the employee who drafted the studies was fluent. Between May and +September 2014, Raytheon falsely recorded the payments to Supplier A for the sham defense +studies as legitimate subcontractor services. + +Bribes Related to Addition 23 + +27. Raytheon also used sham defense studies to funnel bribes to obtain Addition 23. Qatari +Military Official A informed Raytheon that the award of Addition 23 was contingent on +Raytheon giving Supplier A’s subsidiary a subcontract for what would be sham defense +studies. To conceal his involvement with Supplier A and its subsidiary, Qatari Military +Official A instructed Supplier A executive to create an alias email account for +7 +communicating with Raytheon employees about the bribe scheme. Raytheon employees, +including senior managers, were aware that Qatari Military Official A was using an alias +email account to communicate with them. In March 2013, at the instruction of Qatari +Military Official A, Raytheon added the studies provision to Addition 23, which would be +drafted by the same employee as the other sham studies. + +28. Despite Raytheon’s due diligence revealing that Supplier A’s subsidiary was not fully +operational, in March 2016, Raytheon awarded Supplier A’s subsidiary a subcontract for the +defense studies. As before, a Raytheon employee wrote the studies, Raytheon did not retain a +copy, and no other employees reviewed the studies. Between January and November 2017, +Raytheon paid Supplier A’s subsidiary $950,000 for the sham defense studies and falsely +recorded them as legitimate sub-contractor services. + +Bribe Scheme Related to the Falcon Project + +29. Raytheon employees knew that Qatari Military Official A was an advisor to the Falcon +project and attempted to use his influence to win the award by funneling money through +Supplier A’s subsidiary. Rather than again using sham defense studies, they attempted to +enter into a partnering agreement with Supplier A’s subsidiary. Raytheon employees +described partnering with Supplier A’s subsidiary on the Falcon project as “key to an award” +and bringing a “royal connection” to the table for Raytheon’s pursuit of the project. In 2016, +Raytheon approved the partnering agreement, and the employees immediately informed +Qatari Military Officials A and B. However, in early 2017, the Qatari military terminated the +project for budget reasons. Raytheon’s controls failed to detect or prevent the attempted +bribery scheme. + +Qatari Third-Party Agent +Background + +30. Raytheon had long sought to win military defense contracts in Qatar. However, the process +was challenging, given the Qatari military procurement process was opaque. When Raytheon +retained Qatari Agent as its representative in Qatar, his royal ties and lack of military defense +contracting experience were known. Despite due diligence that revealed red flags of +heightened corruption risks, Qatari Agent was engaged on a success fee basis through his +Company. Over time, Raytheon personnel learned of additional red flags associated with +Qatari Agent that Raytheon failed to address. As one compliance employee stated regarding +Qatari Agent, “We have always had some ‘red flags’ that we basically accepted to live with.” + +31. The success-fee arrangement provided for vague services, and Qatari Agent’s primary +obligation was to exercise “best efforts” to help Raytheon establish relationships and good +will with the Qatari military. Qatari Agent was not willing or able to assist Raytheon +personnel with the few substantive tasks that were itemized in the agreements. Neither the +agreements nor Raytheon’s policies required Qatari Agent to submit invoices in order to get +paid; rather, the award of a contract to Raytheon and the receipt of payments from Qatar +triggered Raytheon’s payment of commissions to Qatari Agent. Until at least 2019, Raytheon +8 +did not require the Qatari Agent to report its activities on behalf of Raytheon as a condition +for payment, and thus Raytheon did not know what Qatari Agent did as its representative in +Qatar to help Raytheon win billions in military contracts, or what he did with the millions +paid to him. While numerous Raytheon employees raised concerns regarding red flags of +high corruption risk, they were overruled by management, who allowed the contracts with +Qatari Agent to be extended. + +32. Raytheon employees believed that the Qatari Agent was able to represent Raytheon only as a +result of an exception granted by the Emir to a prohibition on companies using sales +representatives to assist them in military procurements. No efforts were made by Raytheon to +determine whether Qatari Agent engaged in corruption to obtain the exception. Raytheon +also simply referred to Qatari Agent in some agreements as a “service provider” instead of +representative, but the substance of the relationship did not change. + +Raytheon Paid Qatari Agent Millions to Win Military Contracts + +33. Between February 2007 and April 2020, Raytheon paid over $30 million to Qatari Agent as +part of its efforts to sell its Patriot Missile system and other military defense systems to the +Qatari military. Working with Qatari Agent, Raytheon was awarded billions in defense +contracts. Qatari Agent was a relative of the Qatari Emir and for some period a member of +the Council of the Ruling Family, and he had no prior background in military defense +contracting. Time and time again, managers and employees raised concerns over red flags of +corruption regarding the agent. Yet, the relationship with the agent, who provided very little +support for work performed, continued unchecked. + +34. Due diligence on the agent was insufficient, and indicia of corruption were ignored. For +years, the company relied on a poorly drafted two-page opinion that Qatari Agent was not a +government official, despite the agent being a royal family member and a member of the +Council of the Ruling Family, who at times advised the Emir on finances before he became +Emir. Contracts with the agent were entered into and extended several times despite known +significant corruption risk. + +35. Raytheon’s written policies and procedures regarding agents were overlooked and, at times, +circumvented, to allow Qatari Agent to work on the company’s behalf. For example, when +the company finally required that Qatari Agent provide documentation of work performed, a +company employee, with the knowledge of others, ghost-wrote the agent’s reports. + +36. Despite the lack of or inadequate documentation of services performed by Qatari Agent, and +numerous employees expressing concern about continuing to work with the agent due to the +corruption risks, Raytheon paid over $30 million to Qatari Agent. Payments continued to +Qatari Agent even after the Commission staff raised questions about the company’s business +practices and corruption in Qatar. In an effort to exit the relationship quickly, Raytheon paid +the agent a record $17 million in March and April 2020. Despite the staff’s investigation, +Raytheon did not disclose to Commission staff the known corruption concerns and amounts +paid to the Qatari Agent. They were not revealed until new management became aware +9 +following the merger that created RTX and they determined to cooperate fully with the staff’s +investigation. + +Raytheon Failed to Obtain Proof of Services Provided + +37. From 2012 until 2022, the Raytheon Country Manager for Qatar (“Country Manager”) was +considered Qatari Agent’s handler, controlling all access to Qatari Agent by other Raytheon +employees. When Raytheon employees asked to speak with Qatari Agent, they were often told +that Qatari Agent was too important or busy to speak with them or provide the requested +service or information. In addition, Country Manager helped postpone deadlines for Qatari +Agent submissions that were required by Raytheon’s compliance and due diligence program, to +the point that the periodic refreshes of Qatari Agent’s due diligence were chronically late, and +the company’s information about Qatari Agent was frequently out of date by a year or more. +Raytheon personnel understood that Raytheon’s senior leadership supported Country Manager, +rendering him untouchable. + +38. Raytheon personnel could not confirm what work Qatari Agent had done to help Raytheon win +the contracts, and Raytheon failed to require Qatari Agent to report its activities. While +Raytheon managers and employees were aware that Qatari Agent was interacting with Qatari +officials on their behalf in connection with obtaining and retaining military contracts, they did +not know the names or titles of the government officials Qatari Agent contacted on Raytheon’s +behalf. Likewise, they did not know what transpired during those communications and +meetings. + +39. Qatari Agent was seemingly allowed to pick and choose what they were paid for and what +services they were credited with performing. One example occurred when the manager of a +project in Qatar asked Country Manager if Qatari Agent could help Raytheon obtain certain +permits needed for the project. Country Manager told the project manager that it was beneath +Qatari Agent to assist with permits and refused to contact him. When the permits were +issued, however, Country Manager sent an email in which he extolled the efforts of Qatari +Agent in assisting Raytheon obtain the permits. + +40. Country Manager provided Qatari Agent with internal documents and non-public information +to assist him with appearing to provide services and claim additional commissions from the +company. The internal documents included talking points for Qatari Agent to use with +Raytheon executives, draft messages from Raytheon senior managers to Qatari Agent to +allow Qatari Agent to prepare a response, and even draft minutes of a meeting between +Raytheon and Qatari Agent regarding a dispute over commissions. Country Manager’s +sharing of information to help Qatari Agent create the appearance of providing services was +known to others within Raytheon, yet they took no steps to stop the practice. + +41. In addition, it was known that Country Manager ghost-wrote communications on behalf of +Qatari Agent to send to Raytheon managers and executives. These included emails and +WhatsApp messages about the progress of Raytheon pursuits and the burden on Qatari Agent +of completing Raytheon due diligence forms. Moreover, beginning in 2019, when Raytheon +10 +instituted a requirement that representatives submit quarterly activity reports, Country +Manager wrote all Qatari Agent’s activity reports. The reports were vague and lacked +specific information about work performed. Raytheon managers and an attorney knew +Country Manager authored the activity reports without authorization. The reports were a +requirement for Qatari Agent to be paid. Despite knowledge the reports were ghost-written, +Raytheon paid Qatari Agent and continued the relationship. + +42. When Raytheon personnel attempted to obtain an adequate level of detail from Qatari Agent +in the activity reports, Country Manager wrote a letter of complaint for Qatari Agent +Company to send to a Raytheon executive. The executive then tasked Country Manager with +drafting a response for him to send to Qatari Agent. A Raytheon attorney who was aware of +the situation emailed, “Priceless since [Country Manager] probably wrote the letter from +[Qatari Agent Company].” Thus, any attempt to gather information about what Qatari Agent +was doing through the activity reports was a meaningless, check-the-box exercise that neither +enhanced compliance efforts nor mitigated corruption risks. + +Raytheon Made Unsupported Payments to Qatari Agent +43. The contracts that Raytheon sought in Qatar were high-value pursuits worth billions of +dollars which increased the risks of the relationship with Qatari Agent. Raytheon senior +executives focused only on the potential for unusually high revenue from military sales in +Qatar, to the exclusion of meaningful compliance or internal accounting controls over +payments to the Qatari Agent. They believed that keeping Qatari Agent happy was essential +to obtaining that revenue, which resulted in special treatment of Qatari Agent. The tone at the +top of Raytheon and the relevant business unit stressed keeping Qatari Agent on board at all +costs, without regard to the numerous red flags of corruption and compliance concerns. + +44. Over the course of its relationship with Qatari Agent, Raytheon credited it with assisting the +company to obtain eight contracts valued at approximately $5.89 billion. From 2015 to 2020, +Raytheon obtained five of the contracts, worth approximately $3.2 billion. Senior managers +and executives believed that the relationship with Qatari Agent enabled the company to win +the contracts. One stated that Qatari Agent “has access to both the Minister of Defense and +the Emir. . . . I have witnessed it firsthand. It is what got the Patriot, [Ground Based +Integrated Air and Missile Defense] and EWR going.” + +45. The few executives who met with the Qatari Agent merely exchanged courtesies and +discussed Raytheon business at a high level. They did not know what, if any, legitimate +services Qatari Agent was providing in exchange for the millions being paid to him. + +46. In one instance, the dependence of Raytheon executives on Qatari Agent led to Raytheon +paying Qatari Agent commissions for contracts on which they ostensibly had not worked and +which were not covered by any Qatari Agent agreement or appendix. Beginning in 2013, +Qatari Agent demanded commission for Additions 22 and 23, which JV had won, even +though the JV team reported that they had received no assistance from Qatari Agent. In fact, +the JV team had utilized the sham defense studies corruption scheme to win those contracts. +11 +However, because Raytheon managers believed they needed Qatari Agent’s help to win the +large Patriot contract, they acquiesced to Qatari Agent’s demand that he be paid a +commission, since he was their country agent. In 2014 and 2017, Raytheon paid Qatari Agent +commissions for GCC HAT Additions 22 and 23, even though Qatari Agent had provided no +assistance for either addition. + +47. Raytheon’s policies required periodic evaluations of Qatari Agent’s performance as a +representative; however, the main factor used was whether Raytheon won business in Qatar. +For example, one manager admitted in the evaluation form that he was not privy to and did +not attend meetings and he had no knowledge of what Qatari Agent did to win the contracts. +As a result, Raytheon’s evaluation forms were simply a check-the-box requirement. + +48. Raytheon’s financial policies and procedures included caps on commissions to third parties, +which the company raised or manipulated for Qatari Agent. Qatari Agent was one of +Raytheon’s highest-paid representatives world-wide. To ensure that Qatari Agent continued +to receive their unusually high compensation, Raytheon senior management raised the +commission caps for Qatari Agent. In addition, they manipulated Qatari Agent’s existing +contract appendices by adding pursuits in ways that allowed them to supersede internal +policies concerning commission caps. Raytheon took these unusual steps to retain Qatari +Agent’s support due to belief that Qatari Agent was essential to Raytheon’s success in Qatar. + +49. In 2019 and 2020, when Qatari Agent submitted vague and inadequate activity reports, there +were no meaningful consequences for Qatari Agent. Although one commission payment was +delayed, Raytheon personnel were told that they were not to withhold commission payments +or terminate appendices with Qatari Agent because they should not “rock the boat.” Qatari +Agent was perceived to be essential to assisting Raytheon in obtaining payments for Patriot +2-Lot and NASAMS. The message was communicated from Raytheon senior executives, +who emphasized profits over compliance. At Raytheon, winning contracts took priority over +concerns of the legal and compliance functions. Thus, the company’s gatekeepers were not +empowered to address compliance issues with Qatari Agent, exposing Raytheon to the risk of +corruption. + +50. As a result of weaknesses in Raytheon’s internal accounting controls surrounding +intermediaries, Raytheon hired, paid, and increased commission rates for Qatari Agent +despite elevated risks of bribery and without reasonable assurance that its payments +compensated legitimate services. Between 2007 and 2020, Raytheon paid Qatari Agent over +$30 million in commissions, and despite having the right to audit Qatari Agent, it never +performed one. + +51. Raytheon personnel signed off on the payments without knowledge or proof of the services +that Qatari Agent provided. Some approvers stated that they never interacted with Qatari +Agent, yet they or their subordinates approved the payment of commissions. At least one +approver expressed the possibility that paying Qatari Agent could raise FCPA concerns. +Several approvers simply relied on what Country Manager claimed Qatari Agent Company +did. These signoffs represented the epitome of a paper program. Employees were required to +12 +check boxes, but they conducted no meaningful review of the services provided that +supported the proposed payment. + +52. The lack of effective compliance or internal accounting controls created an enhanced risk +that the huge commission payments to Qatari Agent Company could be used to fund +improper payments to foreign officials who were instrumental in awarding the military +defense contracts. Raytheon also maintained inadequate books, records, and accounts +concerning its payments to Qatari Agent Company, as they were unsupported by adequate +documentation of legitimate services, and the company maintained inaccurate documents +relating to Qatari Agent Company in its books and records. These failures occurred against a +backdrop of senior management indifference to the heightened corruption risk in connection +with Raytheon’s business in Qatar. + +LEGAL STANDARDS AND VIOLATIONS + +53. Under Section 21C(a) of the Exchange Act, the Commission may impose a cease-and-desist +order upon any person who is violating, has violated, or is about to violate any provision of +the Exchange Act or any rule or regulation thereunder, and upon any other person that is, +was, or would be a cause of the violation, due to an act or omission the person knew or +should have known would contribute to such violation. + +Raytheon Violated Exchange Act Section 30A + +54. The anti-bribery provisions of the FCPA, Section 30A of the Exchange Act, make it unlawful +for any issuer with securities registered pursuant to Section 12 of the Exchange Act or which +is required to file reports under Section 15(d) of the Exchange Act, or any officer, director, +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 the provision of or offer to +provide anything of value, directly or indirectly, to foreign officials for the purpose of +influencing their official decision-making, in order to assist in obtaining or retaining +business. 15 U.S.C. § 78dd-1(a). + +55. Raytheon Company engaged in the sham supplier scheme to make improper payments to +foreign officials to obtain and retain Qatari military defense contracts. As a result of the +conduct described above, Raytheon violated Exchange Act Section 30A. + +Raytheon Violated Exchange Act Section 13(b)(2)(A) + +56. The books and records provision of the FCPA, Section 13(b)(2)(A) of the Exchange Act, +requires every issuer with a class of securities registered pursuant to Section 12 of the +Exchange Act or which is required to file reports under Section 15(d) of the Exchange Act to +make and keep books, records, and accounts, which, in reasonable detail, accurately and +fairly reflect the transactions and dispositions of the assets of the issuer. 15 U.S.C. § +78m(b)(2)(A). + +13 +57. As a result of the conduct described above, Raytheon’s books and records inaccurately +characterized payments to supplier subcontractors in Qatar that included portions intended +for bribes as legitimate business expenses, and it lacked sufficient detail and support to +record payments to the supplier subcontractors, and to the third-party agent, as legitimate +commissions, and business expenses. Therefore, Raytheon violated Exchange Act Section +13(b)(2)(A). + +Raytheon Violated Exchange Act Section 13(b)(2)(B) + +58. Section 13(b)(2)(B) of the Exchange Act requires companies with a class of securities +registered under Section 12 of the Exchange Act or which are required to file reports under +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. 15 U.S.C. § 78m(b)(2)(B). + +59. As described above, Raytheon failed to implement a system of internal accounting controls +sufficient to provide reasonable assurances that access to assets was permitted, and +transactions were executed, only in accordance with management’s general or specific +authorization. Specifically, Raytheon had insufficient internal accounting controls over +vendor management and accounts payable to provide reasonable assurances that Raytheon +was adhering to Raytheon’s anti-corruption policy and procedures before paying suppliers +and agents, lacked sufficient internal accounting controls over the payments, and failed to +address repeated financial controls deficiencies surrounding intermediaries. By this conduct, +Raytheon violated Exchange Act Section 13(b)(2)(B). + +DISGORGEMENT + +60. The disgorgement and prejudgment interest ordered in section IV is consistent with equitable +principles and does not exceed Respondent’s net profits from its violations, and allowing +Respondent to retain such funds would be inconsistent with equitable principles. Therefore, +in these circumstances, distributing disgorged funds to the U.S. Treasury is the most +equitable alternative. The disgorgement and prejudgment interest ordered in section IV shall +be transferred to the general fund of the U.S. Treasury, subject to Section 21F(g)(3) of the +Exchange Act. + +COOPERATION AND REMEDIATION + +61. After a period of uncooperativeness and following the merger, Raytheon provided significant +cooperation under new management, who also hired new outside counsel. New management +14 +undertook an internal investigation of the Qatari Agent conduct and reexamined prior work +done related to Supplier A. From this point, the company timely produced key documents, +provided facts developed in its internal investigation, translated key documents, and made +numerous employees, including former employees and employees located abroad, available +to speak to Commission staff. + +62. New management also took steps to remediate, including terminating employees involved in +the misconduct, some of which were still working with the company despite their known +roles in the misconduct. Its remediation included revamping its anti-corruption policies, +enhancing internal accounting controls over the retention, payment, and oversight of third +parties, improving its anticorruption risk assessments, and expanding its compliance staff. +These remedial actions were taken following the merger, and elements of the new program +are untested, while continued efforts are underway to make additional enhancements. + +UNDERTAKINGS + +63. Respondent undertakes to engage an Independent Compliance Monitor pursuant to the +provisions set forth in Attachment A of the Order. + +64. For the period of engagement and for a period of two years from completion of the +engagement, Respondent shall not (i) retain the independent monitor for any other professional +services outside of the services described in this Order; (ii) enter into any other professional +relationship with the independent monitor, including any employment, consultant, attorney- +client, auditing or other professional relationship; or (iii) enter, without prior written consent of +the Commission staff, into any such professional relationship with any of the independent +monitor’s present or former affiliates, employers, directors, officers, employees, or agents +acting in their capacity as such. + +65. The reports by the independent monitor 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 objectives of the reporting requirement. For these reasons, among others, the reports and +the contents thereof are intended to remain and shall remain non-public, except (1) pursuant to +court order, (2) as agreed to by the parties in writing, (3) to the extent that the Commission +determines in its sole discretion that disclosure would be in furtherance of the Commission’s +discharge of its duties and responsibilities, or (4) is otherwise required by law. + +66. Respondent undertakes to: 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., Washington, +15 +D.C. 20549-5631B, 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, 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. In determining whether to accept the Offer, the Commission has considered the +undertakings set forth in this paragraph. + +CRIMINAL DEFERRED PROSECUTION AGREEMENT + +68. Raytheon Company, currently a subsidiary of RTX, will enter into a three-year deferred +prosecution agreement with the U.S. Department of Justice Criminal Division, Fraud Section, +and the U.S. Attorney’s Office for the Eastern District of New York, in which it +acknowledges responsibility for criminal conduct relating to certain findings in the Order. +Specifically, Raytheon Company acknowledges responsibility for two violations of 18 U.S.C. +§ 371, conspiracy to violate the FCPA, 15 U.S.C. § 78dd-1, and conspiracy to violate the +Arms Export Control Act, 22 U.S.C. § 2778. 2 Raytheon Company has agreed to pay a +criminal fine of $230,400,000 and forfeiture of $36,696,068 in connection with the deferred +prosecution agreement. + + + + + +2 In total, Raytheon Company will enter into two, three-year deferred-prosecution agreements (“DPAs”) with the U.S. +Department of Justice (“DOJ”). The first agreement is between Raytheon Company and the DOJ Criminal Fraud Section, +National Security Division, and the U.S. Attorney’s office for the Eastern District of New York that acknowledges responsibility +for one count of conspiracy to violate the FCPA, and one count of conspiracy to violate the Arms and Export Controls Act. The +agreement includes a total criminal penalty of $289,000,918 of which $267,096,068 that relates to the FCPA penalty and +forfeiture. The second DPA is with the DOJ’s Market Integrity and Major Frauds unit, and the U.S. Attorney’s Offices for +Massachusetts that acknowledges responsibility for two counts of Major Fraud Against the U.S. in connection with fraud related +to two Raytheon Company contracts. Raytheon Company will make an additional payment of $257,990,981 that relates to the +criminal penalty and restitution as part of this second criminal resolution. Both resolutions require that Raytheon Company retain +a three-year independent compliance monitor. + +16 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + +Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 30A, 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act. + + B. Respondent shall comply with Undertakings as enumerated in paragraphs 63 to 66 +above. + +C. Respondent shall, within fourteen days of the entry of this Order, pay +disgorgement of $37,400,090, and prejudgment interest of $11,786,208, and a civil monetary +penalty in the amount of $75,000,000, for a total of $124,186,298 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject to Exchange +Act Section 21F(g)(3). Respondent shall receive a civil penalty offset of $22,500,000 based on +its payment to the Department of Justice. If timely payment is not made, additional interest shall +accrue pursuant to SEC Rule of Practice 600 (in relation to disgorgement and prejudgment +interest ordered) and 31 U.S.C. § 3717 (in relation to civil penalty ordered). + +D. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +RTX 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 Tracy L. Price, +17 +Deputy Chief, FCPA Unit, Division of Enforcement, Securities and Exchange Commission, 100 +F St., NE, Washington, DC 20549-5631B. + + 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 acknowledges that the Commission is not imposing a civil penalty in +excess of $75,000,000 based upon its cooperation in a Commission investigation or related +enforcement action. If at any time following the entry of the Order, the Division of Enforcement +(“Division”) obtains information indicating that Respondent knowingly provided materially false +or misleading information or materials to the Commission, or in a related proceeding, the +Division may, at its sole discretion and with prior notice to the Respondent, petition the +Commission to reopen this matter and seek an order directing that the Respondent pay an +additional civil penalty. Respondent may contest by way of defense in any resulting +administrative proceeding whether it knowingly provided materially false or misleading +information, but may not: (1) contest the findings in the Order; or (2) assert any defense to +liability or remedy, including, but not limited to, any statute of limitations defense. + + By the Commission. + + + + Vanessa A. Countryman + Secretary + + + +Attachment A +Independent Compliance Monitor +Retention of Monitor and Term of Engagement + 1. RTX Corporation (“RTX” or “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 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. + 2. The Company 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 +may be terminated early (the “Term of the Monitorship”). The Term of the Monitorship can be +extended as set forth in Paragraph 26, below. The Company 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. +2 + 3. For the Term of the Monitorship and for a period of two years from completion of +the engagement, neither the Company nor any of its then current or former affiliates, +subsidiaries, directors, officers, employees, or agents acting in their capacity as such shall (i) +retain the Monitor for any other professional services outside of the services described in this +Order; (ii) enter into any other professional relationship with the Monitor, including any +employment, consultant, attorney-client, auditing or other professional relationship; or (iii) enter, +without prior written consent of the Commission staff, into any such professional relationship +with any of the Monitor’s present or former affiliates, employers, directors, officers, employees, +or agents acting in their capacity as such. +Company’s Obligations + 4. 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; 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. + 5. 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 +3 +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, the Monitor shall notify the Commission +staff. + 6. 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 evidence or allegations to the Commission staff. Any disclosure by the +Company to the Monitor concerning potential 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 + 7. The Monitor shall review and evaluate the effectiveness of the Company’s +policies, procedures, practices, internal accounting controls, recordkeeping, and financial +reporting (collectively, “Policies and Procedures”), with a focus on Raytheon Company +operations as integrated into RTX Corporation, 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 internal accounting controls and FCPA corporate compliance program (the +4 +“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 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 comprehensive review of all +business lines, all business activities, and all markets. 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. + 8. During the term of the Monitorship, the Monitor shall conduct three reviews (First +Review, Second Review, and Third Review), issue a report following each review (First Review +Report, Second Review Report, and Third Review Report), 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 the +Company’s personnel, including auditors and compliance personnel. +First Review and Report + 9. 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 +the Company, the Monitor, and the Commission staff). Promptly upon being retained, the +5 +Monitor shall prepare a written Work Plan, which shall be submitted to the Company and the +Commission staff for comment no later than sixty (60) days after being retained. +10. In order to conduct an effective First Review and to understand fully any existing +deficiencies in the Company’s internal accounting controls 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, +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 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 mutu ally convenient +times and places; and +(d) risk-based analyses, studies, and testing of the Company’s FCPA corporate +compliance program. +6 +11. 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. +12. After receiving the First Review Work Plan, the Company and Commission staff +shall provide any comments concerning the First Review Work Plan within thirty (30) days to +the Monitor. Any disputes between the Company 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 the Company and Commission staff, the Monitor will have fifteen (15) days to +submit a Final First Review Work Plan. +13. 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 the Company, the +Monitor, and the Commission staff). The Monitor shall issue a written report within one hundred +seventy-five (175) days of commencing the First Review, setting forth the Monitor’s assessment +and, if necessary, making recommendations reasonably designed to improve the effectiveness of +the Company’s internal accounting controls 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 Board of Directors of the Company and contemporaneously transmit a +copy to Commission staff. +7 +14. Within one hundred fifty (150) days after receiving the Monitor’s First 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 sixty (60) days of receiving the report, an alternative policy, procedure, +or system designed to achieve the same objective or purpose. +15. 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). +16. With respect to any recommendation that the Monitor determines cannot +reasonably be implemented within one hundred and fifty (150) days after receiving the report, +the Monitor may extend the time period for implementation with prior written approval of the +Commission staff. +Second Review +17. 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 the Company +and Commission staff. The Company and Commission staff shall provide any comments +8 +concerning the Work Plan within thirty (30) 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 fifteen (15) days to submit a Final Second Review +Work Plan. +18. 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 the Company, the +Monitor, and the Commission staff). The Monitor shall issue a written Second Review Report +within one hundred forty-five (145) days of commencing the Second Review. The Second +Review Report shall set forth the Monitor’s assessment of, and any additional recommendations +regarding, the Company’s internal accounting controls and FCPA corporate compliance program +as they relate to the Company’s compliance with the FCPA and other applicable anti-corruption +laws; the Monitor’s assessment of the implementation by the Company of any recommendations +made in the First Review Report; and the Monitor’s assessment of the commitment of the +Company’s Board of Directors and senior management to compliance with anti-corruption laws. +19. Within one hundred twenty (120) days after receiving the Monitor’s Second +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 thirty (30) days of receiving the report, an alternative policy, +procedure, or system designed to achieve the same objective or purpose. +9 +20. In the event the Company and the Monitor are unable to agree on an acceptable +alternative proposal within thirty (30) 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 +its obligations. Pending such determination, the Company shall not be required to implement any +contested recommendation(s). +Third Review +21. The Monitor shall commence a Third Review no later than one hundred fifty +(150) days after the issuance of the Second Review Report (unless otherwise agreed by the +Company, the Monitor, and the Commission staff). The monitor shall issue a written Third +Review Report within one hundred forty-five (145) 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. +22. Within one hundred twenty (120) days after receiving the Monitor’s Third +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 thirty (30) days of receiving the report, an alternative policy, +procedure, or system designed to achieve the same objective or purpose. +10 +23. In the event the Company and the Monitor are unable to agree on an acceptable +alternative proposal within thirty (30) 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 +its obligations. Pending such determination, the Company shall not be required to implement any +contested recommendation(s). +Certification + +24. No later than sixty (60) days after implementation of the recommendations in the +Monitor’s Third Review Report, the Monitor shall certify whether the Company’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 the Company’s compliance +with its obligations under the Order, and which shall set forth an assessment of the sustainability +of the Company’s remediation efforts and may also recommend areas for further follow-up by +the Company. +25. 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. +11 +Extension of Monitor Period +26. If, as informed by the Monitor’s inability to certify that the Company’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 the Company has not successfully satisfied its obligations under +the Monitorship, the Monitor Period shall be extended for a reasonable time. +27. Under such circumstances, the Monitor shall commence a Fourth Review no later +than sixty (60) days after the Commission staff concludes that the Company has not successfully +satisfied its compliance obligations under the Order (unless otherwise agreed by the Company, +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 13 with respect to the First Review and in accordance with the procedures for follow- +up reports set forth in Paragraphs 17 to 21. A determination to terminate the Monitorship shall +then be made in accordance with Paragraph 24. +28. 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 the Company, 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 13 with respect to the First Review and in accordance +with the procedures for follow-up reports set forth in Paragraphs 17 to 21. These reviews shall +continue until the Monitor is able to certify, or unless as otherwise agreed by the Company and +Commission staff. +12 +Discovery of Potential or Actual Misconduct +29. 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 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 or that relevant internal accounting controls were circumvented or +were not reasonably designed or implemented . The Monitor shall contemporaneously notify the +Company’s 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 Completion +30. No later than sixty (60) days from date of the completion of the undertakings with +respect to the Monitorship, the Company 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 the Company agrees to provide such evidence. +Extensions of Time + 31. Upon request by the Monitor or the Company, the Commission staff may extend +any procedural time period set forth above for good cause shown. +13 +Confidentiality of Reports +32. 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 + + 33. All reports or other written communications by the Monitor or the Company +directed to the Commission staff shall be transmitted to Tracy L. Price, Deputy Chief, FCPA +Unit, Division of Enforcement, U.S. Securities and Exchange Commission, 100 F Street NE, +Washington D.C. 20549-5631B. + + + \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4537.txt b/raw/aaer/2024/AAER-4537.txt new file mode 100644 index 0000000000000000000000000000000000000000..7572312c703e27c92a5ace2e4a1840a677dba69f --- /dev/null +++ b/raw/aaer/2024/AAER-4537.txt @@ -0,0 +1,548 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11326 / November 12, 2024 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101574 / November 12, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4537 / November 12, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22309 + + +In the Matter of + + +ELANCO ANIMAL HEALTH 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 against Elanco Animal Health Inc. (“Elanco” +or “Respondent”) pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”) and +Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”). + +II. + + In anticipation of the institution of these proceedings, Elanco 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 finds that: + +SUMMARY + +1. This matter concerns Elanco’s failure to disclose material information concerning its +sales practices that rendered statements it made about its revenue growth misleading. Following a +spin-off from Eli Lilly and Company (“Lilly”) in September 2018, Elanco emphasized internally +the importance of meeting guidance on its revenue, core revenue growth, and earnings-per-share +(“EPS”) provided to investors and analysts, to prove that Elanco could succeed as a standalone +entity. Alongside cost-saving efforts and new product development, it repeatedly highlighted to +investors the growing demand from end-users in animal health generally and for its products in +particular. + +2. From the first quarter of 2019 to the first quarter of 2020, Elanco relied on quarter- +end incentives to its distributors so Elanco could make sales to meet its internal quarterly revenue +and core revenue growth targets (the “Quarter-End Incentivized Sales” or “Incentivized Sales”). +More specifically, Elanco would entice distributors to make end-of-quarter purchases in excess of +then-existing customer demand by offering them incentives such as rebates and extended payment +terms. These incentives allowed Elanco to improve its revenue each quarter, but caused distributors +to purchase products ahead of end-user demand. Without these Incentivized Sales, Elanco would +have missed its internal revenue and core growth targets in each quarter in 2019. + +3. Internally, Elanco employees raised concerns about the use of Quarter-End +Incentivized Sales, including that relying on such sales could negatively impact future inventory +levels at distributors (i.e., “channel inventory”) and consequently future revenue. Despite these +concerns, Elanco failed to disclose the use of its Quarter-End Incentivized Sales publicly, +rendering positive statements it made about revenue materially misleading. Indeed, Elanco publicly +attributed its revenue growth to strong consumer demand. Moreover, Elanco also failed to warn +investors of the impact Incentivized Sales to distributors in excess of consumer demand could have +on its future revenue and core revenue growth, and that its future performance may suffer if its +distributors refused the enticements. + +4. Ultimately, Elanco decided to stop offering Quarter-End Incentivized Sales to +distributors and to reduce channel inventory in the first quarter of 2020, which impacted Elanco’s +revenue and profits for the quarter. On May 7, 2020, Elanco announced an expected $160 million +decline in revenue for the first and second quarters of 2020 that caused its share price to drop by +over 13%. The statement cited the uncertainty of the COVID-19 pandemic and a “strategic +change” in Elanco’s inventory management practices – including reductions in channel inventory – +as the reason for the decline. Elanco publicly stated that it had not anticipated a strategic change to +reduce channel inventory levels when it started the year. However, prior to the onset of the +COVID-19 pandemic, Elanco had already planned to gradually reduce channel inventory levels + + 3 +each quarter and issued lower annual revenue guidance at the start of 2020 that incorporated that +change. In addition, internal documents and communications from prior to the COVID-19 +pandemic reflect that Elanco was planning to make a larger change to its channel inventory levels +in connection with a planned merger in the second half of the year. + +5. As a result of such conduct, and as described in more detail below, Elanco violated +Securities Act Sections 17(a)(2) and (3) and Exchange Act Section 13(a) and Rules 12b-20, 13a-1, +13a-11, 13a-13, and 13a-15(a) thereunder. + +RESPONDENT + +6. Elanco Animal Health Inc. is an Indiana corporation headquartered in Greenfield, +Indiana. Elanco manufactures and sells animal health products, such as flea and tick medications, +livestock feed additives, and vaccines. Elanco’s common stock is registered under Section 12(b) of +the Exchange Act and trades on the New York Stock Exchange. + +FACTS + +A. Elanco’s Pre-IPO Reliance on Quarter-End Incentivized Sales + +7. Elanco was previously a subsidiary of Lilly, representing about 13% of Lilly’s +revenue. On or about September 21, 2018, Lilly spun-off Elanco through an initial public offering +(“IPO”) of 20% of its common stock. It divested the remaining 80% of Elanco’s common stock as +of March 11, 2019, through a public exchange offer. + +8. Elanco has two main businesses: pet health products for dogs and cats +(“Companion Animal”), and farm or food animal products for livestock (“Farm Animal”). In both +businesses, from at least January 2019 through May 2020 (the “Relevant Period”), Elanco’s sales +model involved selling its products to third-party distributors, who then sold them onwards to end- +users of the products, such as animal owners, veterinarians, and feed lots. + +9. Prior to becoming a stand-alone public company, Elanco monitored channel +inventory by comparing Elanco’s sales to distributors with the distributors’ sales to end-users, as +reported to Elanco by an industry data aggregator. During this same time period, Elanco +occasionally used Quarter-End Incentivized Sales to meet its internal sales targets. Over time +Elanco’s reliance on incentives led to a build-up of excess inventory at distributors, as consumer +demand was not strong enough for distributors to sell their excess product to end-users. A +significant risk of building excess inventory at distributors is a corresponding decrease in future +sales to those same distributors if there is no corresponding increase in end-user demand. + +10. Then, as now, when channel inventory increased there were generally only two +ways Elanco could lower it, by: (i) increasing consumer demand for its products (or incentivizing +distributors to do so), which increased the distributors’ sales to end-users; or (ii) decreasing its +sales to distributors. + + 4 + +11. In December 2017, to more closely match channel inventory with actual consumer +demand, Elanco “flushed” excess channel inventory by decreasing sales to distributors until channel +inventory averaged 45 days on hand (i.e., the number of days required for a distributor to sell all of +its inventory on hand), which led to an approximately $35 million decline in revenue for that +quarter. By the time of its IPO, its largest distributors targeted channel inventory of 60 days on +hand. + +B. Elanco’s Post-IPO Reliance on Quarter-End Incentivized Sales + +12. After the September 2018 IPO, Elanco’s senior leadership was aware of the +importance of consistently meeting internal and external financial benchmarks, to demonstrate +Elanco’s viability as an independent entity. Elanco’s employees tracked sales and forecasted +revenue against its annual sales plan. They also continued to use sales reporting from Elanco’s +distributors to estimate and track channel inventory. + +13. For example, about six weeks before the end of each quarter, Elanco commercial +and financial personnel held meetings where they assessed Elanco’s to-date sales performance in +various businesses, forecasted the performance necessary for the remainder of the quarter to meet +quarterly sales targets, and compared these figures to its annual sales plan. These routine meetings +were known internally as “path to plan” or “gap to plan” meetings, and they were also used to +decide what actions were needed, if any, for Elanco to meet its sales targets. + +14. Elanco personnel also discussed whether “intervention” was necessary to meet sales +targets. By late 2018, Elanco had resumed offering distributors incentives, such as rebates and +extended payment terms, to encourage distributors to make additional purchases and allow Elanco +to meet its internal sales targets. + +15. Elanco’s Quarter-End Incentivized Sales generally involved discounts, rebate +payments, or extended payment terms. For example, in Companion Animal, Elanco offered +incentives for distributors to order enough product at quarter-end to increase their inventory to 90 +days on hand or more. As a result, Companion Animal distributors significantly reduced their +purchases from Elanco during the first two months of the following quarter until they sold down +the Elanco inventory they purchased at the end of the prior quarter. + +16. These Quarter-End Incentivized Sales were discussed at monthly and quarterly +financial planning meetings and summarized for senior leadership informally towards the end of +each quarter. Moreover, some Elanco employees raised concerns to senior leadership about the +risks of these sales practices. For example, prior to the Relevant Period, one Elanco employee wrote +in an email that “inflating inventories and kicking the can down the road will end in a reset.” +Another Elanco employee cautioned: “Let’s remember that [e]very time we pull forward or put in +an ask, there are consequences. These consequences will only become more material, for every +incremental dollar we ask. . . . There is only so much ask we can pull and so much inventory we can +build.” + + 5 + +17. Nevertheless, Elanco continued to make Incentivized Sales and used them to meet +its internal sales and core revenue growth targets for each quarter during the Relevant Period. +These sales practices also contributed to channel inventory increasing by over $100 million in +gross value (i.e., the value of the goods in the channel before considering rebates, discounts, and +returns) during 2019, creating a build-up of excess inventory at distributors and a reasonably likely +risk of a decrease in revenue and revenue growth in future periods. But, for each quarter during the +Relevant Period, Elanco failed to disclose the significant impact of its Quarter-End Incentivized +Sales and the reasonably likely risk that these sales practices could have a negative impact on +revenue in future quarters. + +First Quarter 2019 + +18. As of February 2019, Elanco was not on track to meet its internal sales plan. Nor +was it on track to meet the annual external guidance it provided to investors because the external +guidance was derived from its sales plan. To avoid this, Elanco decided to incentivize its +Companion Animal product distributors to purchase additional inventory to close the gap to its +internal sales targets by offering them 90-day payment terms. Elanco also offered its Companion +Animal product distributors rebate payments on all their purchases for the quarter if they ended the +quarter with inventory of 90 days (or more) on hand. It also offered rebates and other incentives to +its Farm Animal distributors to entice them to purchase additional product worth 30 days (or more) +on hand. Internally, Elanco senior leadership discussed these sales practices, describing them in one +email as “mak[ing] some trade-offs with our distribution partners.” + +19. The Quarter-End Incentivized Sales contributed to Elanco’s revenue and core +revenue growth for the quarter, allowing it to meet its internal targets for both metrics. Elanco +experienced a $14 million decrease in consumer purchases from the distributors for the quarter, +which together with the Incentivized Sales caused channel inventory to grow by $37 million in +gross value during the first quarter of 2019. + +20. In its first quarter 2019 earnings release (furnished with the Commission on Form +8-K on May 9, 2019), its earnings call on May 9, 2019, and its Form 10-Q filed with the +Commission on May 14, 2019, Elanco announced global quarterly revenue of $731.1 million. In +making these announcements, Elanco attributed its revenue growth in certain businesses to its sales +of key products based on customer needs. During its earnings call, for example, Elanco highlighted +the strength of the fundamentals of its business and the importance of vet-clinic demand as a lead +indicator of its performance. These statements were materially misleading, however, because +Elanco failed to disclose that a significant portion of its quarterly revenue numbers were +attributable to Incentivized Sales, and the reasonably likely risk that such sales practices could have +a negative impact on revenue in future quarters. + + + 6 +Second Quarter 2019 + +21. Distributor orders for Elanco’s Companion Animal business fell dramatically in +April 2019, only recovering in May after distributors finished selling the extra inventory purchased +late in the prior quarter. An internal report described April as a “challenging sales month given +[the] strong finish in Q1 and subsequent channel inventory depletion in April” even though +“underlying market demand remain[ed] in line with [] expectations.” + +22. By mid-May 2019, during Elanco’s routine path-to-plan process, Elanco employees +anticipated they may miss internal revenue and sales targets. They also recognized that the elevated +channel inventory in its Companion Animal business could be a potential risk because, unless +Elanco continued to offer incentives, its distributors would likely only purchase the minimum level +of contractually-required product which, in turn, could result in missing internal second quarter +sales targets by up to $40 million. Accordingly, Elanco offered Incentivized Sales to distributors in +the second quarter to meet internal sales and core revenue growth targets. + +23. During the second quarter, Elanco succeeded in growing end-user sales by $62 +million compared to the prior quarter and $54 million year-over-year – a record level of consumer +demand. Despite the record end-user demand, as a result of its continued use of Incentivized Sales, +Elanco’s channel inventory levels fell by only $2 million in gross value in the quarter. If Elanco had +not used Incentivized Sales, the significant increase in sales to end-users would have led to a more +significant reduction in channel inventory. + +24. In its second quarter 2019 earnings release (furnished with the Commission on Form +8-K on August 13, 2019), its earnings call on August 13, 2019, and its Form 10-Q filed with the +Commission on August 13, 2019, Elanco reported global quarterly revenue of $781.6 million, an +increase of 1% compared to the second quarter of 2018. As it did in the first quarter, Elanco again +cited underlying consumer demand in describing how it achieved its revenue. For example, in its +10-Q and earnings release, Elanco stated that its Companion Animal revenue growth was “driven by +increased demand for products across the therapeutics portfolio.” Additionally, in the earnings call +for the same period, Elanco stated that its “top line results represent[ed] a solid underlying demand +for our products” and highlighted the importance of vet clinic demand to Elanco’s quarterly results. +These statements were materially misleading because Elanco failed to disclose that a significant +portion of its quarterly revenue and growth numbers were attributable to Incentivized Sales, and the +reasonably likely risk that such sales practices could have a negative impact on revenue in future +quarters. + +Third Quarter 2019 + +25. In August 2019, a manager in Elanco’s U.S. Companion Animal business informed +Elanco’s senior leadership that distributor orders and channel inventory fell significantly in July in +the absence of incentive offers. By late August, during Elanco’s routine path-to-plan process, +Elanco identified a $30 million gap between its projected sales for the quarter and its annual sales +plan, meaning that Elanco was not likely to meet its internal sales targets. + + 7 + +26. Accordingly, at the end of the third quarter of 2019, Elanco repeated its incentives +to distributors. It also increased its payment term incentive for its two largest Companion Animal +distributors to 120 days – 30 days more than in the first two quarters in 2019 and double Elanco’s +standard terms. These incentives contributed to Elanco’s efforts to meet internal sales and core +revenue growth targets for the quarter. Elanco also experienced, however, a $19 million decrease +in consumer purchases from its distributors. Accordingly, Elanco’s channel inventory grew by $15 +million in gross value in the third quarter of 2019. + +27. In its third quarter 2019 earnings release (furnished with the Commission on Form +8-K on November 6, 2019), its earnings call on November 6, 2019, and its Form 10-Q filed with the +Commission on November 8, 2019, Elanco reported global quarterly revenue of $771.3 million, an +increase of 1% compared to the third quarter of 2018. As in the first two quarters of the year, Elanco +attributed its revenue to strong underlying consumer demand. Its 10-Q for the quarter, for example, +identified “increased demand for products” and “favorable purchasing patterns” as key positive +drivers of revenue. Similarly, on the earnings call, Elanco stated that “our top line results showed a +solid underlying demand for our products and the strength of our fundamentals.” These statements +were materially misleading, however, because Elanco failed to disclose that a significant portion of +its quarterly revenue numbers were attributable to Incentivized Sales, and the reasonably likely risk +that such sales practices could have a negative impact on revenue in future quarters. + +28. Although Elanco added language to its Form 10-Q regarding certain risks associated +with its channel inventory and revenue, Elanco’s statements nevertheless remained misleading. +More specifically, Elanco warned its investors that increases or decreases in inventory levels at its +channel distributors can positively or negatively impact its quarterly and annual revenue results, +leading to variations in quarterly revenues. Elanco also disclosed that it had extended payment terms +in the past and may do so in the future due to “competitive pressures” and the need for certain +inventory levels to avoid supply disruptions. These statements all described potential risks while +failing to disclose the Incentivized Sales that actually occurred and the existing reasonably likely +risks they created for future sales. + +Fourth Quarter 2019 + +29. In November 2019, Elanco continued offering incentives to its Companion Animal +distributors. This time, however, one of its largest distributors declined Elanco’s offer. Internally, a +member of Elanco’s management raised a concern that Elanco’s sales practices seemed to default to +loading the sales channel rather than increasing consumer demand, and that underlying demand +from end users of Elanco’s products was not strong enough to reduce channel inventory. + +30. During the last two weeks of December 2019, Elanco reduced the number of U.S. +Companion Animal distributors, eliminating four regional distributors that would have represented +about $61 million in fourth quarter sales. To recoup these sales, Elanco offered the four remaining +Companion Animal distributors incentives such as rebates and 90-day payment terms to entice +them to order more products that quarter. In its Farm Animal business, Elanco offered distributors + + 8 +incentives, including distributors with a much smaller level of business with Elanco. Elanco’s Farm +Animal team expressed concern that it sold these smaller distributors an average of 2-3 months’ +additional inventory in December 2019. By offering these incentives, Elanco was able to meet +internal sales and core revenue growth targets for the quarter and achieve annual EPS within its +revised annual EPS guidance range. Elanco also experienced a $36 million decrease in consumer +purchases from the distributors during the quarter, which together with the Incentivized Sales +caused channel inventory to grow by $44 million in gross value in the fourth quarter of 2019. + +31. On January 10, 2020, Elanco published annual revenue guidance for 2020 in a press +release furnished with the Commission on Form 8-K, and hosted a public call later that same day to +discuss it. During this call, Elanco stated that its growth was “[D]urable and resilient, driven by our +new products that offer solutions to key health challenges and target growth categories. . . . Most +importantly, we’re well-positioned to sustain and build on this 2020 growth over the long term.” +These statements were materially misleading, however, because Elanco failed to disclose that a +significant portion of its quarterly revenue numbers were attributable to Incentivized Sales, the +reasonably likely risk that such sales practices could have a negative impact on revenue in future +quarters throughout 2020, and the fact that those sales practices led to $100 million in gross channel +inventory growth during 2019. Moreover, by the time these statements were made, Elanco had +already determined to issue lower annual revenue guidance and take steps to gradually reduce +channel inventory because of the risk it posed to future revenue growth, but that material +information was not disclosed. + +32. In its fourth quarter 2019 earnings release (furnished with the Commission on Form +8-K on February 19, 2020), its earnings call on February 19, 2020, and its Form 10-K filed with the +Commission on February 28, 2020, Elanco reported global quarterly revenue of $787.0 million, a +decrease of 2% compared to the fourth quarter of 2018. Elanco continued to describe its revenue as +driven by consumer demand. For example, in its earnings release and during its earnings call, +Elanco attributed growth in its Companion Animal business to “continued uptake” of certain key +products. Similarly, during its earnings call, Elanco stated that it had grown its core revenue and met +its expectations in each of its six quarters as an independent public company. These statements were +materially misleading, however, because Elanco failed to disclose that a significant portion of its +revenue was attributable to Incentivized Sales in each of the six quarters, and the reasonably likely +risk that such sales practices could have a negative impact on future revenue. They were also +materially misleading because, while end-user demand grew in 2019 as compared to the prior year, +Elanco did not disclose that its channel inventory had increased by over $100 million in gross value +in 2019, which created a significant risk that Elanco would not be able to achieve future revenue +growth. + +First Quarter 2020 + +33. Elanco’s sales to distributors declined in January and February 2020. Accordingly, +in March 2020, Elanco began offering distributors Quarter-End Incentives to entice them to make +additional purchases before the end of the quarter. + + + 9 +34. During the same quarter, Elanco personnel discussed concerns with senior +leadership about these sales practices and channel inventory, including the use of Incentivized Sales. +In a March 9, 2020 meeting, a senior executive acknowledged the concerns and explained that +Elanco’s leadership team had discussed decreasing channel inventory and, in addition to gradual +reductions already planned at the start of the year, was considering a more aggressive plan to change +its sales model and target channel inventories of 60 days on hand and 60-day payment terms. + +35. Ultimately, after the onset of the COVID-19 pandemic, Elanco decided to stop +offering Quarter End Incentivized Sales to its distributors and to reduce channel inventory to 60 +days on hand with 60-day payment terms. In connection with this decision, Elanco considered how +they would explain the changes to investors. For example, in March 2020, Elanco senior leaders +discussed whether the company could cite the onset of the COVID-19 pandemic to explain the +planned inventory shift, and analyzed what would happen if it stopped offering Quarter-End +Incentivized Sales. + +36. As a consequence of Elanco’s decision to stop offering Incentivized Sales in March +2020, Elanco experienced a $62 million decrease in net sales to distributors and a significant +decrease in revenue compared to the fourth quarter of 2019. Consumer purchases from the +distributors increased by $22 million during the quarter, which together with the decreased sales to +distributors caused channel inventory to decrease by $55 million in gross value in the first quarter +of 2020. + +37. In its first quarter 2020 earnings release (furnished with the Commission on Form +8-K on May 7, 2020), its earnings call on May 7, 2020, and its Form 10-Q filed with the +Commission on May 7, 2020, Elanco announced global quarterly revenue of $657.7 million, down +10% compared to the first quarter of 2019. Elanco stated that nine percent of the revenue decline +was due to a $60 million reduction in channel inventory and that it expected an additional $80-100 +million revenue decline in the second quarter of 2020. To explain these decreases, Elanco stated +that its “distributors [were] managing their inventory more tightly” and that the distributors’ +“ability to generate demand is much less effective than [Elanco’s] own.” Elanco also said that +“[t]he COVID-19 virus and ensuing pandemic are impacting our lives and our industry[, f]rom +declining vet clinic visits and revenue to pressures in protein production and logistics,” and that +“[t]he COVID pandemic created significant working capital and liquidity pressures and uncertainty +on near-term end customer demand for our distributors, prompting reductions in the amount of +inventory they hold.” This, it said, had a “triggering effect to accelerate an important commercial +change” for Elanco that included a reduction in channel inventory. These statements were +materially misleading because Elanco did not disclose that (i) its decision to stop offering Quarter- +End Incentivized Sales was a materially significant contributing factor to the decrease in its +revenue; (ii) its use of Quarter-End Incentivized Sales in 2019 caused channel inventory to increase +by over $100 million in gross value; and (iii) it had already planned before the onset of the +COVID-19 pandemic to reduce channel inventory during 2020. + +38. During the Relevant Period, Elanco offered and sold securities, including through a +follow-on offering of common stock and convertible debt in January 2020 and the grant of + + 10 +incentive compensation to certain employees through a stock plan for which a registration +statement on Form S-8 was filed with the Commission on September 20, 2018. + +C. Elanco Acted Negligently in Making its Public Disclosures + +39. From May 2019 through May 2020, Elanco’s public disclosures misled investors +by attributing its revenue and revenue growth to strong consumer demand for its products while +failing to disclose the material impact of its Quarter-End Incentivized Sales and the reasonably +likely risk that such sales practices could have a negative impact on revenue in future quarters. +These failures occurred because Elanco did not act reasonably or implement disclosure controls +and procedures designed to ensure that all material factors contributing to revenue and revenue +growth were disclosed. + +VIOLATIONS + +40. As a result of the conduct described above, Elanco violated Sections 17(a)(2) and +(3) of the Securities Act, which proscribes the receipt of “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 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). + +41. Also as a result of the conduct described above, Elanco violated Section 13(a) of +the Exchange Act and Rules 13a-1, 13a-11, and 13a-13 thereunder, which require issuers to file +accurate annual, current, and quarterly reports with the Commission, respectively. Elanco also +violated Rule 12b-20 of the Exchange Act, which requires issuers to add such further material +information, if any, as may be necessary to make the required statements, in the light of the +circumstances under which they are made, not misleading. + +42. Section 13(a) of the Exchange Act also requires issuers to file periodic reports +with the Commission containing such information as the Commission prescribes by rule. Form +10-K and Form 10-Q require registrants to comply with Regulation S-K Item 303, which, in turn, +requires (among other things) that reports describe “any known trends or uncertainties that have +had or that the registrant reasonably expects will have a material favorable or unfavorable impact +on net sales or revenues or income from continuing operations” in its annual report on Form 10- +K. This item further requires that reports describe “any other significant components of revenues +or expenses that, in the registrant’s judgment, should be described in order to understand the +registrant’s results of operations.” Instruction 3 to Item 303(a) of Regulation S-K requires that +the “discussion and analysis shall focus specifically on 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.” Item 303(b) of Regulation S-K +requires discussion of material changes in such known trends or uncertainties in quarterly reports + + 11 +on Form 10-Q. Elanco’s use of Quarter-End Incentivized Sales created an uncertainty or event +that was known to Elanco’s senior management and reasonably expected to have a material +effect on its future revenues. Accordingly, Elanco also violated Section 13(a) of the Exchange +Act and Rules 13a-1, 13a-13, and 12b-20 thereunder because its failure to attribute revenue +growth to its use of Quarter-End Incentivized Sales deprived investors of material information +about its revenue necessary to understand the results of its operations. + +43. Finally, Elanco also violated Exchange Act Rule 13a-15(a), which requires issuers +such as Elanco to maintain disclosure controls and procedures designed to ensure that +information required to be disclosed by an issuer in reports it files or submits under the Exchange +Act is recorded, processed, summarized, and reported within the time periods specified in the +Commission’s rules and forms. + +ELANCO’S REMEDIAL EFFORTS + +44. In determining to accept the Offer, the Commission considered remedial acts +undertaken by Respondent, including new controls concerning its channel inventory levels and +amendments to its disclosure processes. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Elanco’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 Elanco cease and desist from committing or causing any violations and any future +violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Section 13(a) as well as +Exchange Act Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15(a) thereunder. + +B. Elanco shall, within 14 days of the entry of this Order, pay a civil money penalty of +$15,000,000.00 to the Securities and Exchange Commission. 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 + + + 12 +(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 +Elanco 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 Stacy L. Bogert, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. +C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for the penalties referenced in paragraph B above. Amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, Elanco +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 +Elanco’s payment of a civil penalty in this action (“Penalty Offset”). If the court in any Related +Investor Action grants such a Penalty Offset, Elanco 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 Elanco 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/2024/AAER-4538.txt b/raw/aaer/2024/AAER-4538.txt new file mode 100644 index 0000000000000000000000000000000000000000..bf86dcbf0ebf265082f746f2ae5d43ca62512467 --- /dev/null +++ b/raw/aaer/2024/AAER-4538.txt @@ -0,0 +1,99 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101579 / November 12, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4538 / November 12, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22310 + +In the Matter of +PRAGER METIS CPAs, LLC +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + +I. + The Securities and Exchange Commission (“Commission” or “SEC”) deems it +appropriate and in the public interest that public administrative proceedings be, and hereby are, +instituted against Prager Metis CPAs, LLC (“Respondent” or “Prager Metis LLC”) pursuant to +Rule 102(e)(3) 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 it and the subject matter of these +proceedings, and the findings contained in Section III. 2. below, which are admitted, Respondent +consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to + +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. + +Rule 102(e)(3)(iii) further provides that the Commission may impose a censure. + 2 +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. Prager Metis LLC is an accounting and auditing firm headquartered in +New York, New York, which has been registered with the Public Company Accounting +Oversight Board (“PCAOB”) since 2003. Prager Metis LLC provides accounting, auditing, +consulting, and tax services to a variety of companies, including public issuers whose securities +are registered with the Commission and trade in the U.S. markets, broker-dealers (“BDs”), and +investment advisers (“IAs”). + 2. On October 3, 2024, the court entered a final judgment permanently +restraining and enjoining Prager Metis LLC, by consent, from violating, directly or indirectly, +Rule 2-02(b) of Regulation S-X and Rule 17a-5(i) of the Securities Exchange Act of 1934 +(“Exchange Act”); from aiding and abetting violations of Sections 13(a), 15(d), and 17(a) of the +Exchange Act [15 U.S.C. §§ 78m(a), 78o(d), and 78q(a)] and Exchange Act Rules 13a-1, 13a- +11, 13a-13, 15d-1, 15d-13, and 17a-5; and from aiding and abetting violations of Section 206(4) +of the Investment Advisers Act of 1940 (“Advisers Act”) [15 U.S.C. § 80b-6(4)] and Advisers +Act Rule 206(4)-2, as set forth in the final judgment entered in the civil action entitled Securities +and Exchange Commission v. Prager Metis CPAs, LLC, et al., Case Number 1:23-cv-23723- +RNS, in the United States District Court for the Southern District of Florida. Prager Metis LLC +also was ordered to pay disgorgement in the amount of $172,728.19, plus prejudgment interest +thereon in the amount of $27,486.64, and a civil money penalty in the amount of $980,000. + 3. The Commission’s complaint alleged, among other things, that from in or +around December 2017 to in or around October 2020, Prager Metis LLC failed to comply with +Rule 2-01(b) of Regulation S-X, the Commission’s general standard for auditor independence, +when it included indemnification provisions in engagement letters with its clients, including +public issuers, BDs and IAs (collectively, “SEC Registrant Clients”). The complaint further +alleged that Prager Metis LLC had been on notice of its independence impairment since at +least early January 2019, but continued to enter into engagement letters which contained +indemnification provisions until approximately October 2020. The Commission’s complaint +alleged that as a result of the inclusion of indemnification provisions in its engagement letters, +Prager Metis LLC was not independent during the engagement periods for each of the audits, +examinations, and reviews of its SEC Registrant Clients in accordance with Rule 2-01(b) of +Regulation S-X and that Prager Metis LLC violated Rule 2-02(b) of Regulation S-X and Rule +17a-5(i) of the Exchange Act; aided and abetted violations of Sections 13(a), 15(d), and 17(a) +of the Exchange Act [15 U.S.C. §§ 78m(a), 78o(d), and 78q(a)] and Exchange Act Rules 13a- +1, 13a-11, 13a-13, 15d-1, 15d-13, and 17a-5; and aided and abetted violations of Section +206(4) of the Advisers Act [15 U.S.C. § 80b-6(4)] and Advisers Act Rule 206(4)-2. + 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 Prager Metis LLC’s Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: + Prager Metis LLC is censured pursuant to Rule 102(e) of the Commission’s Rules of +Practice [17 C.F.R. § 201.102(e)]. + By the Commission. + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4539.txt b/raw/aaer/2024/AAER-4539.txt new file mode 100644 index 0000000000000000000000000000000000000000..06a9f6e039f4a9bc4f5c450091362fbf59947c59 --- /dev/null +++ b/raw/aaer/2024/AAER-4539.txt @@ -0,0 +1,96 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101580 / November 12, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4539 / November 12, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22311 + +In the Matter of +PRAGER METIS CPAs LLP +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + I. + The Securities and Exchange Commission (“Commission” or “SEC”) deems it +appropriate and in the public interest that public administrative proceedings be, and hereby are, +instituted against Prager Metis CPAs LLP (“Respondent” or “Prager Metis LLP”) pursuant to +Rule 102(e)(3) 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 it and the subject matter of these +proceedings, and the findings contained in Section III. 2. 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. + +Rule 102(e)(3)(iii) further provides that the Commission may impose a censure. + 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. Prager Metis LLP is an accounting and auditing firm headquartered in El +Segundo, California, which has been registered with the Public Company Accounting Oversight +Board (“PCAOB”) since 2010. Prager Metis CPAs, LLC formed Prager Metis LLP to perform +professional services in California, but all employees are employed by Prager Metis CPAs, LLC, +which has a service agreement with Prager Metis LLP. + 2. On October 3, 2024, the court entered a final judgment permanently +restraining and enjoining Prager Metis LLP, by consent, from violating, directly or indirectly, +Rule 2-02(b) of Regulation S-X, and from aiding and abetting violations of Sections 13(a) and +15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. §§ 78m(a) and +78o(d)] and Exchange Act Rules 13a-1, 13a-13, 15d-1, and 15d-13, as set forth in the final +judgment entered in the civil action entitled Securities and Exchange Commission v. Prager +Metis CPAs LLP, et al., Case Number 1:23-cv-23723-RNS, in the United States District Court +for the Southern District of Florida. Prager Metis LLP also was ordered to pay disgorgement in +the amount of $3,868.90, plus prejudgment interest thereon in the amount of $916.27, and a civil +money penalty in the amount of $20,000. + 3. The Commission’s complaint alleged, among other things, that from in or +around April 2019 to in or around July 2019, Prager Metis LLP failed to comply with Rule 2- +01(b) of Regulation S-X, the Commission’s general standard for auditor independence, when it +included indemnification provisions in engagement letters with its clients, including public +issuers (“SEC Registrant Clients”). The complaint further alleged that Prager Metis LLP had +been on notice of its independence impairment since at least early January 2019, but continued to +enter into engagement letters which contained indemnification provisions until approximately +July 2019. The Commission’s complaint alleged that as a result of the inclusion of +indemnification provisions in its engagement letters, Prager Metis LLP was not independent +during the engagement periods for each of the audits of its SEC Registrant Clients in accordance +with Rule 2-01(b) of Regulation S-X and that Prager Metis LLP violated Rule 2-02(b) of +Regulation S-X, and aided and abetted violations of Sections 13(a) and 15(d) of the Exchange +Act [15 U.S.C. §§ 78m(a) and 78o(d)] and Exchange Act Rules 13a-1, 13a-13, 15d-1, and 15d- +13. +IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanction agreed to in Respondent Prager Metis LLP’s Offer. + + 3 + Accordingly, it is hereby ORDERED, effective immediately, that: + Prager Metis LLP is censured pursuant to Rule 102(e) of the Commission’s Rules of +Practice [17 C.F.R. § 201.102(e)]. + By the Commission. + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4540.txt b/raw/aaer/2024/AAER-4540.txt new file mode 100644 index 0000000000000000000000000000000000000000..e966fbd708ba79165cfe1fa5bf42e45abc5101a5 --- /dev/null +++ b/raw/aaer/2024/AAER-4540.txt @@ -0,0 +1,116 @@ + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101585 / November 12, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4540 + +ADMINISTRATIVE PROCEEDING +File No. 3-22312 + +In the Matter of + +ALDO PISCITELLO +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 Aldo +Piscitello (“Respondent” or “Piscitello”) 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 . . . [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 +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 +proceeding, and the findings contained in Section III, paragraph 3, below, which are admitted, +Respondent consents to the entry of this Order Instituting Public Administrative Proceedings +Pursuant to Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing +Remedial Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Piscitello, 72, was BorrowMoney.com Inc.’s (“BorrowMoney”) founder, majority +shareholder, and sole officer, including its President, Chief Executive Officer, and Chief Financial +Officer. Piscitello signed BorrowMoney’s filings with the Commission as BorrowMoney’s +President, Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer, +Secretary, Treasurer, and Chairman of the Board of Directors. Piscitello, 72, resides in Fort +Lauderdale, Florida. + +2. BorrowMoney was, at all relevant times, a Florida corporation with its principal +place of business in Fort Lauderdale, Florida. BorrowMoney’s common stock began trading on the +OTC Pink Market as “BWMY” on October 28, 2019. BorrowMoney’s common stock was +registered under Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”) on June +11, 2020. + +3. On September 13, 2024, a judgment was entered by consent against Piscitello, +permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933 +and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by committing or engaging in +specified actions or activities relevant to such violations; permanently enjoining him from +violations of Sections 13(d), 13(g), and 16(a) of the Exchange Act and Rules 13d-1 and 16a-3 +thereunder; and aiding and abetting violations of Section 13(a) of the Exchange Act and Rule 13a- +1 thereunder, as set forth in the judgment entered in the civil action entitled Securities and +Exchange Commission v. BorrowMoney.com, Inc., et al., Civil Action Number 0:24-cv-61118- +DSL, in the United States District Court for the Southern District of Florida. + +4. The Commission’s complaint alleged that BorrowMoney, founded by Piscitello, +who was its President, CEO, CFO and sole officer, purported to provide an internet-based platform +to match mortgage and loan providers with prospective borrowers, earning revenue by supplying +leads of prospective customers to those lenders. In Forms 10-Q filed with the Commission, for +each of its first three reporting periods for its fiscal year ending on August 31, 2019, BorrowMoney +represented that its revenue was related to lead generation. However, the majority of the revenue + 3 +reported was fictitious and, for the remainder, BorrowMoney did not have contracts or events that +met the criteria for revenue recognition required by U.S. generally accepted accounting principles. +Further, as alleged, Piscitello failed to make required disclosures related to his beneficial +ownership of BorrowMoney securities, and BorrowMoney did not report Piscitello's failure to file +beneficial ownership filings. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Piscitello’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that Piscitello 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/2024/AAER-4541.txt b/raw/aaer/2024/AAER-4541.txt new file mode 100644 index 0000000000000000000000000000000000000000..66cf09bfa9409ef323bbb5d68118b538510c5822 --- /dev/null +++ b/raw/aaer/2024/AAER-4541.txt @@ -0,0 +1,456 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101649 / November 18, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4541 / November 18, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22324 + + +In the Matter of + +BIT MINING 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 BIT Mining Ltd. (“BIT Mining” or +“Respondent”), formerly known as 500.com Limited (“500.com”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, Respondent admits the Commission’s jurisdiction over it and the +subject matter of these proceedings, and consents to the entry of this Order Instituting Cease-and- +Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + + + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + 2 +Summary + +1. This matter arises from violations of the anti-bribery, books and records, and +internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by +500.com, which at the time of the misconduct was an online sports lottery service provider +headquartered in Shenzhen, China. From 2017 to 2019, Respondent engaged in a widespread +bribery scheme to influence numerous foreign government officials, including members of Japan’s +parliament, in its effort to enter the Integrated Resort (“IR”) market and obtain licensing to +establish an IR casino in Japan (“the IR project”). At the time, Japan had recently lifted its long- +standing ban on casinos and passed legislation to legalize gambling. + +2. The scheme included illicit payments of approximately $2.5 million in the form of +fees and reimbursements to sham consultants, cash bribes to IR decision makers, and entertainment +and extravagant trips for Japanese officials. 500.com also created a subsidiary, 500.com Nihon, to +help orchestrate the bribery scheme. 500.com’s then Senior Executive authorized the improper +payments, which were at times paid via a U.S. dollar denominated bank account or a U.S. +correspondent bank. In late 2019, 500.com’s offices were raided, and Tokyo prosecutors charged +its consultants with bribery and prosecuted prominent government officials for accepting bribes. +500.com was unable to enter the IR market in Japan. The illicit payments were inaccurately +reflected in the company’s books and records, and it failed to have sufficient internal accounting +controls in place to detect or prevent the misconduct. + + Respondent + +3. 500.com was formerly an online sports lottery service provider incorporated in +the Cayman Islands, with headquarters and major business operations in Shenzhen, China. From +November 2013 to April 2021, 500.com’s American Depositary Shares (ADSs) were registered +with the Commission pursuant to Section 12(b) of the Exchange Act and traded on the New +York Stock Exchange (“NYSE”) under the symbol “WBAI.” 500.com is now known as BIT +Mining, a crypto assets mining business incorporated in the Cayman Islands and headquartered +in Akron, Ohio. Since April 2021, BIT Mining’s ADSs have been registered with the +Commission pursuant to Section 12(b) of the Exchange Act and trade on the NYSE under the +symbol “BTCM.” + + Other Relevant Entities and Individuals + +4. Senior Executive, a Chinese National, was an executive, officer, and agent of +500.com from around September 2014 to 2020. Senior Executive authorized and approved +500.com’s improper payments to Japanese officials via its consultants and signed the relevant +consulting agreements. Senior Executive facilitated the improper payments to induce Japanese +officials to support 500.com’s entry into the Japanese IR market. + +5. 500.com Nihon Co. Ltd. (“500.com Nihon”), a wholly owned subsidiary of +500.com with operations in Japan, was incorporated in July 2017, and purportedly engaged in +market research and promotional activities related to the IR project. 500.com Nihon was created + 3 +primarily to facilitate the IR project, and its books and records were consolidated into the books +and records of 500.com. + +6. Official 1, a Japanese National, was, during the relevant period, a member of the +Japanese House of Representatives and Liberal Democratic Party, the Vice-Minister of Land, +Infrastructure, Transport and Tourism, and the state Minister in charge of IRs at the Cabinet +Office in Japan (“Vice-Minister”). In 2021, he was convicted in Tokyo District Court of +accepting bribes from 500.com in 2017 and 2018, while the company was seeking to enter +Japan’s IR market. The Court sentenced Official 1 to four years in prison and ordered him to +pay a fine of JPY 7,600,000 (approximately $72,000). + +7. Official 2, a Japanese National, was, during the relevant period, the Assistant for +Official 1 in Japan. In 2021, he was convicted in Tokyo District Court of accepting bribes from +500.com in 2017 and 2018. The Court sentenced Official 2 to two years in prison and suspended +the sentence. + +8. Company 1, a Singapore based subsidiary of a Japanese marketing and media +resource company, was retained as a consultant by 500.com in 2017 in connection with the IR +project. Consultant 1 was the Director and Senior Manager of Company 1 as well as a Director +of 500.com Nihon. + +9. Consultant 1, a Chinese National, was a Director of 500.com Nihon and a Japan +based translator, consultant, and Director of Company 1, who was retained by 500.com from +April 2017 to June 2020 to assist with the IR project. Consultant 1 was also an agent of +500.com. In August 2020, Consultant 1 pled guilty in Tokyo District Court to paying bribes to +Official 1 on behalf of 500.com so that it could enter the IR market. + +10. Consultant 2, a Japanese National, was retained by 500.com from March 2017 +to September 2019, as a consultant and agent, to assist with the IR project. In August 2020, +Consultant 2 pled guilty in Tokyo District Court to paying bribes on behalf of 500.com to +Official 1 in exchange for Official 1’s help establishing an IR in either Hokkaido or Okinawa, +Japan. In October 2020, Consultant 2 was convicted of bribery in Tokyo District Court. + +11. Consultant 3, a Japanese National, was retained by 500.com from July 2017 to +September 2019, as a consultant and agent, to assist with the IR project. In August 2020, +Consultant 3 pled guilty in Tokyo District Court to paying bribes on behalf of 500.com to +Official 1 in exchange for Official 1’s help establishing an IR in Japan. In October 2020, +Consultant 3 was convicted of bribery in Tokyo District Court. + +12. Tour Company Executive was the President of a Japan based tourism company +that partnered with 500.com to seek Official 1’s support for establishment of an IR in Hokkaido. +In September 2020, Tour Company Executive pled guilty in Tokyo District Court to conspiring +with Consultant 2 and Consultant 3 to bribe Official 1. + + + + 4 +Facts + +The IR Project in Japan + +13. In April 2015, 500.com suspended its online lottery services in China after the +government made changes to its rules governing online lottery sales. Thereafter, the Company’s +net revenues declined substantially. + +14. On December 15, 2016, Japan’s parliament, the National Diet, passed the IR +Promotion Act, which legalized gambling in Japan and lifted its long-standing comprehensive +ban on casinos. In July 2018, the National Diet enacted the IR Implementation Act, which +allowed for the licensing and creation of a limited number of resorts in Japan designed to +integrate casinos with other facilities such as hotels, convention centers, entertainment venues, +luxury retail areas and restaurants. + +15. 500.com’s then Senior Executive learned about the IR Promotion Act in +approximately late 2016, and soon sought to bolster the company’s failing business operations +by establishing an IR related casino in Japan. In order to facilitate this goal, the company +engaged in a widespread bribery scheme designed to influence numerous foreign government +officials, including members of Japan’s National Diet. + +16. Between March and July 2017, 500.com hired Japan-based consultants, including +but not limited to Consultant 1, Consultant 2, and Consultant 3, to assist with entering the IR +market. In July 2017, 500.com created 500.com Nihon, a Tokyo based subsidiary, to facilitate +its entry into the IR market, and made Consultant 1 a Director. In a text message dated July 14, +2017, Consultant 1 asked Consultant 2 about “500 Corporation being able to enter into IR in the +first attempt” and referenced Senior Executive’s concern about “head-on competition with a +major company in Europe or the U.S. in open application” to which Consultant 2 replied, +“[t]hat’s why we’re aiming for cities where under-the-table deals can be used.” Later, in +September 2017, 500.com hired Consultant 1’s company, Company 1, as another purported +consultant on the IR project. + +17. Ultimately, the bribery scheme came to light in late 2019 and Tokyo prosecutors +charged both Japanese officials and consultants of 500.com in connection with the bribery scheme. +500.com did not obtain a license for an IR in Japan and was unable to enter the IR market. + +500.com Used Consultants to Make Improper Payments to Government +Officials Closely Connected to IRs, Including Official 1 and Official 2 + +18. In order to enter the nascent and competitive IR market, 500.com’s Senior +Executives and management knew it needed to gain support from influential government +officials with ties to IR development in Japan. As a means to gain this needed support, sham +consultants were hired to target government officials and pay them bribes on behalf of the +company. From 2017 to 2019, improper payments of approximately $2.5 million were paid to +further 500.com’s pursuit of entering the IR market, and were made through methods including +sham consulting fees and reimbursements, cash bribes, and entertainment and extravagant trips. + 5 +A portion of the improper payments were paid to, or for the benefit of, government officials. +Some examples of the improper payments are described herein. + +19. In connection with the bribery scheme, 500.com used a U.S. dollar denominated +bank account to facilitate improper payments, and U.S. based email service providers were used +at times when communicating about the IR project. During the relevant period, 500.com failed to +devise and maintain a system of internal accounting controls sufficient to detect or prevent the +improper payments. + +500.com Paid a Bribe Disguised as a “Lecture Fee” to Official 1 for his +Attendance at an IR Symposium in Okinawa, Japan, in August 2017 + +20. In approximately July 2017, 500.com planned an IR Symposium to promote its bid +for the development of an IR in Okinawa, Japan. Senior Executive invited Official 1 to be a +keynote speaker at the Symposium which was held in August 2017. Official 1 agreed to be paid a +lecture fee of JPY 500,000 (approximately $4,600), which Senior Executive approved. Following +the lecture, 500.com’s consultants learned that Official 1 would soon be promoted to Vice Minister +in charge of IRs and Senior Executive unilaterally approved payment of a larger fee to Official 1 of +JPY 2,000,000, even though the speech had already been given and Official 1 had not requested a +larger fee. + +21. In August 2017, 500.com paid the lecture fee pursuant to a sham invoice for JPY +2,400,000 ($26,395) issued by an entity owned by Consultant 3. Once payment was received +Consultant 3 transferred JPY 2,000,000 to a company controlled or owned by Official 1. The sole +purpose of the inflated lecture fee was to improperly influence Official 1 and obtain favorable +treatment on IR related matters. 500.com improperly recorded the lecture fee as management +expense – advisory fees. + +500.com Entered into a Sham Consulting Agreement with Company 1 for the Purpose of +Paying Cash Bribes to Government Officials Connected to IRs in Japan + +22. In September 2017, Japan’s Prime Minister abruptly dissolved the lower house of +the Japanese National Diet and called for a new general election in October 2017. Hoping to not +lose momentum with influential Japanese politicians whose support was needed to enter the IR +market, 500.com decided to use Consultant 1’s business, Company 1, to funnel cash to various +National Diet members. The purpose of the payments was to influence the IR process and gain +access to non-public information. + +23. On September 17, 2017, Consultant 2 communicated with Consultant 1 about the +bribery scheme, indicating “Once the OK is given, let’s coordinate….in Hong Kong…and take +cash (Japanese yen exchanged in Hong Kong) to Japan in a hand-carry bag. It surely will give an +excellent impression to make monetary contributions before anyone else.” Senior Executive +oversaw and approved the illicit payment scheme, including the transfer of cash by hand to the +National Diet members after it was determined that it was illegal to donate campaign funds directly +to the Japanese officials. + + 6 +24. In late September 2017, with Senior Executive and Consultant 1’s authorization, +500.com signed a sham consulting agreement to pay, among other things, “[c]osts associated with +IR Research and Reports of JPY 26,300,000 (or equivalent US dollars)” to Company 1 within five +days. On or about September 22, 2017, 500.com wired $233,715 (approximately JPY 26,400,000) +to Company 1’s bank, which then wired the money to a Hong Kong SAR, China (“Hong Kong”) +bank affiliated with Consultant 2. The wire payment went through a U.S. correspondent bank +account. Afterwards, Consultant 2 withdrew a portion of the money from the Hong Kong bank +account. Consultant 2 and Consultant 3 used the money to pay cash bribes to several Japanese +officials in Japan connected to IRs, including Official 1 and Official 2. + +25. 500.com improperly recorded the payment to Company 1 as management expense +– advisory fees. + +500.com Funded Travel by Japanese Officials to Shenzhen, China, and Macau, in +December 2017 and Paid Bribes to the Officials to Advance its Effort to Enter the +IR Market +26. In late December 2017, 500.com invited Official 1 and three other Japanese +officials, including Official 2, to travel on a three-day trip from Tokyo to Shenzhen, China, and +then Macau, purportedly to attend an IR related seminar on managing gambling addiction. The +real purpose for inviting Official 1, Official 2, and the other officials on the trip was to +improperly influence them and gain their support for 500.com entering the IR market. 500.com +executives, including Senior Executive, and consultants accompanied the officials on the trip, +along with employees of Company 1 and Tour Company, a travel agency that 500.com planned +to partner with on the IR project. + +27. 500.com made improper payments of approximately $221,614 in connection with +the December 2017 trip, including paying for roundtrip private jet transportation from Japan to +Shenzhen and Macau, entertainment, meals and hotel costs, shopping, gifts, and cash bribes for +Official 1, Official 2, and two other officials. 500.com improperly recorded the payments as +management expenses – travel expenses. + +500.com Paid Costs Related to a Ski Trip for Official 1, his Family Members and +Official 2 in February 2018 + +28. With Senior Executive’s approval, 500.com also sponsored a ski trip for Official +1, his family members and Official 2 to Hokkaido, Japan, in February 2018. The ski trip did not +involve a legitimate business purpose and was instead part of the effort to improperly influence +Official 1 and Official 2 and gain their support for the establishment of an IR in Hokkaido. + +29. Tour Company Executive partnered with 500.com to pay for the ski trip. With +Senior Executive’s approval, Consultant 3 and Tour Company paid approximately $6,635 for the +trip and 500.com reimbursed Consultant 3 for his share of the costs. 500.com improperly recorded +the payment as management expense – entertainment and travel expenses. + + 7 +30. In September 2020, Tour Company Executive was found guilty in Tokyo District +Court of conspiring with Consultant 2 and Consultant 3 to win influence over the IR project by +bribing Official 1 and Official 2 with the Hokkaido ski trip. + +500.com Failed to Follow Its Own Procurement Policy When it Retained Company 1, +Company 2, and Company 3 as Consultants + +31. During the relevant period, 500.com failed to properly verify that payments to +consultants were used for their stated purposes, and it failed to have mitigating controls to verify +that services were properly rendered before paying the consultants and corresponding expense +reimbursements. Executives at 500.com were able to direct employees to pay invoices without +having supporting documented deliverables and to pay cash bribes. Furthermore, 500.com failed +to provide anti-bribery and anti-corruption training to employees and third-party consultants who +interacted with government officials on its behalf. + +32. Similar deficiencies surrounded the retention of Company 1 and two other +business consultants, Company 2 and Company 3, in connection with the IR project. + +33. From August 2017 to August 2018, 500.com engaged Company 2 as a consultant +and paid a total of $240,000. While the company received no legitimate deliverables from +Company 2, the expense was nevertheless recorded as management expense-advisory fees for +the Japan IR project. + +34. Similarly, from January 2018 to September 2019, 500.com also engaged +Company 3 as a consultant and paid $310,785 for purported consulting services related to IRs. +As with Company 2, despite lacking support for the existence of legitimate deliverables, the +Company 3 expenses were also recorded as management expense-advisory fees for the Japan IR +project. + +35. Though required by its Procurement Policy, 500.com did not provide its Finance +Department with any price comparisons between the anticipated costs of the consulting services +for Company 1, Company 2 and Company 3, and prevailing market rates prior to retaining their +services. + +36. In addition to the improper payments described above, 500.com also paid +approximately $1,004,887 to its consultants, approximately $115,452 in expenses related to the IR +project, and an additional $370,774 to Company 1. Senior Executive authorized the payments. + +Legal Standards and Violations + +37. Under Section 21C(a) of the Exchange Act, the Commission may impose a cease- +and-desist order upon any person who is violating, has violated, or is about to violate any provision +of the Exchange Act or any rule or regulation thereunder, and upon any other person that is, was, +or would be a cause of the violation, due to an act or omission the person knew or should have +known would contribute to such violation. + + 8 +38. As a result of the conduct described above, 500.com violated Section 30A of the +Exchange Act, which prohibits any issuer with securities registered pursuant to Section 12 of the +Exchange Act or which is required to file reports under Section 15(d) of the Exchange Act, or +any officer, director, 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. + +39. Further, as a result of the conduct described above, 500.com 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 disposition +of the assets of the issuer. + +40. In addition, as a result of the conduct described above, 500.com 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. + +Cooperation and Remediation + + In determining to accept 500.com’s Offer, the Commission considered 500.com’s +cooperation, and remedial efforts. 500.com, now known as BIT Mining Ltd., disposed of its entire +lottery related business after an announcement in July 2021. In addition, the executives responsible +for the misconduct are no longer employed by the company. The company has revised and +enhanced its policies and procedures and training programs related to procurement, anti-corruption +and the FCPA. During the investigation, the company’s cooperation included providing regular +updates to the Commission, sharing facts identified during its own internal investigation, and +providing English translations of important documents. + +Deferred-Prosecution Agreement + +Respondent has entered into a deferred-prosecution agreement that acknowledges +responsibility for criminal conduct relating to the findings in the Order. Specifically, in United +States v. Bit Mining Ltd., Crim. No. 24-cr-744 (U.S. District Court for the District of N..J.), +Respondent acknowledged responsibility for violations of one count of conspiracy to commit an +offense against the United States, in violation of Title 18, U.S.C. § 371, that is, to violate the anti- +bribery provisions of the FCPA as amended, Title 15, U.S.C. § 78dd-1, and to violate the books +and records provisions of the FCPA, Title 15, U.S.C. §§ 78m(b)(2)(A) and (b)(5); and one count of +violating the books and records provisions of the FCPA, Title 15, U.S.C. §§ 78m(b)(2)(A) and +(b)(5). + 9 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 30A, 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act. + + B. Respondent shall, within fourteen days of the entry of this Order, pay a civil money +penalty in the amount of $4,000,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. Payment must be +made in one of the following ways: + + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +500.com, now BIT Mining Ltd., 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. + +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 + 10 +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of +the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + +D. Respondent acknowledges that the Commission is not imposing a civil penalty in +excess of $4,000,000 based upon its cooperation and agreement to cooperate in a Commission +investigation and/or related enforcement action. If at any time following the entry of the Order, the +Division of Enforcement (“Division”) obtains information indicating that Respondent knowingly +provided materially false or misleading information or materials to the Commission, or in a related +proceeding, the Division may, at its sole discretion and with prior notice to the Respondent, +petition the Commission to reopen this matter and seek an order directing that the Respondent pay +an additional civil penalty. Respondent may contest by way of defense in any resulting +administrative proceeding whether 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/2024/AAER-4542.txt b/raw/aaer/2024/AAER-4542.txt new file mode 100644 index 0000000000000000000000000000000000000000..e48ea9f3b4059dc48b78805af2b2800138ded4c9 --- /dev/null +++ b/raw/aaer/2024/AAER-4542.txt @@ -0,0 +1,632 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 11328 / November 22, 2024 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101702 / November 22, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4542 / November 22, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22327 + +In the Matter of + +UNITED PARCEL +SERVICE, 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 United Parcel Service, Inc. (“UPS” 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 UPS’s failures to adhere to the basic accounting principle that +the “fair value” of an asset is the price that would be received to sell that asset in an orderly +transaction between market participants. These failures resulted in material misrepresentations to +investors regarding its earnings and other reported items and activities. +2. In 2019, UPS’s corporate strategy group conducted a months-long analysis of one +of the company’s worst performing business units, UPS Freight. Although UPS was carrying the +business on its balance sheet at $1.4 billion, the 2019 analysis, which was available prior to the +company’s annual goodwill impairment test, concluded Freight was likely to sell for only about +$350 million to $650 million. This reflected that the nearly $500 million of goodwill associated +with Freight was impaired. An impairment in that amount would have materially reduced UPS’s +earnings, goodwill balances, and shareowners’ equity. +3. However when conducting the goodwill impairment testing required by Generally +Accepted Accounting Principles in 2019, UPS ignored the company’s own assessment of Freight’s +fair value. Instead it relied on valuation estimates prepared by an external consultant to support the +carrying value UPS had assigned to Freight without giving the consultant the information it needed +to fairly value the business. For example, UPS did not inform the consultant that its internal +analysis had concluded a prospective buyer would expect Freight to generate significantly less +profit after it was sold because it would no longer benefit from synergies and other cost savings it +was getting as part of UPS. Using financial information and assumptions provided or approved by +UPS, the consultant valued Freight at about $2 billion. It was clear that the consultant’s valuation +was based on assumptions a prospective buyer would not make in valuing Freight, and therefore +did not produce a fair value estimate determined in accordance with GAAP. Nevertheless, UPS +relied on this valuation and did not record a goodwill impairment. +4. UPS decided to seek a sale of Freight in 2020. In October 2020, UPS executed a +non-binding term sheet with a prospective buyer to sell Freight for $800 million subject to various +adjustments that were likely to reduce the final price. Yet when conducting the goodwill +impairment test for 2020, UPS did not consider this proposed transaction when valuing Freight. +Instead UPS relied again on the consultant’s valuation of Freight without informing the consultant +of the terms of the sale transaction the company was pursuing. As in 2019, the consultant again +valued Freight at about $2 billion using financial information and assumptions provided or +approved by UPS that market participants would not make, and thus did not reflect Freight’s fair +value. +5. In 2019 and 2020, UPS made various disclosures regarding the amount of its +earnings, goodwill balances, and shareowners’ equity that were materially misleading. UPS failed + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. +3 + +to inform investors that these reported items were materially dependent on valuations for Freight +that did not reflect the business’s fair value and did not fairly align with information in the +company’s possession about the assumptions market participants would use in valuing Freight. +Instead, these disclosures were based on UPS’s conclusion that the goodwill for its Freight +business was not impaired when the company had reliable information that it was. Had UPS +complied with GAAP by valuing Freight using assumptions market participants would use and +recognized the resulting goodwill impairment, its reported earnings, goodwill balances, and +shareowners’ equity would have been materially lower during the relevant period. UPS did not +disclose or otherwise inform investors of these material facts. +6. UPS finally concluded that Freight’s goodwill was impaired in the fourth quarter of +2020, when the company wrote off the goodwill after reaching an agreement to sell Freight for a +net price of about $650 million. The write-off reduced UPS’s fiscal year 2020 income from +continuing operations by about 6%, its fiscal year 2020 net income by about 20 percent, its +goodwill balances by about 13 percent, and its shareowners’ equity by about 32 percent. +7. In addition, UPS made false and misleading disclosures during this period about its +goodwill impairment testing. For example, in the third quarter of 2020, while UPS was in +negotiations to sell Freight for hundreds of millions of dollars below its carrying value, the +company falsely claimed in a Form 10-Q that there had been “no events or changes in +circumstances” that would indicate Freight’s goodwill may be impaired. +8. As a result of this misconduct, UPS engaged in conduct that materially misled +investors and failed to comply with its reporting, books and records, internal accounting controls, +internal control over financial reporting, and disclosure controls and procedures obligations. +Respondent +9. UPS, a Delaware corporation headquartered in Atlanta, Georgia, is a package +delivery company and provides supply chain management products and services. UPS’s stock is +registered under Section 12(b) of the Exchange Act and trades on the New York Stock Exchange. +Background +UPS’s Failures to Properly Value the Freight Business +UPS’s Internal Analysis of Freight +10. In mid-2019, UPS’s corporate strategy group, which included the company’s +mergers and acquisitions specialists, worked with external financial advisors on a months-long +evaluation of whether UPS should sell Freight, a business unit that had been underperforming the +4 + +company’s expectations. That analysis concluded Freight would likely sell for between $350 +million and $650 million. +11. This estimate was considerably less than the $1.4 billion carrying value UPS had +ascribed to Freight.2 The corporate strategy group concluded that a sale at that price would require +UPS to recognize an impairment of all the goodwill associated with Freight (about $500 million) +on its balance sheet and record a material charge to income. +12. Though UPS decided not to sell Freight at that time, its analysis of what Freight’s +sale price was likely to be should have been considered in the company’s goodwill impairment +testing under GAAP. Accounting Standards Codification 350 (Intangibles – Goodwill and Other) +requires entities testing goodwill to compare the carrying value of the reporting unit to its fair +value. Fair value is the price that would be received to sell an asset or transfer a liability in an +orderly transaction between market participants at the measurement date under current market +conditions.3 +13. If the carrying value of a reporting unit that includes goodwill exceeds the fair +value, GAAP requires the entity to record an impairment loss in an amount equal to that excess or +the entire goodwill balance, whichever is lower. The impairment loss is recorded as a charge to +income in the current period and thus can have a significant impact on an entity’s financial results, +including its earnings and shareowners’ equity. +14. Because UPS’s analysis of Freight reflected a range of likely sale prices that were +well below the business’s carrying value, it reflected that Freight’s goodwill was impaired and that +UPS should have recorded an impairment loss with respect to Freight’s goodwill. However UPS +did not record an impairment at that time because it did not use its analysis of Freight’s likely sale +prices, which it determined using assumptions market participants would use, in its goodwill +impairment testing. +UPS’s 2019 Goodwill Impairment Test +15. Prior to 2019, UPS had engaged a valuation consultant to prepare valuation +estimates for Freight as part of its goodwill impairment testing. UPS used a valuation consultant +again to prepare a valuation estimate for Freight in 2019. 4 UPS knew or should have known, +however, that the consultant’s conclusions in 2019 would not reflect Freight’s fair value because + +2 Freight’s carrying value equaled the value of the business’s assets on UPS’s balance sheet (including +goodwill) minus its liabilities. +3 ASC 350 provides that fair value shall be determined in accordance with ASC 820 ( Fair Value +Measurement). As explained in ASC 820, the term “fair value” is synonymous with a sale or exit price. ASC 820 +further provides that the fair value determination shall be based on “assumptions market participants would use in +pricing the asset or liability.” +4 UPS tested Freight’s goodwill balance for impairment annually, using an effective date of July 1, but the +actual impairment testing occurred in the months following that date. UPS’s external valuation consultant would +prepare fair value estimates and provide UPS with a draft valuation report prior to the company’s filing of its third +quarter Form 10-Q. After review and comment by UPS, the consultant would issue a final report late in the four th +quarter or early the next calendar year. +5 + +the consultant’s assumptions, which UPS provided or approved, differed substantially from those +market participants would use to value the business. +16. The valuation consultant used two valuation methods for its work: the discounted +cash flow (“DCF”) method, which calculates the present value of a business’s future cash flows, +and the “Guideline Public Company” (“GPC”) method, which derives a valuation by comparing +the entity to similar public companies. Using these two methods, the valuation consultant +estimated that Freight’s value was about $2 billion—more than three times the high end of UPS’s +expected sale price range for Freight. +17. The valuation consultant’s DCF calculation did not reflect Freight’s fair value for +several reasons. First, the consultant assumed a higher profit margin for Freight than market +participants would. UPS had internally allocated costs between Freight and a sister business unit in +a way that allowed Freight to consistently generate about a 16% profit margin on its most +important service. Absent this cost allocation arrangement, Freight would have been significantly +less profitable. Though UPS’s corporate strategy group had determined a third party buyer of +Freight would not benefit from the same cost allocation arrangement, and would therefore earn a +substantially lower profit from this service, the financial data UPS gave the valuation consultant +did not reflect this conclusion. +18. In addition, the financial data UPS gave the valuation consultant did not include +other costs a third party buyer would incur to operate Freight as a stand-alone entity. The data +UPS gave the consultant for its DCF model included various cost savings that benefited Freight +because it was part of the much larger UPS. For example, Freight did not have to incur certain +human resources, technology, financial, accounting, legal, and pension-related costs as a +component of UPS. Market participants would expect Freight to incur many of these costs— +which were likely to be significant—and would adjust their assumptions to take them into account +when valuing Freight. +19. UPS’s internal forecasts for Freight also used aggressive assumptions about +revenue and profit growth in future years. Although UPS’s corporate strategy group concluded a +prospective buyer would discount these projections by as much as 50 percent, the company did not +reflect this conclusion in the financial data it gave the valuation consultant for use in its DCF +model. +20. As a result of these factors, the valuation consultant’s DCF valuation was not based +on the likely assumptions market participants would use in valuing Freight, and therefore did not +reflect the price UPS would receive for Freight in an orderly transaction between market +participants. +21. The valuation consultant’s 2019 GPC calculation also did not reflect Freight’s fair +value. In its selection of the peer companies it would use to estimate Freight’s value, the valuation +consultant included multiple firms that—unlike Freight—had non-unionized workforces. UPS +understood the non-unionized firms had significantly higher valuation multiples than unionized +firms like Freight. UPS was responsible for confirming the suitability of the peer companies +proposed by the valuation consultant. Yet UPS did not advise the consultant to exclude the non- +unionized firms or otherwise make appropriate adjustments for the valuations of the non-unionized +6 + +firms even though it knew or should have known the economic characteristics of the non-unionized +firms were not comparable to Freight for valuation purposes. Consequently, the consultant +included those firms in its sample and estimated Freight’s value to be about $2 billion using those +firms as “comparables” in its GPC valuation. +22. Though UPS knew or should have known the valuation consultant’s estimate was +unreliable, the company used this work to conclude Freight’s goodwill was not impaired and to +continue carrying Freight on its balance sheet at about $1.4 billion. +UPS’s 2020 Goodwill Impairment Test +23. In June 2020, UPS launched an initiative to evaluate its asset portfolio and +potentially exit businesses that were not meeting the company’s expectations. At the time, Freight +was one of UPS’s worst performing businesses. +24. Later that month, UPS began pursuing a sale of Freight, with the goal of +announcing a transaction before the end of 2020. In August 2020, UPS executives began +negotiations with a company that had expressed interest in buying Freight. Consistent with UPS’s +internal analysis in 2019, the executives determined that Freight’s sale price was unlikely to exceed +$650 million. +25. In September 2020, UPS told the prospective buyer it was open to selling Freight +for $900 million. The prospective buyer made a non-binding offer to buy Freight for between +$750 and $800 million before various adjustments to the sale price to be calculated when the +transaction closed that were likely to reduce the net sale price.5 +26. In October 2020—several weeks before UPS filed its Form 10-Q for the third +quarter of 2020—UPS and the prospective buyer signed a non-binding term sheet. The contract +included a “headline” price of $800 million before the future adjustments.6 +27. On November 3, 2020, the day after UPS filed its Form 10-Q, during a regularly +scheduled meeting, UPS’s Board of Directors authorized management to conclude a sale of Freight +to the prospective buyer on terms consistent with the term sheet. Management informed the Board +that it expected the company would write off about $500 million in goodwill for Freight at the +close of the transaction.7 + +5 The proposed adjustments related to working capital, cash-on-hand, and various payments expected at the +close of the transaction. +6 The term sheet contemplated that UPS and the buyer would sign a contract under which UPS would +continue to provide a certain class of package transport service (as a subcontractor to the buyer) and realize a portion +of the profits on that service. +7 Although GAAP required UPS to impair Freight’s goodwill when its fair value declined below its carrying +value—regardless of whether the company was selling the business—the then-senior accountant supervising the +impairment analysis wrongly concluded Freight’s goodwill would not be impaired until the period in which the +company completed a sale of Freight. There was no basis for this in GAAP. +7 + +28. Despite this clear evidence of Freight’s fair value, UPS did not consider the signed +term sheet when testing goodwill for impairment as of the third quarter of 2020.8 Instead UPS +relied again on its consultant to prepare a valuation estimate for Freight – but did so without +informing the consultant of the term sheet. +29. Moreover, like the prior year, UPS knew or should have known that the valuation +consultant’s analysis was not based on assumptions market participants would use in valuing +Freight. As it had the prior year, UPS gave the consultant financial results and forecasts for Freight +that did not reflect how market participants would evaluate the business, and, again, the consultant +estimated Freight’s value at about $2 billion. Based on the valuation consultant’s estimate, UPS +concluded Freight’s goodwill was not impaired and continued carrying Freight on its balance sheet +at about $1.3 billion. +UPS Announces the Sale of Freight and Impairs Goodwill +30. On January 25, 2021, UPS publicly announced that it had reached a definitive +agreement to sell Freight for a “headline” price of $800 million. UPS expected the net sale price +would be about $650 million after future adjustments. UPS also announced that it would record a +goodwill impairment charge. The charge reduced UPS’s income from continuing operations and +after-tax net income for the twelve months ended December 31, 2020 by about 6 percent ($494 +million) and 20 percent ($357 million), respectively. It also reduced the values of UPS’s aggregate +goodwill on its balance sheet by about 13 percent and its shareowners’ equity by about 32 percent. +UPS’s Materially Misleading Statements to Investors +31. In 2019 and 2020, UPS made various disclosures to investors in Forms 8-K, 10-Q, +and 10-K, as well as during earnings calls, regarding its earnings, goodwill balances, and +shareowners’ equity that were materially misleading. In reporting these financial statement line +items, UPS did not inform investors that they were materially dependent on a valuation for Freight +that did not reflect the business’s fair value and did not fairly align with information in the +company’s possession about the assumptions market participants would use in valuing Freight. +Instead, these disclosures were based on UPS’s conclusion that the goodwill for its Freight +business was not impaired when the company had reliable information that it was. Had UPS +complied with GAAP by valuing Freight using assumptions market participants would use and +recognized the resulting goodwill impairment, its earnings, goodwill balances, and shareowners’ +equity would have been materially lower. UPS did not disclose or otherwise inform investors of +these material facts. +32. To the contrary, UPS’s public disclosures implied that the company’s goodwill tests +were based on reliable valuations of its businesses. In periodic filings for the third quarter and full- +year 2019, UPS disclosed that its financial statements used estimates that were based on the “most +current and best information” available to the company, and that its impairment tests indicated +goodwill was not impaired. Similarly, in its Forms 10-Q for the first three quarters of 2020, UPS +represented that its estimates “contemplate current and expected future conditions,” and that its + +8 UPS’s entry into the October 2020 non-binding term sheet was a Type 1 Subsequent Event under ASC 855 +(Subsequent Events). As such, the company should have considered the term sheet additional evidence of Freight’s +fair value for purposes of the annual goodwill impairment testing in the third quarter of 2020. +8 + +impairment tests indicated goodwill was not impaired. These statements were materially false and +misleading: UPS’s goodwill estimates were not based on the most current and best information +available to it about Freight, and the company did not impair goodwill because it had failed to +value Freight using assumptions market participants would use as GAAP required. +33. In its Form 10-Q for the quarter ended September 30, 2020 (filed on November 2, +2020), UPS disclosed in its Management’s Discussion and Analysis, “There were no events or +changes in circumstances during the third quarter of 2020 that would indicate the carrying amount +of our goodwill may be impaired as of November 2, 2020.” This was materially false. At that +time, UPS was in discussions to sell Freight at a price far below its $1.3 billion carrying value. +These discussions indicated not only that UPS’s goodwill “may be” impaired, but that it was. +UPS Knew or Should Have Known It Was Materially Misleading Investors +34. UPS knew or should have known the valuation consultant’s estimates for Freight +did not fairly value Freight in accordance with GAAP and were not a reliable basis on which to +conclude that Freight’s goodwill was not impaired, and thus that the company’s disclosures +regarding its earnings, goodwill balances, and shareowners’ equity were materially misleading. +UPS also knew or should have known the statements in the disclosures cited above regarding its +estimates and its goodwill not being impaired were similarly false and misleading. +35. A then-senior accountant at UPS supervised the company personnel performing the +goodwill impairment testing with the support of the valuation consultant. The senior accountant +knew that under GAAP, a fair value estimate must be based on assumptions market participants +would use, and that UPS was required to make adjustments to Freight’s historical financial results +and internal forecasts when valuing the business as part of its goodwill testing to account for the +differences in how market participants would evaluate the business for a potential bid. +36. The then-senior accountant also knew the financial results and forecasts UPS +provided to the valuation consultant for use in its valuation of Freight in 2019 and 2020 did not +reflect how market participants would value Freight. The senior accountant knew a team of UPS +executives, including the company’s mergers and acquisitions group, had worked with an external +financial advisor to prepare a set of financial results and forecasts that accounted for the various +ways in which a potential buyer would evaluate Freight differently from UPS. These reflected the +reduced profits, additional “standalone” costs, and less aggressive growth assumptions discussed +above. Yet the senior accountant understood UPS did not provide this information to the valuation +consultant. +37. The then-senior accountant also was aware of UPS’s $350 million to $650 million +expected sale price range for Freight as determined during the 2019 strategic assessment, and she +knew that, weeks prior to filing its third quarter 2020 Form 10-Q, UPS had executed a non-binding +term sheet to sell Freight for $800 million subject to various adjustments that were likely to reduce +the final sale price. Yet UPS did not disclose this information to the valuation consultant either.9 + +9 A UPS manager informed the valuation firm in late-August 2020 that the company was having discussions +with a third party about a potential sale of Freight, but the manager did not share information about the sale price + +9 + +38. The withheld information clearly reflected that Freight’s fair value was far below its +$1.3 billion then-carrying value. However the then-senior accountant did not consider UPS’s +internal assessments regarding a likely sale price range for Freight, or the nonbinding agreement to +sell Freight for $800 million subject to adjustments, relevant to the fair value determination. +Instead, UPS assumed that, until it executed a binding agreement of sale, the “best evidence” of +Freight’s fair value was the valuation consultant’s estimates – despite the fact that the financial +results and forecasts UPS had provided to the valuation consultant in 2019 and 2020 had not been +adjusted to reflect assumptions market participants would use in valuing Freight. +39. UPS assumed, for purposes of its goodwill impairment testing, that a potential +buyer of Freight would be a firm equal to UPS in scale and would integrate Freight into its +consolidated operations as UPS had. However there was no factual basis for this assumption. UPS +had concluded the buyer universe for Freight was limited and none of the potential buyers was +even close to the size of UPS. Accountants at UPS also had expertise in goodwill impairment +testing under GAAP, which requires that fair value estimates be based on “current market +conditions” rather than hypothetical scenarios under which a buyer is assumed to have the same +characteristics as the seller.10 +UPS’s Insufficient Controls and Procedures +40. UPS’s failure to impair Freight’s goodwill as required under GAAP arose, in part, +from inadequate internal accounting controls and internal control over financial reporting. UPS +failed to devise and maintain controls and procedures sufficient to provide reasonable assurances +that its accountants were appropriately considering reliable indicia of Freight’s fair value, including +the company’s internal assessments of Freight’s likely sale price range and, in 2020, information +regarding the negotiations to sell Freight for considerably below its carrying value. +41. UPS’s disclosure failures arose, in part, from and reflected inadequate disclosure +controls and procedures. UPS failed to maintain controls and procedures designed to ensure that +its disclosures in reports filed with the Commission relating to its earnings, goodwill balances, +shareowners’ equity, and estimates were not materially false or misleading. +UPS’s Violations +42. As a result of the conduct described above, UPS violated Section 17(a)(2) and (3) +of the Securities Act, which prohibit any person from directly or indirectly “obtain[ing] 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 from “engag[ing] in any transaction, practice, or course of + +under discussion. The valuation firm was unaware of the “gap” between its valuation and the much lower sale price +until shortly before UPS announced the impending sale of Freight on January 25, 2021. +10 ASC 820 provides, “[t]he objective of a fair value measurement is to estimate the price at which an orderly +transaction to sell the asset … would take place between market participants at the measurement date under current +market conditions.” +10 + +business which operates or would operate as a fraud or deceit upon the purchaser” in the offer or +sale of securities.11 + +43. UPS 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, current, 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. +44. UPS violated Exchange Act Section 13(b)(2)(A), which requires reporting +companies to make and keep books, records and accounts which, in reasonable detail, accurately +and fairly reflect their transactions and dispositions of their assets. +45. UPS violated Section 13(b)(2)(B), which requires all reporting companies to devise +and maintain a system of internal accounting controls sufficient to provide reasonable assurances +that, among other things, transactions are recorded as necessary to permit preparation of financial +statements in accordance with GAAP. +46. UPS also violated Exchange Act Rule 13a-15, which requires that every issuer of a +security registered pursuant to Exchange Act Section 12 maintain disclosure controls and +procedures as defined in Exchange Act Rule 13a-15(e), and, for issuers required to file an annual +report pursuant to Section 13(a) or 15(d) for the prior fiscal year, internal control over financial +reporting as defined in Rule 13a-15(f). +Undertakings +47. Respondent undertakes to: +a. Cooperate fully with the Commission in any and all investigations, litigations, or +other proceedings relating to or arising from the matters described in the Order. In +connection with such cooperation, Respondent shall: +i. 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; +ii. Use its best efforts to cause its officers, employees, and directors to be +interviewed by the Commission staff at such time as the staff reasonably +may direct; +iii. Use its best efforts to cause its officers, employees, and directors to appear + +11 Violations of Sections 17(a)(2) and (3) of the Securities Act do not require scienter. See Aaron v. SEC, 446 +U.S. 680, 697 (1980). During the relevant period, UPS offered and sold stock to its employees through an Omnibus +Incentive Compensation Plan for which a Form S-8 was filed with the Commission on May 15, 2018. The S-8 +incorporated by reference all subsequent filings by UPS under the Exchange Act, including the filings containing +statements and omissions at issue herein. UPS also offered and sold stock to employees through an employee stock +program in which its common stock was one of the investment options. +11 + +and testify without service of a notice or subpoena in such investigations, +depositions, hearings or trials as may be requested by the Commission staff; +and +b. In connection with any testimony of Respondent’s officers, employees, and +directors to be conducted at deposition, hearing, or trial pursuant to a notice or +subpoena, Respondent: +i. Agrees that any such notice or subpoena for Respondent’s officers’, +employees’, and directors’ appearance and testimony may be served by +regular or electronic mail on: David Woodcock, Esq., Gibson, Dunn & +Crutcher LLP, 1700 M Street N.W., Washington, DC 200036; +dwoodcock@gibsondunn.com. +ii. Agrees that any such notice or subpoena for Respondent’s officers’, +employees’, and directors’ appearance and testimony in any action pending +in a United States District Court may be served, and may require testimony, +beyond the territorial limits imposed by the Federal Rules of Civil +Procedure. +In determining whether to accept the Offer, the Commission has considered these +undertakings. +48. Respondent also undertakes to complete the following actions: +a. Remedial Training. Beginning within 90 days and ending no earlier than 36 +months after entry of this Order: +i. UPS will cause all certified public accountants employed by the company +who are involved in preparing, reviewing, or supervising fair value +estimates to complete a minimum of 4 hours of annual training concerning +the preparation of fair value estimates under ASC 820 and goodwill +impairment testing pursuant to ASC 350, to be administered by an +independent training provider not unacceptable to the staff of the +Commission; and +ii. UPS will cause all officers and employees with responsibility for UPS’s +public disclosures, including but not limited to all members of the +company’s Disclosure Committee, to complete a minimum of 4 hours of +annual training concerning UPS’s public disclosure obligations required by +the Securities Exchange Act of 1934 and the collection and assessment of +information potentially subject to those requirements, to be administered by +an independent training provider not unacceptable to the staff of the +Commission. +b. Retention of Independent Compliance Consultant. Within 30 days of the issuance +of this Order, Respondent shall retain the services of an Independent Compliance +Consultant (“Independent Consultant”) not unacceptable to the staff of the +12 + +Commission and provide a copy of this Order to the Independent Consultant. +Respondent shall provide the Commission staff with a copy of the engagement +letter detailing the Independent Consultant’s responsibilities, which shall include +the reviews and reports to be made by the Independent Consultant as set forth in +this Order. The Independent Consultant’s compensation and expenses shall be +borne exclusively by Respondent. +c. Independent Consultant’s Reviews. Respondent shall require the Independent +Consultant to: +i. Review the company’s policies, procedures, and controls relating to: +preparation and use of fair value estimates in connection with annual +and interim period goodwill impairment testing; and collection and +assessment of information concerning UPS’s public disclosure +obligations required by the Securities Exchange Act of 1934 and the +collection and assessment of information potentially subject to those +requirements; and +ii. At the end of the review, but no later than 365 days after the entry of +this Order, submit a written report to Respondent and the Commission +staff that shall include a description of the review performed, the names +of the individuals who performed the review, the Independent +Consultant’s findings and recommendations for changes or +improvements to the disclosures, policies, and procedures, and a +procedure for implementing the recommended changes and +improvements. +d. Respondent shall, within 60 days of receipt of the Independent Consultant’s report, +adopt all recommendations contained in the report, provided, however, that within +45 days after the date of the report, Respondent shall in writing advise the +Independent Consultant and the Commission staff of any recommendations that it +considers to be unduly burdensome, impractical, or inappropriate. With respect to +any recommendation that Respondent considers to be unduly burdensome, +impractical, or inappropriate, Respondent need not adopt that recommendation at +that time but Respondent shall instead propose in writing to the Independent +Consultant and Commission staff an alternative policy or procedure designed to +achieve the same objective or purpose as that recommended by the Independent +Consultant, or a different timeline for implementation in light of the +recommendation. Respondent shall attempt in good faith to reach an agreement +with the Independent Consultant on any recommendations objected to by +Respondent. Within 15 days after the conclusion of the discussion and evaluation +by Respondent and the Independent Consultant, Respondent shall require that the +Independent Consultant inform Respondent and the Commission staff in writing of +the Independent Consultant’s final determination concerning any recommendation. +At the same time, Respondent may seek approval from the Commission staff to not +adopt the recommendations that Respondent can demonstrate to be unduly +burdensome, impractical, or inappropriate. In the event that Respondent and the +13 + +Independent Consultant are unable to agree on an alternative proposal within 30 +days and the Commission staff does not agree that any proposed recommendations +are unduly burdensome, impractical, or inappropriate, Respondent shall abide by +the determinations of the Independent Consultant. +e. Within 30 days of Respondent’s adoption and implementation of all of the +recommendations in the Independent Consultant’s report that the Independent +Consultant deems appropriate, as determined pursuant to the procedures set forth +herein, Respondent shall certify in writing to the Independent Consultant and the +Commission staff that Respondent has adopted and implemented all +recommendations in the applicable report. The Commission staff may make +reasonable requests for further evidence of compliance, and Respondent agrees to +provide such evidence. +f. Respondent shall cooperate fully with the Independent Consultant and shall provide +the Independent Consultant with access to such of its files, books, records, and +personnel as reasonably requested for the Independent Consultant’s review, +including access by on-site inspection. To ensure the independence of the +Independent Consultant, Respondent (1) shall not have the authority to terminate +the Independent Consultant or substitute another independent consultant for the +initial Independent Consultant without prior written approval of the Commission +staff; and (2) shall compensate the Independent Consultant and persons engaged to +assist the Independent Consultant for services rendered pursuant to this Order at +their reasonable and customary rates. +g. The deadlines in this Undertaking 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 the last day. +h. For the period of engagement and for a period of two years from completion of the +engagement, Respondent shall not (i) retain the Independent Consultant for any +other professional services outside of the services described in the Order; (ii) enter +into any other professional relationship with the Independent Consultant, including +any employment, consultant, attorney-client, auditing or other professional +relationship; or (iii) enter, without prior written consent of the Commission staff, +into any such professional relationship with any of the Independent Consultant’s +present or former affiliates, employers, directors, officers, employees, or agents +acting in their capacity as such.. +i. Respondent 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 of privilege to prevent the Independent Consultant +from transmitting any information, reports, or documents to the Commission. +j. The reports by the Independent Consultant will likely include confidential financial, +proprietary, competitive business or commercial information. Public disclosure of +the reports could discourage cooperation, impede pending or potential government +14 + +investigations or undermine the objectives of the reporting requirement. For these +reasons, among others, the reports and the contents thereof are intended to remain +and shall remain non-public, except (1) pursuant to court order, (2) as agreed to by +the parties in writing, (3) to the extent that the Commission determines in its sole +discretion that disclosure would be in furtherance of the Commission’s discharge of +its duties and responsibilities, or (4) as otherwise required by law. +k. Respondent shall certify, in writing, compliance with the undertaking(s) set forth +above. The certification shall identify the undertaking(s), provide written evidence +of compliance in the form of a narrative, and be supported by exhibits sufficient to +demonstrate compliance. The Commission staff may make reasonable requests for +further evidence of compliance, and Respondent agrees to provide such evidence. +The certification and supporting material shall be submitted to Rami Sibay, +Assistant Director, Division of Enforcement, Securities and Exchange Commission, +100 F St., NE, Washington, DC 20549, with a copy to the Office of Chief Counsel +of the Enforcement Division, 100 F St., NE, Washington, DC 20549, no later than +sixty (60) days from the date of the completion of the undertakings. +Respondent may apply to the Commission staff for an extension of the deadlines described +above before their expiration, and upon a showing of good cause by the Respondent, the +Commission staff may, in its sole discretion, grant such extensions for whatever time +period it deems appropriate. +IV. + +In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent UPS’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 shall cease and desist from committing or causing any violations and any future +violations of Section 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-1, 13a-11, 13a-13, and 13a-15 thereunder. +B. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $45 million to the Securities and Exchange Commission. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. +Payment must be made in one of the following ways: +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +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 UPS +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. +C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for the penalty and interest referenced in paragraph B above. Amounts ordered to be paid as civil +money penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +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 shall comply with the undertakings enumerated in Paragraph 48 above. + + By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4543.pdf b/raw/aaer/2024/AAER-4543.pdf new file mode 100644 index 0000000000000000000000000000000000000000..e95bc16e85144f979796de2de634e8eb733388f8 Binary files /dev/null and b/raw/aaer/2024/AAER-4543.pdf differ diff --git a/raw/aaer/2024/AAER-4543.txt b/raw/aaer/2024/AAER-4543.txt new file mode 100644 index 0000000000000000000000000000000000000000..61c8c2e672e39953ba5ac82b318f8c0ed212418e --- /dev/null +++ b/raw/aaer/2024/AAER-4543.txt @@ -0,0 +1,123 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101731 / November 25, 2024 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4543 / November 25, 2024 +ADMINISTRATIVE PROCEEDING +File No. 3-19804 + +In the Matter of +MICHAEL BELLACH, +CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN +ACCOUNTANT RESPONSIBLE FOR THE +PREPARATION OR REVIEW OF FINANCIAL +STATEMENTS REQUIRED TO BE FILED WITH +THE COMMISSION OTHER THAN AS A MEMBER +OF AN AUDIT COMMITTEE + +On May 18, 2020, the Commission issued a consented Order Instituting Public +Administrative Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange Act of +1934 (“Exchange Act”) and Rule 102(e) of the Commission’s Rules of Practice, Making +Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order (the “Suspension +Order”) against Respondent Michael Bellach, CPA.1 The Suspension Order denied Bellach the +privilege of appearing or practicing before the Commission as an accountant but permitted him, +after two years from the date of the Suspension Order and if certain conditions were met, to +request that the Commission consider his reinstatement to resume appearing or practicing before +the Commission as (1) a preparer or reviewer, or a person responsible for the preparation or +review, of financial statements that are 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 Exchange Act; +(2) a preparer or reviewer, or a person responsible for the preparation or review, of financial +statements that are required to be 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; or (3) an independent +accountant. +This order is issued in response to Bellach’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. + +1 See Accounting and Auditing Enforcement Release No. 4142, dated May 18, 2020. + + 2 + +In the Suspension Order, the Commission found that Bellach, while a partner at KPMG +LLP, texted pictures of questions and answers to an internal training examination to a colleague +who served as the lead engagement partner on an audit engagement where Bellach served as a +second partner. The texts were sent at the lead partner’s request. After learning that the firm had +opened an internal investigation, Bellach deleted the relevant text messages after being +encouraged to do so by the lead partner. Bellach later admitted his conduct to the firm. As a +result of his conduct, Bellach failed to meet standards implemented by the Public Company +Accounting Oversight Board and American Institute of Certified Public Accountants requiring +him to act with integrity and to refrain from committing acts discreditable to the profession. + +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 which determination is necessarily +highly fact specific. + +Bellach has shown good cause for reinstatement and has met the conditions set forth in +the Suspension Order to be reinstated to appear and practice before the Commission as a person +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. In his capacity as a person +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, Bellach attests that he will have his +work reviewed by the independent audit committee of any company for which he works, or in +some other manner acceptable to the Commission, while practicing before the Commission in +this capacity. + +Bellach is not, at this time, seeking to appear or practice before the Commission as a +person responsible for the preparation or review of financial statements required to be filed with +the Commission as a member of an audit committee or as an independent accountant. If, in the +future, Bellach should wish to resume appearing and practicing before the Commission in such a +capacity, he will be required to submit an application to the Commission showing, among other +things, that he has complied and will comply with the terms of the Suspension Order. + +Bellach’s license to practice as a Certified Public Accountant is currently subject to +probation administered by the New York State Education Department Office of Professional +Discipline. Bellach has attested that he will notify the Commission if he is found to have violated +the terms of the probation. He has also attested that he understands that the suspension of his +CPA license could result in the revocation of the reinstatement of his privilege to appear and +practice before the Commission as an accountant. + + +2 Rule 102(e)(5)(i) provides: + +“[a]n 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 +On the basis of information supplied, representations made, and undertakings agreed to +by Bellach, and for the reasons stated immediately above, it appears that he has complied with +the terms of the Suspension Order denying him the privilege of appearing or practicing before +the Commission as an accountant. No information has come to the attention of the Commission +relating to his character, integrity, professional conduct, or qualifications to practice before the +Commission that would be a basis for adverse action against him pursuant to Rule 102(e) of the +Commission's Rules of Practice. As a result, Bellach 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 +Michael Bellach, 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. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4544.txt b/raw/aaer/2024/AAER-4544.txt new file mode 100644 index 0000000000000000000000000000000000000000..336facc6dd3f4543169d3b94f4b5e4919752a6ff --- /dev/null +++ b/raw/aaer/2024/AAER-4544.txt @@ -0,0 +1,71 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101804 / December 3, 2024 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4544 / December 3, 2024 +ADMINISTRATIVE PROCEEDING +File No. 3-20998 + +In the Matter of +MICHAEL HURLEY, +CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN +INDEPENDENT ACCOUNTANT + +On August 24, 2022, the Commission issued a consented Order Instituting Public +Administrative Proceedings Pursuant to Sections 4C of the Securities Exchange Act of 1934 +(“Exchange Act”) and Rule 102(e) of the Commission’s Rules of Practice, Making Findings and +Imposing Remedial Sanctions (the “Suspension Order”) against Respondent Michael Hurley, +CPA. +1 The Suspension Order denied Hurley the privilege of appearing or practicing before the +commission as an accountant but permitted him, after one year from the date of the Suspension +Order and if he provided certain documentation and attestations, to request that the Commission +consider his reinstatement to resume appearing or practicing before the Commission as (1) a +preparer or reviewer, or a person responsible for the preparation or review, of financial +statements that are 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 Exchange Act; (2) a preparer or +reviewer, or a person responsible for the preparation or review, of financial statements that are +required to be 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; or (3) an independent accountant. +This order is issued in response to Hurley’s application for reinstatement to appear and +practice before the Commission as an independent accountant. +In the Suspension Order, the Commission found that Farber Hass Hurley, LLP (“FHH”), +a public accounting firm, was engaged to perform annual surprise examinations, pursuant to + +1 See Accounting and Auditing Enforcement Release No. 4324, dated August 24, 2022. + + 2 +Section 206(4) of the Adviser Act of 1940 and Rule 206(4)-2 thereunder, for two SEC-registered +investment advisers for the fiscal years 2017 through 2020. Hurley, who was a non-equity +partner of FHH, conducted engagement quality control reviews for each of the surprise +examinations. During the course of that work, however, Hurley did not comply with relevant +professional standards, specifically failing to ensure that sufficient and appropriate examination +procedures were performed and that the examination reports issued by the firm were appropriate +in the circumstances. + + Hurley has provided the requisite information set forth in the Suspension Order and the +Commission has not discovered any contrary information or any other information indicating +that Hurley has violated a federal securities law, rule, or regulation or rule of professional +conduct since the entry of the Order. The Commission further finds no basis to determine that +reinstatement would not be in the public interest. Therefore, it is accordingly, + +ORDERED for cause shown that Michael Hurley, CPA is hereby reinstated to appear and +practice before the Commission as an independent accountant. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4545.txt b/raw/aaer/2024/AAER-4545.txt new file mode 100644 index 0000000000000000000000000000000000000000..02d72d4286096a1f32cd2ef0b67afb72e84ecf5c --- /dev/null +++ b/raw/aaer/2024/AAER-4545.txt @@ -0,0 +1,113 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101810 / December 4, 2024 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4545 / December 4, 2024 +ADMINISTRATIVE PROCEEDING +File No. 3-20076 + +In the Matter of +LAM D. HA, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN +ACCOUNTANT RESPONSIBLE FOR THE +PREPARATION OR REVIEW OF FINANCIAL +STATEMENTS REQUIRED TO BE FILED WITH +THE COMMISSION OTHER THAN AS A MEMBER +OF AN AUDIT COMMITTEE + +On September 25, 2020, the Commission issued a consented 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 (the “Suspension Order”) against Respondent Lam D. Ha, CPA. +1 The Suspension +Order denied Ha the privilege of appearing or practicing before the Commission as an accountant +but permitted him, after two years from the date of the Suspension Order and if certain +conditions were met, to request that the Commission consider his reinstatement to resume +appearing or practicing before the Commission as (1) a preparer or reviewer, or a person +responsible for the preparation or review, of financial statements that are 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”); (2) a preparer or reviewer, or +a person responsible for the preparation or review, of financial statements that are required to be +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; or (3) an independent accountant. +This order is issued in response to Ha’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. + +1 See Accounting and Auditing Enforcement Release No. 4173, dated September 25, 2020. + + 2 + +In the Suspension Order, the Commission found that Ha had engaged in improper +professional conduct in connection with his work as the senior manager for the audit of the fiscal +year 2017 financial statements for Santa Fe Gold Corporation. In this role, Ha had supervisory +responsibility for the audit and participated in its planning and performance. In connection with +the audit, the Commission found that Ha failed to exercise due professional care, maintain +professional skepticism, obtain sufficient appropriate audit evidence, and prepare audit +documentation of sufficient detail regarding the work performed. + +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 which determination is necessarily +highly fact specific. + +Ha has shown good cause for reinstatement and has met the conditions set forth in the +Suspension Order to be reinstated to appear and practice before the Commission as a person +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. In his capacity as a person +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, Ha attests that he will have his work +reviewed by the independent audit committee of any company for which he works, or in some +other manner acceptable to the Commission, while practicing before the Commission in this +capacity. + +Ha is not, at this time, seeking to appear or practice before the Commission as a person +responsible for the preparation or review of financial statements required to be filed with the +Commission as a member of an audit committee or as an independent accountant. If, in the +future, Ha should wish to resume appearing and practicing before the Commission in such a +capacity, he will be required to submit an application to the Commission showing, among other +things, that he has complied and will comply with the terms of the Suspension Order. + +On the basis of information supplied, representations made, and undertakings agreed to +by Ha, and for the reasons stated immediately above, it appears that he has complied with the +terms of the Suspension Order denying him the privilege of appearing or practicing before the +Commission as an accountant. No information has come to the attention of the Commission +relating to his character, integrity, professional conduct, or qualifications to practice before the +Commission that would be a basis for adverse action against him pursuant to Rule 102(e) of the +Commission's Rules of Practice. As a result, Ha has shown good cause for reinstatement. +Therefore, it is accordingly, + + +2 Rule 102(e)(5)(i) provides: + +“[a]n 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 +Lam D. Ha, 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. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4547.txt b/raw/aaer/2024/AAER-4547.txt new file mode 100644 index 0000000000000000000000000000000000000000..f5afd2b05a060dc1948046d0edb1682487c95e35 --- /dev/null +++ b/raw/aaer/2024/AAER-4547.txt @@ -0,0 +1,829 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES ACT OF 1933 +Release No. 11344 / December 16, 2024 +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101931 / December 16, 2024 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4547 / December 16, 2024 +ADMINISTRATIVE PROCEEDING +File No. 3-22361 +In the Matter of +BECTON, DICKINSON +AND COMPANY, +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” or “SEC”) deems it appropriate +that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the +Securities Act of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 +(“Exchange Act”) against Becton, Dickinson and Company (“BD” 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 +the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order +(“Order”), as set forth below. + +2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary +1. This matter involves Becton Dickinson’s repeated misrepresentations to investors +regarding the risks it was taking in selling one of its most important products. From 2016 to early +2020, BD understood its Alaris infusion pump, whose sales contributed about 10% of BD’s profits, +required new regulatory clearance from the FDA to address historical changes to the device and to +fix multiple software flaws that posed safety risks to patients. BD misrepresented these risks and +failed to disclose the risk that the FDA would prohibit sales of Alaris until the company obtained +new clearance and fixed its software. BD also overstated its income by failing to properly account +for the costs of fixing the device. +2. In 2016, BD’s regulatory experts determined that Alaris required new clearance +from the FDA because of cumulative historical changes made to the device since its last regulatory +clearance. In June 2016, BD began work internally to seek this clearance. Within several months, +however, BD realized it was unable at that time to give the FDA information it would require to +clear the device. So BD decided to change course. Instead, BD sought FDA clearance only for +certain new features it wanted to add to Alaris in the future. However, even for this substantially +narrowed submission, BD could not then give the FDA the information it needed for clearance. +BD withdrew that application in June 2018 and advised the FDA it would work on a new +submission. Nevertheless, BD continued to sell Alaris until 2020 while misleading investors about +the company’s regulatory compliance and without informing investors of the material risk that the +FDA would prohibit BD from continuing to sell the device without the necessary clearance. +3. In FY2019 and FY2020, BD also materially misled investors and failed to make +required disclosures about the increased risk that the FDA would prohibit sales of Alaris in light of +flaws in the device’s software that presented risks to patient safety. One involved the pump’s low +battery alarm, which was intended, but sometimes failed, to alert clinicians that Alaris was on the +verge of shutting down during infusions if the device was not plugged in. Another involved error +codes the device would generate in certain circumstances that delayed the start of infusions. By +2018, BD had received reports that there had been over 30 deaths or serious injuries potentially +associated with these issues.2 + +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 Further investigation ultimately determined in 2020 that these issues were potentially associated with 24 +serious injuries, but no deaths. In this time period, about 2 million Alaris pumps were used to deliver approximately +2.7 billion infusions to patients. + + +3 + +4. By January 2019, BD had identified over 25 additional flaws in Alaris’s software +that the company’s experts categorized as presenting risks of the greatest potential harm to patients. +BD did not, however, fix any of these flaws or inform investors of the heightened risk that the FDA +would limit BD’s ability to continue selling Alaris in light of these issues. +5. By this point, it was probable that BD would need to conduct a recall to fix Alaris. +However, BD failed to comply with Generally Accepted Accounting Principles by not disclosing +or properly accounting for these recall costs. +6. In October 2019, after the FDA3 raised new concerns about Alaris’s alarms, BD +proposed a plan to the agency for fixing all of the software issues. In doing so, BD informed the +FDA for the first time about the additional flaws it had found, including those categorized as +presenting risks of the greatest potential harm to patients, which by then totaled 37. BD asked the +FDA to allow the company to continue selling Alaris while it worked on addressing these issues +over time. BD proposed to do this by fixing the issues with a new software version while deferring +the regulatory clearance process it had tried and failed to complete previously. +7. On October 31, 2019, the FDA rejected BD’s proposal, warning BD it was putting +a “violative” device into the market with “defects and safety issues.” The FDA informed BD that +continuing to sell Alaris was “problematic” and “not an acceptable way to proceed.” The FDA +said, “These issues cannot be propagated in current manufacturing products. We cannot allow that +to happen.” The FDA added that the changes BD had proposed required regulatory clearance, and +that the devices already in medical facilities needed to be recalled and remediated more quickly +than BD had proposed. +8. BD understood it needed to stop selling new Alaris units until it addressed the +FDA’s concerns. It told the agency it would develop a new plan to fix the software +issues. Immediately following this meeting, BD ceased shipping Alaris. +9. Within a few days, however, BD’s then-senior management, in consultation with +multiple attorneys, senior internal experts, and executives in various roles, agreed to a different +plan proposed by the Alaris team that was similar to the one the FDA had already rejected: BD +would, within three months, resume shipping Alaris with a new software version but without first +completing the regulatory clearance process. Notwithstanding the concerns raised by the FDA +several days prior, BD’s plan assumed the FDA would exercise its enforcement discretion to allow +BD to make changes to Alaris’s software that otherwise required prior FDA clearance so that BD +could resume selling the device with new software that fixed all of the issues presenting risks of the +greatest potential harm. + +3 The FDA communications discussed in this Order refer to those made by and to the FDA team directly +responsible for overseeing Alaris’s compliance with regulatory requirements and were not binding on the agency. + + +4 + +10. On November 5, 2019, BD held an earnings call in which it told investors it was +pausing Alaris shipments during its first fiscal quarter to make software “upgrades” to the device. +On that call and in a concurrent Form 8-K, BD issued earnings and revenue forecasts that assumed +the company would recoup in the remainder of FY2020 most of the sales it would not make during +this pause. BD’s statements materially misled investors about Alaris’s regulatory status and the +reliability of its forecasts because they implied the company was merely enhancing the device and +were based on the company’s undisclosed conjecture that the FDA would reverse course and allow +BD to continue selling Alaris without clearance. +11. During this call and in the Form 8-K, BD also overstated its Q4 FY2019 operating +income.4 By this point, BD estimated the Alaris recall would cost the company $50 million. Yet it +did not reserve for these costs as GAAP required. BD’s failure to record the costs in Q4 FY2019 +resulted in BD overstating its operating income for that quarter by 82%. +12. Later in November 2019, BD filed a Form 10-K that included various statements +regarding the regulatory status of Alaris and the company’s interactions with the FDA. These +statements continued to mislead investors about Alaris and BD’s ability to continue selling the +device without new regulatory clearance. +13. In that filing, BD also materially misstated its financial results by again failing to +record the estimated costs of remediating and recalling Alaris—this time overstating its FY2019 +annual income before taxes by over 5%. +14. BD made additional misrepresentations to investors regarding Alaris over the +following two months. At a widely attended healthcare investor conference in November 2019, +BD again said it was “upgrading” Alaris and reaffirmed its previously issued earnings and revenue +guidance. In December 2019, BD told participants at another investor conference it believed +Alaris would continue to take market share from its competitors, and that the pause in sales would +be short-lived. In neither case did BD inform investors that it had ceased shipping Alaris to +address concerns raised by the FDA about the device, or that its forecasts depended on the FDA +allowing the company to resume sales. +15. In December 2019, BD finalized the interim software version it had been +developing and resumed selling Alaris without receiving FDA concurrence. At another investor +conference in January 2020, BD told investors Alaris sales had resumed and reaffirmed its 2020 +revenue forecast. BD did not, however, inform investors of the material fact that its forecast +hinged on its assumption that the FDA would allow BD to continue selling the device without new +regulatory clearance. +16. When the FDA learned in mid-January 2020 that BD had resumed shipping Alaris, +it warned the company that its decision to resume sales was “misaligned with our previous + +4 BD’s fiscal year end is September 30. + +5 + +conversations regarding your software issues and our mutual agreement that your firm should not +be distributing devices to new customers.” +17. On January 23, BD again stopped shipping Alaris. BD did not know how long this +“ship hold” would last, but understood it would likely have a substantially negative impact on the +company’s revenue in FY2020. Nevertheless, during its January 28 annual shareholders’ meeting, +BD again reaffirmed the FY2020 revenue forecasts that assumed the company would continue +selling Alaris without limitation in FY2020. +18. In February 2020, BD informed investors it had ceased shipping Alaris to new +customers and would not fully resume selling the device until it obtained clearance from the +FDA. That announcement led to a 12% decline in the company’s share price. Following the call, +one analyst texted a senior member of BD’s investor relations group, “I just can’t even . . . I do not +understand what happened here. 10 days ago we heard everything in pumps was ok and back on +market and better than expected . . . I’m stunned and have a lot of angry people with pitchforks.” +Respondent +19. Becton, Dickinson and Company is a New Jersey corporation headquartered in +Franklin Lakes, New Jersey. BD is a global medical technology company that develops, +manufactures, and sells medical supplies and devices. BD’s stock is registered with the +Commission pursuant to Exchange Act Section 12(b) and trades on the New York Stock +Exchange. BD files periodic reports, including Forms 10-K and 10-Q, with the Commission +pursuant to Section 13(a) of the Exchange Act and related rules thereunder. +Background +20. BD’s Alaris infusion pump delivers fluids, medications, and blood to patients in +hospitals throughout the United States. Alaris was a highly profitable and important product for +BD that contributed a material portion of BD’s total operating income in FY2019 and early +FY2020, when the violations described below occurred. +21. Infusion pumps like Alaris are Class II medical devices that present moderate to +high risk to patients. Section 510(k) of the Food, Drug and Cosmetic Act requires manufacturers +of such devices to obtain FDA “clearance” before they can be legally marketed and sold in the U.S. +To obtain this clearance, a manufacturer must demonstrate to the FDA that the device is safe and +effective through a “510(k)” submission. +22. Manufacturers often make changes to medical devices after obtaining 510(k) +clearance. If a manufacturer makes a modification that could significantly affect a device’s safety +or effectiveness—or if a manufacturer has made multiple modifications at once or over time that +cumulatively could have such an effect—new 510(k) clearance from the FDA is required to + +6 + +continue selling the device. However the FDA may exercise “enforcement discretion” not to bring +an enforcement action for devices that require new 510(k) clearance but continue to be sold.5 +BD’s Decision Not to Obtain New 510(k) Clearance for Alaris +23. In 2016, BD’s regulatory experts within the business unit responsible for the +manufacture and sale of Alaris determined that because of cumulative changes made over time to +Alaris’s software, Alaris needed new 510(k) clearance. In June 2016, the company began working +on a 510(k) submission that would cover these changes. Soon after beginning this work, however, +the Alaris team realized it did not have readily available the data and documentation the FDA +would require to obtain new 510(k) clearance for those historical changes.6 +24. At that time, the Alaris team was developing new features to include in Alaris. +Concerned that generating the data and documentation necessary for new 510(k) clearance would +delay the release of the new features and disadvantage its competitive position, the Alaris team +changed course. Rather than seek new FDA clearance for the cumulative historical changes it had +made to Alaris, the Alaris team decided it would instead seek clearance for only certain new +features it wanted to commercialize quickly. +25. After BD filed this narrowed 510(k) in October 2017, the FDA notified BD that its +submission was inadequate. The FDA informed BD that to begin its substantive review, the +company would need to provide, among other things, information concerning previous changes to +Alaris’s software, the requisite data to support those changes, and BD’s rationale for not submitting +a 510(k) application to cover the prior changes. +26. Because BD’s data and documentation about the previous changes to Alaris was +incomplete, it could not timely provide the FDA the information it requested. BD believed +pushing forward with this 510(k) application posed a “High Probability of Regulatory / +Compliance Risk,” which included, among other things, the FDA determining Alaris was +“adulterated,” meaning out of compliance and in need of a new 510(k) clearance because of +cumulative historical changes to the device. +27. BD withdrew this application in June 2018. The Alaris team indicated to the FDA +that it would work to pursue a new 510(k) submission, including for cumulative historical +changes—but without informing the agency that it had previously determined those changes +necessitated new regulatory clearance. BD continued selling Alaris nonetheless. + +5 A manufacturer may ask the FDA for a determination that the agency would not require it to stop sales of a +product that requires new 510(k) clearance. The FDA exercises this enforcement discretion from time to time. + +6 BD’s subsidiary responsible for Alaris (“CFN 303”) had significant gaps in its data about Alaris’s software +development. For example, it lacked information the FDA required for new 510(k) clearance about how the +software had changed over time. + + +7 + +28. BD knew or should have known this presented heightened risk to the company. +When BD acquired the Alaris product line in 2015, Alaris was (and remains) subject to a +preexisting consent decree with the FDA that resulted from longstanding compliance and safety +issues with Alaris.7 The consent decree subjects BD’s subsidiary responsible for Alaris to +heightened FDA scrutiny concerning its infusion pumps and gives the FDA enhanced authority to +take unilateral actions for violations of FDA rules, including limiting its sales of Alaris or even +prohibiting sales of the device. SEC disclosure rules required BD to disclose to investors the +material uncertainty that the FDA would prohibit BD from continuing to sell Alaris without new +FDA clearance.8 However BD did not do so. +29. To the contrary, BD materially misled investors about the company’s regulatory +compliance risks relating to Alaris. In FY2019, BD disclosed to investors in its periodic reports +that the consent decree gave the FDA authority to stop the company from continuing to sell Alaris +“in the event of any violations in the future.” And in its annual report during this period, BD stated +that it had “made substantial progress in its compliance efforts” in connection with the consent +decree. These disclosures were misleading given that (i) BD had not obtained the new 510(k) +clearance its Alaris team had concluded was required and (ii) the company was unlikely to obtain +such clearance in the near future. +30. By December 2018, numerous members of BD’s then-executive leadership knew or +should have known of significant deficiencies in how the company’s business unit responsible for +Alaris had been managing Alaris’s regulatory requirements. They were informed that the business +unit’s regulatory experts had concluded in 2016 that new 510(k) clearance was needed for past +changes to Alaris, that the business unit had a historical strategy of avoiding FDA engagement and +510(k)s, that there was a need for additional training regarding the quality system relating to +Alaris,9 that the withdrawn submission for new 510(k) clearance had been driven by business + +7 The consent decree was first entered into in 2007, following safety issues in an earlier version of the Alaris +infusion pump that was not manufactured by BD. Starting in 2009, Alaris was manufactured and sold by CFN 303, +which BD acquired in 2015. + +8 See 17 CFR § 229.303 (Regulation S-K Item 303, Management’s discussion and analysis of financial +condition and results of operations, including description of known trends and uncertainties that have had or are +reasonably likely to have a material favorable or unfavorable impact on net sales or revenues or income from +continuing operations). By no later than January 2019, the risk that the FDA would restrict BD’s ability to sell +Alaris was a known uncertainty that would have such a material unfavorable impact if it came to fruition . However, +BD did not conduct the requisite analyses to determine that no disclosure was required. Accordingly, disclosure was +required in BD’s periodic filings during its FY2019. See Management’s Discussion and Analysis of Financial +Condition and Results of Operations, Exchange Act Release No. 6835, 43 S.E.C. Docket 1330, 1989 WL 1092885, +at *6 (May 18, 1989). + +9 FDA rules require medical device manufacturers to “establish and follow quality systems to help ensure +that their products consistently meet applicable requirements and specifications.” FDA, Quality System (QS) +Regulation/Medical Device Current Good Manufacturing Practices (CGMP), https://www.fda.gov/medical- +devices/postmarket-requirements-devices/quality-system-qs-regulationmedical-device-current-good-manufacturing- +practices-cgmp. + +8 + +decisions instead of regulatory strategy, and that there was a lack of internal transparency and a +lack of respect for the regulatory experts within the business unit. +Misrepresentations Relating to Risks in Alaris’s Software +31. Postponing a new 510(k) submission for the cumulative changes to Alaris had +additional consequences beyond the heightened risk that the FDA could prohibit BD from +continuing to sell the device. Obtaining clearance would have allowed BD to update Alaris’s +software and fix over 140 software flaws it had found. These issues had varying degrees of +severity and risk. BD categorized over 15 of them as presenting risks of the greatest potential harm +to patients. +32. One of these flaws involved Alaris’s low battery alarm. This issue could cause +Alaris, if not plugged in, to shut down when its battery was depleted without warning to the +clinician. In November 2016, BD’s regulatory experts planned to address this issue by modifying +Alaris’s software. But this fix required new 510(k) clearance before it could be implemented. +That month, BD issued a recall notification informing clinicians using Alaris of the issue and ways +to mitigate it and prepared a software update to fix it. This update was included in the software for +which BD sought 510(k) clearance in 2017, but because BD withdrew that application in 2018, it +did not fix this the flaw in units it had already sold or in new units it was selling. +33. Another issue related to a “system error code” Alaris would spontaneously generate +in certain circumstances. This could interrupt or delay the start of infusions, posing an additional +safety risk to patients. In June 2017, BD issued a recall notification informing clinicians of the +issue and ways to mitigate it, but again, the company did not fix the software because it had +withdrawn its 510(k) application in 2018. This issue therefore also persisted in devices BD had +already sold and in new devices the company was continuing to sell. +34. By the end of 2018, BD had received reports of over 30 serious injuries or deaths +potentially associated with the low battery alarm and system error code issues.10 +35. Over time, BD learned of more issues with Alaris’s software. By January 2019, +BD was tracking over 160. By August 2019, the number had surpassed 200. Of these, BD’s +experts categorized over 25 as presenting risks of the greatest potential harm to patients. Though +BD had told the FDA about the low battery alarm and system error code issues, it did not inform +the agency of the other issues it was tracking until October 2019. +36. In August 2019, the FDA alerted BD to two additional alarm issues with Alaris that +presented potential safety risks. The agency informed BD that Alaris’s alarms for notifying + +10 As noted above, these reports led BD to conduct risk evaluations and make certain associated field +communications. BD subsequently investigated these reports further. By February 2020, the company determined +these issues were potentially associated with 24 serious injuries, but no deaths. In this time period, about 2 million +Alaris pumps were used to deliver approximately 2.7 billion infusions to patients. + + +9 + +clinicians that infusions had ended were not sufficiently audible and should be designated as “high +priority” rather than “medium priority.” The FDA told BD this “alarm prioritization” issue posed +safety risks because clinicians may not immediately respond to medium or low priority alarms, and +when the delivery of critical medication stops, a clinician’s unresponsiveness could lead to a +patient’s death. The FDA told BD to prioritize addressing this issue on an expedited basis.11 +37. Though SEC disclosure rules required BD to inform investors in its periodic reports +that these software issues increased the risk of regulatory action by the FDA to limit BD’s ability +to sell Alaris,12 BD did not do so. +38. To the contrary, BD misled investors by giving them a materially incomplete view +of the potential for recalls of its products. From 2016 to 2020, BD’s annual and quarterly filings +on Forms 10-K and 10-Q made generic disclosures relating to the possibility of recalls, regulatory +action, loss of sales, and injuries or other adverse events due to potential product defects or safety +concerns.13 By no later than FY2019, BD’s disclosures were materially misleading. They +presented such events as contingent or merely possible while omitting that BD was aware of +multiple issues with one of its most important products that created a heightened risk the FDA +would take regulatory action to limit BD’s ability to continue selling the device. Moreover, in +November 2018, BD had explicitly committed to the FDA that it would recall Alaris to remediate +the low battery alarm issue. +39. BD also failed to properly account for the costs of fixing these software issues. By +November 2018, it was probable that fixing devices it had already sold would require BD to send +technicians to medical facilities using Alaris to update the device’s software. Generally Accepted +Accounting Principles required BD to record or otherwise disclose its expected costs to implement +these fixes.14 BD did not do so. + +11 The FDA explained to BD that the only other pump manufacturer that had a similar issue had already +undertaken a Class I recall. Such a recall reflects the highest degree of health hazard because it involves a situation +in which there is a reasonable probability that the use of, or exposure to, a violative product will cause serious +adverse health consequences or death. + +12 See supra note 8. + +13 BD’s Forms 10-K, in describing a risk factor concerning defects or quality issues, state: “Manufacturing or +design defects . . . can lead to injury or other serious adverse events. These events could lead to recalls . . . and +could result, in certain cases, in the removal of a product from the market. A recall could result in significant costs +and lost sales and customers . . . as well as negative publicity and damage to our reputation that could reduce future +demand for our products. . . . In some circumstances, such adverse events could also cause delays in regulatory +approval of new products.” BD’s Forms 10-Q referred readers to these risk factors. + +14 GAAP Accounting Standards Codification (ASC) Subtopic 450 requires accrual and disclosure of material +loss contingencies that are probable and reasonably estimable. A loss contingency is probable when the future event +is likely to occur. BD failed to comply with GAAP with respect to its annual and quarterly periodic reports for +FY2019. The company ultimately disclosed and recorded a reserve for these recall costs in Q1 FY2020. + + +10 + + +BD’s Proposal to Fix Alaris’s Software Before 510(k) Clearance +40. After the FDA notified BD that it needed to fix Alaris’s alarm prioritization issue, +BD told the FDA it would submit a proposal to the agency that would address that issue as part of +a plan the company had been discussing with the FDA since November 2018 to fix Alaris’s low +battery alarm. +41. BD presented its proposal in October 2019. In it, BD revealed to the FDA that +Alaris had hundreds of other software flaws, including what by then were 37 that BD categorized +as presenting risks of the greatest potential harm to patients. BD proposed to develop and release +new software for Alaris within several months that would fix most of these issues while it worked +on preparing a submission for new 510(k) clearance.15 +42. As for the two million Alaris pumps being used in medical facilities across the +country, BD proposed to recall those devices by sending technicians to remediate their software +over a three-and-a-half-year period. +43. BD acknowledged to the FDA that Alaris required new 510(k) clearance for some +of these fixes and said it would prepare a filing to cover them, as well as historical cumulative +changes made to the device. But it told the FDA it did not expect to be able to file the 510(k) +submission for over a year, until late 2020 or early 2021. In effect, BD was proposing that the +agency exercise enforcement discretion to allow the company to continue selling Alaris with the +new changes, while the company worked on a 510(k) filing for a year or more. +The FDA’s Rejection of BD’s Proposal +44. On October 31, 2019, the FDA’s team responsible for overseeing Alaris’s +compliance with FDA rules firmly rejected BD’s proposal. Concerned by the number of software +issues, they warned BD it was putting a “violative” device into the market with “defects and safety +issues” and that continuing to sell Alaris was “problematic” and “not an acceptable way to +proceed.” The FDA team said, “These issues cannot be propagated in current manufacturing +products. We cannot allow that to happen.” +45. The FDA team also told BD its proposed three-and-a-half-year timeline to fix the +Alaris devices already in medical facilities was “unacceptable” and would need to happen more +quickly. +46. BD asked the FDA whether it could submit a limited 510(k) submission in the near +term that would cover only the most significant safety fixes, and leave for later a comprehensive +510(k) application for the remaining software issues and the historical changes it had made to + +15 BD had internally assessed that Alaris was safe for use even with the software flaws and shared this view +with the FDA during the meeting. The FDA did not agree with BD’s methodology concerning the risk assessment. + + +11 + +Alaris. The FDA team rejected this too, telling BD, “[w]e cannot clear the device piecemeal since +the agency is aware of other safety issues.” +47. To understand how rapidly BD could remediate the software issues in already-sold +devices in the field, the FDA team asked BD for a timeline to fix software issues that did not +require regulatory clearance. The FDA also asked BD for a timeline for fixing issues that did +require clearance, in the event the agency allowed BD to make such fixes to devices it had already +sold before the company obtained new 510(k) clearance. Though the FDA told BD “there are +issues that BD can take action [on] now in the interim,” the agency did not indicate any such fixes +would be sufficient for BD to resume normal sales of Alaris before it obtained new 510(k) +clearance. +48. BD understood from the October 31 meeting that the FDA team believed BD +should stop selling the current version of Alaris.16 BD told the FDA it would develop and propose +a revised plan to fix the issues. Immediately afterwards, BD put Alaris on a “ship hold” to stop +further sales of the device while it worked to address the FDA’s questions and concerns. +49. Various BD internal experts responsible for regulatory affairs and the quality of its +products—both at the corporate level and in the BD business unit that manufactured and sold +Alaris—testified they had no idea how long the ship hold would last when it was implemented. +Indeed, the BD regulatory expert responsible for Alaris who participated in the October 31 FDA +meeting told at least one colleague that they believed the FDA would not allow BD to resume +shipping Alaris until the company obtained new 510(k) clearance for the device. +50. BD’s October 31 meeting with the FDA team occurred five days before the +company’s scheduled Q4 FY2019 earnings call on November 5, 2019. On November 4, one +senior executive asked a senior member of BD’s investor relations group, “[a]ny thought to delay +earnings? That would prob cause hysteria?” +BD’s Risky Plan to Resume Shipping Alaris Without New 510(k) Clearance +51. On November 4, 2019, in preparation for the earnings call the next day, BD’s then- +senior management, in consultation with company lawyers, senior internal experts, and executives +in various roles—but not the regulatory expert from the business unit responsible for Alaris— +agreed to proceed with a plan proposed by certain members of the Alaris team that was similar to +the one the team had proposed to the FDA and that the FDA had rejected: BD would, within three +months, resume shipping Alaris with a new software version but without first completing the +regulatory clearance process. Notwithstanding the concerns raised by the FDA several days prior, +BD’s plan assumed the FDA would exercise its enforcement discretion to allow BD to make +changes to Alaris’s software that otherwise required prior 510(k) clearance so that BD could + +16 BD’s notes of the meeting reflect the company’s regulatory expert responsible for Alaris acknowledging to +the FDA, “we understand you asked for a ship hold.” As discussed below, in January 2020, the FDA described one +outcome of the meeting as reaching a “mutual agreement that your firm should not be distributing devices to new +customers.” + +12 + +resume selling the device with new software that fixed all of the issues presenting risks of the +greatest potential harm. +52. Because BD expected this software fix to be developed within three months, it +expected this plan would limit the revenue impact of the ship hold to just the first fiscal quarter and +allow the company to recoup most of that forgone revenue during the remainder of FY2020. +BD’s November 2019 Misrepresentations to Investors +53. Having adopted that plan, on its November 5, 2019 earnings call, BD told investors +certain revenue would shift from Q1 FY2020 to the rest of the fiscal year because it “expected to +move the timing” of Alaris sales to make “some improvements” to the device as part of BD’s +process and strategy to “continually iterate and make enhancements to the platform.” BD said it +was “in discussions with the FDA about the timing” of the “upgrades” to the software’s “alarm +prioritization and optimization.” On that call and in a concurrent Form 8-K, BD issued earnings +and revenue forecasts that assumed the company would recoup most of the sales it would not make +during its first quarter in the remainder of FY2020. +54. BD’s statements materially misled investors about Alaris’s regulatory status, and +the reliability of its financial forecasts. BD’s statements implied the company was merely +enhancing the device. In reality, BD had stopped shipping Alaris after the FDA team responsible +for overseeing the device had expressed significant concerns about its software issues and +compliance and referred to the device as “violative.”17 Moreover, Alaris’s software issues went +significantly beyond “alarm prioritization and optimization.” +55. BD’s statements were also misleading by omission: they failed to inform investors +that the company’s ability to resume Alaris sales in FY2020 hinged on the assumption that the +FDA would, despite its team’s recent statements, exercise enforcement discretion to permit BD to +do so. BD’s statements further misled investors by omitting the substantial risk of a long-term ship +hold if, as one of its key regulatory experts believed, the FDA would require BD to obtain a new +510(k) clearance to resume Alaris sales to new customers. +56. In reporting its earnings during the call and in a contemporaneous Form 8-K, BD +also misled investors about its financial results. By that time, BD had estimated that recalling + +17 BD’s uses of the terms “improvements,” “upgrades,” and “enhancements” in the earnings call were false +and misleading. The fixes BD was making to Alaris’s software were not “enhancements.” An enhancement to a +medical device is “(1) a change to improve the performance or quality of a device that is (2) not a change to remedy +a violation” of the Food, Drug and Cosmetic Act “or associated regulations enforced by the [FDA].” FDA Center +for Devices and Radiological Health, Distinguishing Medical Device Recalls from Medical Device Enhancements +(Oct. 15, 2014), https://www.fda.gov/media/89909/download?attachment (emphasis in original). BD had begun the +October 31 meeting with the FDA by referring to the company’s proposed fixes for the low battery alarm issue and +alarm prioritization issues as enhancements. The FDA immediately corrected BD: “Want to be clear that [the low +battery alarm and alarm prioritization issues] are not software enhancements. They are all recall issues.” Later in +the meeting, the FDA suggested that other software issues might be as well. + + +13 + +Alaris to fix the software issues would cost the company $50 million. BD’s failure to record these +probable costs in Q4 FY2019 as GAAP required resulted in the company overstating its reported +operating income for the fourth quarter of 2019 by 82%.18 +BD Continues to Mislead Investors + +57. By mid-November 2019, BD changed its plan for resuming Alaris sales. BD +decided not to seek enforcement discretion from the FDA to fix all the flaws presenting risks of the +greatest potential harm to patients that required prior 510(k) clearance. This would mean the new +version BD was developing would exclude fixes for several software issues that the FDA had +expressed significant concerns about. This made the possibility that the FDA would permit BD to +fully resume Alaris sales even more remote in light of the FDA team’s statements that it could not +allow BD to further propagate such issues in currently manufactured products. +58. BD echoed its prior misrepresentations at an investor conference in late November +2019. BD told investors it was “upgrading some software in the pumps, and that will delay some +installations and shipment into the subsequent quarters, and we anticipate getting all of that back +inside of the fiscal year.” BD further stated, “we posted our strongest ever revenue dollars in the +[business unit responsible for Alaris] in the fourth quarter [of 2019], and we expect that momentum +to continue when you look at the full year of fiscal ’20.” +59. BD made similar misrepresentations during another investor conference in early +December 2019, stating that it believed Alaris would continue to take market share from its +competitors and that the pause in sales would be short-lived. +60. In neither of these investor conferences did BD inform investors that its forecasts +depended on the FDA allowing BD to resume selling Alaris with a new version of the software that +did not fix all of the safety issues that the FDA team had raised significant concerns about during +their October 31 meeting. +BD’s Material Misrepresentations and Omissions in Its 2019 Form 10-K +61. On November 27, 2019, BD filed its FY2019 Form 10-K. As in earlier filings, this +Form 10-K included several materially misleading statements concerning regulatory risks as well +as the possibility of recalls, lost sales, and injuries or other adverse events due to potential product +defects or safety concerns. BD presented these risks as contingent or merely possible even though +it knew Alaris was on a ship hold because the FDA had told BD the device was violative, that the + +18 BD’s accounting practice at that time was not to disclose or record the costs of a recall until the company +had publicly announced the recall. BD erroneously believed no GAAP obligation existed before the public +announcement of a recall based on interpretative guidance it found online from a “Big Four” audit firm. It was +wrong for BD to narrowly rely on this guidance. In evaluating whether to record or disclose a loss from a recall, +ASC 450 requires consideration of all available information to assess whether a loss was probable or reasonably +possible. BD made no such assessment. BD’s written policy regarding accounting for recall costs was inconsistent +with GAAP for similar reasons. + +14 + +FDA might require the ship hold to last until BD obtained new 510(k) clearance, that Alaris had +numerous software flaws categorized as presenting risks of the greatest potential harm to patients, +and that BD planned to recall Alaris. +62. Also as in earlier filings, BD failed to comply with SEC disclosure rules requiring +the company to inform investors of the material uncertainty that BD might be unable to resume +shipping Alaris until it had obtained new 510(k) clearance. +63. And BD again materially overstated its financial results. By the time BD filed this +Form 10-K, it had updated its estimate of the remediation costs to recall Alaris to $59 million. As +in its November 5, 2019 Form 8-K, BD failed to disclose and accrue these costs in its Form 10-K’s +financial statements as GAAP required. Had BD recorded the $59 million estimated cost in its +financial statements for FY2019, its annual income before taxes would have been over 5% lower. +64. Pursuant to BD’s disclosure controls and procedures, BD’s Disclosure Committee, +Audit Committee, outside auditor, and BD’s board of directors reviewed the draft filing before it +was submitted.19 These procedures did not, however, include any review by, or consultations with, +the regulatory or quality experts in the business unit who had participated in the October 31, 2019 +discussions with the FDA about Alaris. +BD Resumes Shipping Alaris Without New Clearance and Continues to Mislead Investors +65. In December 2019, BD finalized the new interim software version it had been +developing and resumed regular sales of Alaris with the updated software, including to new +customers. BD did so without any indication from the FDA that it concurred with BD’s +approach.20 +66. At a healthcare conference on January 14, 2020, BD told investors it had resumed +shipping Alaris and reaffirmed the 2020 revenue guidance it had given in November. After an +analyst at the conference asked BD for an update on Alaris “as you await guidance from the FDA + +19 BD’s disclosure controls and procedures required Disclosure Committee members to certify, prior to the +filing of any periodic report, that the report did not contain any untrue statement of material fact or omit to state a +material fact. These certifications were not distributed to Disclosure Committee members in connection with the +2019 Form 10-K, and none were executed, in contravention of BD’s own controls and procedures. + +20 While BD and the FDA had discussions following their October 31 meeting about the company developing +a new version of its software, those discussions focused on BD’s plan to “remediate all devices in the field” —i.e. to +fix the pumps it had already sold. At no point during or following the October 31 meeting did the FDA indicate that +it would grant BD enforcement discretion to resume regular sales of Alaris. On December 16, 2019, BD informed +the FDA that it had finalized the new software and added “BD would like to initiate remediating the products in the +field as soon as possible and will begin offering this new software version to all customers.” In the context of their +prior discussions, this only suggested that BD would offer the update to remediate devices already sold to customers +rather than to resume sales of new devices. + +15 + +around fixing some of the alarms,” BD responded it had “[f]ully resumed shipping in the first +quarter” and that the situation played out “exactly as expected.” +67. BD knew or should have known these statements were materially false or +misleading in multiple respects. In the context of its prior statements about Alaris, BD’s +statements at the conference misleadingly suggested it had fixed the Alaris alarm issues. However, +the software version it developed did not include those fixes because BD had determined they +required 510(k) clearance. BD’s statements further suggested that BD had resumed shipping with +the FDA’s concurrence. This was not the case. +BD Reinstates Ship Hold But Again Misleadingly Reaffirms Prior Revenue Guidance + +68. In mid-January 2020, while discussing BD’s efforts to remediate Alaris devices in +the field, the FDA learned BD had resumed regular sales of Alaris with the new software version +that did not fix certain significant safety issues the FDA had warned the company about on +October 31. The FDA team responded by telling BD they had understood from the company that it +had “ceased distribution of devices to customers . . . due to the many issues that have been +identified, except in the case of remediation.” The FDA team further told BD that its decision to +resume selling Alaris was “misaligned with our previous conversations regarding your software +issues . . . and our mutual agreement that your firm should not be distributing devices to new +customers.” +69. BD reinstated the Alaris ship hold on January 23, 2020. Though BD did not know +how long the ship hold would last, the company understood it would likely have a materially +negative impact on the company’s revenue in FY2020. +70. On January 28, 2020, BD held its annual shareholders meeting. Despite the Alaris +team having prepared a financial forecast several days prior showing the ship hold would likely +have a materially unfavorable revenue impact in FY2020, BD again reaffirmed the FY2020 +revenue guidance it had originally made in November 2019 when it planned to fully resume Alaris +sales after one quarter. +BD Informs Investors About Need for New 510(k) Clearance +71. On February 6, 2020, BD conducted an earnings call for Q1 FY2020. During this +call, the company finally told investors about its need to obtain new 510(k) clearance for Alaris +and revised its financial guidance for the full fiscal year. It told investors that until the FDA +granted that clearance, it would not sell the device to new customers; sales would be limited only +to cases of medical necessity to existing customers. That day, BD’s share price fell by about 12%. +72. During the call, one analyst asked management “how you got caught off guard and +how this went from sort of a software upgrade to something much more significant.” That day, +another analyst texted a senior member of BD’s investor relations group, “I just can’t even . . . I do +not understand what happened here. 10 days ago we heard everything in pumps was ok and back + +16 + +on market and better than expected . . . I’m stunned and have a lot of angry people with +pitchforks.” +Violations + +73. As a result of the conduct described above, BD violated Sections 17(a)(2) and +(a)(3) of the Securities Act, which prohibit any person from directly or indirectly obtaining money +or property by means of any untrue statement of a material fact or any omission to state a material +fact necessary in order to make the statements made, in light of the circumstances under which +they were made, not misleading, or engaging in any transaction, practice, or course of business +which operates or would operate as a fraud or deceit upon the purchaser, in the offer or sale of +securities.21 +74. BD violated Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11, and +13a-13 thereunder, which require that every issuer of a security registered pursuant to Exchange +Act Section 12 file with the Commission, among other things, annual, quarterly, and current +reports as the Commission may require. BD also violated Rule 12b-20 of the Exchange Act, which +requires an issuer to include in a statement or report filed with the Commission any information +necessary to make the required statements in the filing not materially misleading. +75. BD violated Exchange Act Section 13(b)(2)(A), which requires reporting +companies to make and keep books, records and accounts which, in reasonable detail, accurately +and fairly reflect their transactions and dispositions of their assets. BD also violated Section +13(b)(2)(B), which requires all reporting companies to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that, among other things, +transactions are recorded as necessary to permit preparation of financial statements in accordance +with GAAP. +76. BD violated Exchange Act Rule 13a-15, which requires that every issuer of a +security registered pursuant to Exchange Act Section 12 maintain disclosure controls and +procedures as defined in Exchange Act Rule 13a-15(e), and, for issuers required to file an annual +report pursuant to Section 13(a) or 15(d) for the prior fiscal year, internal control over financial +reporting as defined in Rule 13a-15(f). +Undertakings + +77. Respondent has undertaken to complete the following actions: + +21 Violations of Sections 17(a)(2) and (a)(3) of the Securities Act do not require scienter. See Aaron v. SEC, +446 U.S. 686, 695-96 (1980). During its FY2019 and FY2020, BD offered and sold stock to its employees through +an Employee and Director Equity-Based Compensation Plan, for which a Form S-8 was filed with the +Commission. The S-8 incorporated by reference all subsequent filings by BD under the Exchange Act, includi ng the +filings containing statements and omissions at issue herein. + +17 + +a. Retention of Independent Compliance Consultant. Within 30 days of the issuance of +this Order, Respondent shall retain the services of an Independent Compliance +Consultant (“Independent Consultant”) acceptable to the staff of the Commission and +provide a copy of this Order to the Independent Consultant. Respondent shall provide +the Commission staff with a copy of the engagement letter detailing the Independent +Consultant’s responsibilities, which shall include the reviews and reports to be made +by the Independent Consultant as set forth in this Order. The Independent +Consultant’s compensation and expenses shall be borne exclusively by Respondent. +b. Independent Consultant’s Reviews. Respondent shall require the Independent +Consultant to: +i. Review the company’s practices and procedures relating to: its evaluation of +product recalls and remediation under GAAP and its disclosure controls and +procedures, including but not limited to controls and procedures relating to +collection and assessment of information concerning potential risks, +contingencies, operating events, trends, and uncertainties. +ii. At the end of the review, but no later than 365 days after the entry of this +Order, submit a written report to Respondent and the Commission staff that +shall include a description of the review performed, the names of the +individuals who performed the review, the Independent Consultant’s findings +and recommendations for changes or improvements to the disclosure controls, +policies, and procedures, and a procedure for implementing the recommended +changes and improvements. +c. Respondent shall, within 60 days of receipt of the Independent Consultant’s report, +adopt all recommendations contained in the report, provided, however, that within 45 +days after the date of receipt of the report, Respondent shall in writing advise the +Independent Consultant and the Commission staff of any recommendations that it +considers to be unduly burdensome, impractical, or inappropriate. With respect to +any recommendation that Respondent considers to be unduly burdensome, +impractical, or inappropriate, Respondent need not adopt that recommendation at that +time but Respondent shall instead propose in writing to the Independent Consultant +and Commission staff an alternative policy or procedure designed to achieve the same +objective or purpose as that recommended by the Independent Consultant, or a +different timeline for implementation in light of the recommendation. Respondent +shall attempt in good faith to reach an agreement with the Independent Consultant on +any recommendations objected to by Respondent. Within 15 days after the +conclusion of the discussion and evaluation by Respondent and the Independent +Consultant, Respondent shall require that the Independent Consultant inform +Respondent and the Commission staff in writing of the Independent Consultant’s +final determination concerning any recommendation. At the same time, Respondent +may seek approval from the Commission staff to not adopt the recommendations that + +18 + +Respondent can demonstrate to be unduly burdensome, impractical, or inappropriate. +In the event that Respondent and the Independent Consultant are unable to agree on +an alternative proposal within 30 days and the Commission staff does not agree that +any proposed recommendations are unduly burdensome, impractical, or +inappropriate, Respondent shall abide by the determinations of the Independent +Consultant. +d. Within 30 days of Respondent’s adoption and implementation of all of the +recommendations in the Independent Consultant’s report that the Independent +Consultant deems appropriate, as determined pursuant to the procedures set forth +herein, Respondent shall certify in writing to the Independent Consultant and the +Commission staff that Respondent has adopted and implemented all +recommendations in the applicable report. The Commission staff may make +reasonable requests for further evidence of compliance, and Respondent agrees to +provide such evidence. +e. Respondent shall cooperate fully with the Independent Consultant and shall provide +the Independent Consultant with access to such of its files, books, records, and +personnel as reasonably requested for the Independent Consultant’s review, including +access by on-site inspection. To ensure the independence of the Independent +Consultant, Respondent (1) shall not have the authority to terminate the Independent +Consultant or substitute another independent consultant for the initial Independent +Consultant without prior written approval of the Commission staff; and (2) shall +compensate the Independent Consultant and persons engaged to assist the +Independent Consultant for services rendered pursuant to this Order at their +reasonable and customary rates. +f. The deadlines in this Undertaking 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 the last day. +g. For the period of engagement and for a period of two years from completion of the +engagement, Respondent shall not (i) retain the Independent Consultant for any other +professional services outside of the services described in this Order; (ii) enter into any +other professional relationship with the Independent Consultant, including any +employment, consultant, attorney-client, auditing or other professional relationship; or +(iii) enter, without prior written consent of the Commission staff, into any such +professional relationship with any of the Independent Consultant’s present or former +affiliates, employers, directors, officers, employees, or agents acting in their capacity as +such. +h. Respondent 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 + +19 + +other doctrine of privilege to prevent the Independent Consultant from transmitting any +information, reports, or documents to the Commission. +i. The reports by the Independent Consultant 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 objectives of the reporting requirement. For these +reasons, among others, the reports and the contents thereof are intended to remain and +shall remain non-public, except (1) pursuant to court order, (2) as agreed to by the +parties in writing, (3) to the extent that the Commission determines in its sole discretion +that disclosure would be in furtherance of the Commission’s discharge of its duties and +responsibilities, or (4) as otherwise required by law. +j. Respondent shall certify, in writing, compliance with the undertaking(s) set forth +above. The certification shall identify the undertaking(s), provide written evidence of +compliance in the form of a narrative, and be supported by exhibits sufficient to +demonstrate compliance. The Commission staff may make reasonable requests for +further evidence of compliance, and Respondent agrees to provide such evidence. The +certification and supporting material shall be submitted to Pei Chung, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., +NE, Washington, DC 20549, with a copy to the Office of Chief Counsel of the +Enforcement Division, 100 F St., NE, Washington, DC 20549, no later than sixty (60) +days from the date of the completion of the undertakings. +Respondent may apply to the Commission staff for an extension of the deadlines described +above before their expiration, and upon a showing of good cause by the Respondent, the +Commission staff may, in its sole discretion, grant such extensions for whatever time +period it deems appropriate. +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent’s Offer. + Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent shall cease and desist from committing or causing any violations and future violations +of Sections 17(a)(2) and (a)(3) of the Securities Act and Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) +of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13a-15 promulgated thereunder. +B. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $175,000,000 to the Securities and Exchange Commission. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +20 + +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 BD +as Respondent in these proceedings, and the file number of these proceedings; a copy of the cover +letter and check or money order must be sent to Pei Chung, Associate Director, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549. +C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for the penalty referenced in paragraph B above. Amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +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. + +21 + +D. Respondent shall comply with the undertakings enumerated in paragraph 77 above. + + By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4548.txt b/raw/aaer/2024/AAER-4548.txt new file mode 100644 index 0000000000000000000000000000000000000000..b6378d08470f1425f8b13c32e58c8f06007d3012 --- /dev/null +++ b/raw/aaer/2024/AAER-4548.txt @@ -0,0 +1,259 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101934 / December 17, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4548 / December 17, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22362 + + +In the Matter of + +EXPRESS, 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 Express, Inc. (“Express” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over it and the subject matter of these proceedings, which are +admitted, Respondent consents to the entry of this Order Instituting Cease-And-Desist Proceedings +Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a +Cease-and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + 2 +Summary + +1. This matter arises from Express, Inc.’s failure to disclose in its definitive proxy +statements $979,269 worth of certain perquisites and personal benefits it paid on behalf of its Chief +Executive Officer (the “CEO”), and member of its board of directors, for its fiscal years 2019, +2020, and 2021. Most of the undisclosed perquisites and personal benefits were costs associated +with the CEO’s authorized use of chartered private aircraft. Express did not have adequate +controls, policies, or procedures in place to effectively identify and analyze potential compensation +for disclosure. In connection with this conduct, Express violated Sections 13(a) and 14(a) of the +Exchange Act and Rules 12b-20, 13a-1, 13a-15(a), 14a-3, and 14a-9 thereunder. + +Respondent + +2. Express, Inc. is a Delaware corporation headquartered in Columbus, Ohio. The +company is a multi-brand American fashion retailer that operates online stores as well as physical +stores. Express’s common stock traded on the New York Stock Exchange (“NYSE”) until March +25, 2024, when it was delisted. It was then quoted on the OTC Pink Open Market under the ticker +symbol “EXPR.” On April 22, 2024, Express and its affiliated subsidiaries filed for Chapter 11 +bankruptcy in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy +Action”). On April 24, 2024, Express filed a Form 15 to terminate its registration of its common +stock under Section 12(g) of the Exchange Act and to immediately suspend its duty to file periodic +reports with the Commission. On June 25, 2024, a group of investors acquired the majority of +Express's retail operating assets in the Bankruptcy Action. + +Background + +3. Section 14(a) of the Exchange Act makes it unlawful to solicit any proxy in respect +of any security (other than an exempted security) registered pursuant to Section 12 of the Exchange +Act in contravention of such rules and regulations as the Commission may prescribe. Rule 14a-3 +prohibits issuers with securities registered pursuant to Section 12 of the Exchange Act from +soliciting proxies without furnishing proxy statements containing the information specified in +Schedule 14A, including executive compensation disclosures pursuant to Item 402 of Regulation +S-K. Item 402 of Regulation S-K requires disclosure of the total value of all perquisites and other +personal benefits provided to named executive officers who receive at least $10,000 worth of such +items in a given year. See Item 402(c)(2)(ix)(A). Item 402 of Regulation S-K also requires +identification of all perquisites and personal benefits by type, and quantification of any perquisite +or personal benefit that exceeds the greater of $25,000 or 10% of total perquisites. See Instruction 4 +for Item 402(c)(2)(ix). + +4. In 2006, the Commission adopted amendments to executive compensation +disclosure rules, including Item 402 of Regulation S-K. See Commission’s Executive +Compensation and Related Person Disclosure Final Rule adopting release, Release Nos. 33- +8732A; 34-54302A; IC-27444A; File No. S7-03-06 (August 29, 2006) (the “Adopting Release”). +According to the Adopting Release, “an item is not a perquisite or personal benefit,” and does not + + 3 +need to be reported, “if it is integrally and directly related to the performance of the executive’s +duties. Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit +that has a personal aspect, without regard to whether it may be provided for some business reason +or for the convenience of the company, unless it is generally available on a non-discriminatory +basis to all employees.” The Adopting Release also states that “the concept of a benefit that is +‘integrally and directly related’ to job performance is a narrow one,” which “draws a critical +distinction between an item that a company provides because the executive needs it to do the job, +making it integrally and directly related to the performance of duties, and an item provided for +some other reason, even where that other reason can involve both company benefit and personal +benefit.” + +5. According to the Adopting Release, even where the company “has determined that +an expense is an ‘ordinary’ or ‘necessary’ business expense for tax or other purposes or that an +expense is for the benefit or convenience of the company,” that determination “is not responsive to +the inquiry as to whether the expense provides a perquisite or other personal benefit for disclosure +purposes.” Indeed, “business purpose or convenience does not affect the characterization of an +item as a perquisite or personal benefit where it is not integrally and directly related to the +performance by the executive of his or her job.” + +Facts + +6. Contrary to Item 402 of Regulation S-K and the Commission’s guidance in the +Adopting Release, Express’s system for identifying, tracking, and calculating perquisites +incorrectly applied a standard whereby a business purpose would be sufficient to determine that +certain items were not perquisites or personal benefits that required disclosure. + +7. In definitive proxy statements disclosing executive compensation paid for fiscal +years 2019, 2020, and 2021, which were filed in 2020 through 2022, Express disclosed “All Other +Compensation” for the CEO in the amounts of: $33,068 for fiscal year 2019, excluding $147,704 +for relocation benefits; $4,942 for fiscal year 2020; and $16,360 for fiscal year 2021, excluding +$277,358 for vesting of a one-time restricted cash award. The disclosed “All Other Compensation” +consisted of retirement contributions and insurance premiums for each year, $32,000 for one +private flight for the CEO’s relocation for fiscal year 2019, and $2,895 worth of private aircraft +usage by the CEO’s family members for fiscal year 2021. + +8. However, these same definitive proxy statements failed to disclose $979,269 worth +of perquisites and personal benefits provided to the CEO, thereby understating the “All Other +Compensation” portion of its Named Executive Officers’ compensation by an average of 94% over +the three fiscal years 2019, 2020 and 2021. Express incorrectly viewed the CEO’s business +expenses to include expenses associated with the CEO’s personal flights, including transportation, +meals, and hotel. Express paid these expenses but did not disclose these expenses as perquisites. + + + 4 +9. Express incorporated its definitive proxy statements disclosing executive +compensation paid for fiscal years 2019, 2020, and 2021 into its Forms 10-K annual reports by +reference. + +10. On April 28, 2023, Express filed its fiscal year 2022 proxy statement, which, +among other things, provided revised disclosures regarding perquisites and personal benefits +provided to the CEO for fiscal years 2020 and 2021. Express also disclosed that the CEO +voluntarily reimbursed the company approximately $454,000 for private air travel and expenses +that were determined to be perquisites or personal expenses. + +Violations + +11. Section 14(a) of the Exchange Act makes it unlawful to solicit any proxy with +respect to any security (other than an exempted security) registered pursuant to Section 12 of the +Exchange Act in contravention of such rules and regulations as the Commission may prescribe. +Rule 14a-3 prohibits issuers from soliciting proxies without furnishing proxy statements containing +the information specified by Schedule 14A, including executive compensation disclosures pursuant +to Item 402 of Regulation S-K. Item 402 of Regulation S-K requires disclosure of the total value of +all perquisites and other personal benefits provided to named executive officers who receive at +least $10,000 worth of such items in a given year. Item 402 of Regulation S-K also requires +disclosure of all perquisites and personal benefits by type, and specific identification of any +perquisite or personal benefit that exceeds the greater of $25,000 or 10% of the total perquisites. +Rule 14a-9 prohibits the use of proxy statements containing materially false or misleading +statements or materially misleading omissions. Misstatements and omissions are material under +Rule 14a-9 if they would alter the “total mix of information” considered by a shareholder in +making a voting decision. TSC Indus., Inc. v. Northway, 426 U.S. 438, 449 (1976). Proxy +violations do not require a showing of scienter; negligence is sufficient. See, e.g., Gerstle v. +Gamble-Skogmo, Inc., 478 F.2d 1281, 1300-01 (2d Cir. 1973); Sirota v. Econo-Car Intern., Inc., +61 F.R.D. 604, 607 (S.D.N.Y. Jan 15, 1974). As a result of the conduct described above, Express +violated Section 14(a) of the Exchange Act and Rules 14a-3 and 14a-9 thereunder. + +12. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require every issuer +of a security registered pursuant to Section 12 of the Exchange Act to file with the Commission, +among other things, annual reports as the Commission may require. The Commission need not +prove scienter to establish a violation of Section 13(a) of the Exchange Act (or Exchange Act +Rules 12b-20 and 13a-1). See, e.g., SEC v. McNulty, 137 F.3d 732, 740-41 (2d Cir. 1998). As a +result of its incorporation of deficient proxy statements by reference in its annual reports, Express +violated Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. + +13. As a result of the conduct described above, Express violated Rule 12b-20 under the +Exchange Act, which requires that, in addition to the information expressly required to be included +in a statement or report filed with the Commission, there shall be added such further material +information, if any, as may be necessary to make the required statements, in light of the +circumstances under which they are made, not misleading. + + 5 + +14. Rule 13a-15(a) of the Exchange Act requires issuers to maintain disclosure controls +and procedures. Rule 13a-15(e) defines “disclosure controls and procedures” to mean “controls and +other procedures of an issuer that are designed to ensure that information required to be disclosed +by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded, +processed, summarized and reported, within the time periods specified in the Commission's rules +and forms.” Rule 13a-15(e) explains that “[d]isclosure controls and procedures include, without +limitation, controls and procedures designed to ensure that information required to be disclosed by +an issuer in the reports that it files or submits under the Act is accumulated and communicated to +the issuer's management, including its principal executive and principal financial officers, or +persons performing similar functions, as appropriate to allow timely decisions regarding required +disclosure.” By failing to maintain policies, procedures, or controls designed to ensure that all +potential perquisites and personal benefits are identified and analyzed for complete and accurate +disclosure in its proxy statements, Express violated Rule 13a-15(a). + +Express’s Self-Reporting, Cooperation and Remedial Efforts + +15. In determining to accept the Offer, the Commission considered the +following: + +a. After learning of potential misconduct, Express acted promptly to +ensure that outside counsel conducted an internal investigation. Before completing its +internal investigation, Express self-reported to the Commission staff the failure to +disclose perquisites referred to herein and other conduct potentially implicating the +federal securities laws. + +b. Express cooperated with the Commission’s investigation, when it +provided to Commission staff facts developed through the internal investigation, +compilations of relevant documents, information, and data. + +c. After it self-reported, Express implemented remedial measures +designed to ensure compliance with Item 402 of Regulation S-K and Commission +guidance. Express also made disclosures in its fiscal year 2022 proxy statement +concerning expenses it had identified that constituted undisclosed perquisites, and made +additional disclosures thereafter. + + + + 6 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 13(a) and 14(a) of the +Exchange Act and Rules 12b-20, 13a-1, 13a-15(a), 14a-3 and 14a-9 thereunder. + +B. Respondent acknowledges that the Commission is not imposing a civil penalty +based in part upon its cooperation in a Commission investigation. If at any time following the entry +of the Order, the Division of Enforcement (“Division”) obtains information indicating that +Respondent knowingly provided materially false or misleading information or materials to the +Commission, or in a related proceeding, the Division may, at its sole discretion and with prior +notice to the Respondent, petition the Commission to reopen this matter and seek an order directing +that the Respondent pay a civil money penalty. Respondent may contest by way of defense in any +resulting administrative proceeding whether it knowingly provided materially false or misleading +information, but may not: (1) contest the findings in the Order; or (2) assert any defense to liability +or remedy, including, but not limited to, any statute of limitations defense. + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4549.txt b/raw/aaer/2024/AAER-4549.txt new file mode 100644 index 0000000000000000000000000000000000000000..7f05decf36d6ef4dd4930b025b84a8f75f3d6f14 --- /dev/null +++ b/raw/aaer/2024/AAER-4549.txt @@ -0,0 +1,532 @@ +1 + UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101972 / December 19, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4549 / December 19, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22366 + + + +In the Matter of + +DAVIDSON & COMPANY +LLP, EREZ BAHAR, CA, +CPA, and GRANT BLOCK, +CA, CPA. + +Respondents. + + + +ORDER INSTITUTING CEASE- +AND-DESIST PROCEEDINGS PURSUANT +TO SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted against Davidson & Company LLP +(“Davidson” or the “Firm”), Erez Bahar (“Bahar”), and Grant Block (“Block”) (collectively +“Respondents”) pursuant to Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”). + +II. + +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondents consent +to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the +Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order +2 +(“Order”), as set forth below. + +III. + +On the basis of this Order and Respondents’ Offers, the Commission finds1 that: + +SUMMARY + +1. This matter involves violations of auditor independence rules and Public Company +Accounting Oversight Board (“PCAOB”) Auditing Standards resulting from repeated failures by +Davidson and several of its audit partners to comply with audit partner rotation requirements +during the course of their engagement as the independent auditor for nine issuer clients between +2019 and 2023 (“relevant time period”). These failures resulted in Davidson’s issuance of audit +reports that erroneously stated the Firm had conducted its audits in accordance with PCAOB +standards; the failures also caused the issuer clients to file annual and quarterly reports with the +Commission that were not reviewed by an independent public accountant as required by +Regulation S-X of the Exchange Act. + +2. Furthermore, these failures arose from a deficient system of quality controls and +monitoring and a lack of diligent firm management by the Firm’s current and former managing +partners, Bahar and Block, respectively. + +RESPONDENTS +3. Davidson & Company LLP is a Canadian accounting and auditing firm +headquartered in Vancouver, British Columbia and registered with the Canadian Public +Accountability Board (“CPAB”). The Firm has also been registered with the PCAOB since 2003. +4. Erez Bahar joined Davidson in 1999 and is the Firm’s current managing partner. +He is a licensed Canadian Chartered Accountant2 (“CA”) and Chartered Professional Accountant +(“CPA”) and a certified public accountant licensed in the state of Washington. In 2011, Bahar +was denied temporarily the privilege of appearing or practicing before the Commission for a +period of two years for engaging in improper professional conduct. +5. Grant Block joined Davidson in 1989 and was the Firm’s managing partner from +the early 2000s to December 31, 2023. He is a licensed Canadian CA and CPA and a certified +public accountant licensed in the state of Nevada. + +1 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +2 A “Chartered Accountant” designation was one of three professional designations granted by Canadian +accounting bodies to accountants who satisfied requisite educational coursework and training and passed required +exams, similar to Certified Public Accountant licenses in the United States. In 2014, the Canadian accounting +bodies merged to form a unified Chartered Professional Accountants of Canada (CPA Canada), which would +thereafter offer the single CPA designation. + +3 + +RELATED INDIVIDUALS +6. Partner A joined Davidson in 2001 and is a Canadian CA and CPA and a +certified public accountant licensed in the state of Washington. At relevant times, Partner A +served as the lead engagement partner or the engagement quality review (“EQR”) partner for +Issuer A. +7. Partner B joined Davidson in 1993 and is a Canadian CA and CPA and a +certified public accountant licensed in the state of Nevada. At relevant times, Partner B served as +the EQR partner for Issuer B. + +RELEVANT ISSUERS +8. During the relevant time period, Issuer A’s common stock was registered with the +Commission pursuant to Section 12(g) of the Exchange Act and traded on the OTC Markets. The +issuer also had a fiscal year ending on the last day of December. +9. During the relevant time period, Issuer B’s common stock was registered with the +Commission pursuant to Section 12(g) of the Exchange Act and traded on the OTC Markets. The +issuer also had a fiscal year ending on the last day of December. +10. During the relevant time period, Issuer C’s common stock was registered with the +Commission pursuant to Section 12(g) of the Exchange Act and traded on the OTC Markets. The +issuer also had a fiscal year ending on the last day of June. +11. During the relevant time period, Issuer D’s common stock was registered with the +Commission pursuant to Section 12(g) of the Exchange Act and traded on the OTC Markets. The +issuer also had a fiscal year ending on the last day of September. +12. During the relevant time period, Issuer E’s common stock was registered with the +Commission pursuant to Section 12(g) of the Exchange Act and traded on the OTC Markets. The +issuer also had a fiscal year ending on the last day of December. +13. During the relevant time period, Issuer F’s common stock was registered with the +Commission pursuant to Section 12(g) of the Exchange Act and traded on the OTC Markets. The +issuer also had a fiscal year ending on the last day of December. +14. During the relevant time period, Issuer G’s common stock was registered with the +Commission pursuant to Section 12(g) of the Exchange Act and traded on the OTC Markets. The +issuer also had a fiscal year ending on the last day of December. +15. During the relevant time period, Issuer H’s common stock was registered with the +Commission pursuant to Section 12(b) of the Exchange Act and traded on NASDAQ. The issuer +also had a fiscal year ending on the last day of December. +4 +16. During the relevant time period, Issuer I filed a Form S-1 registration statement that +was withdrawn before it became effective3 and the company’s common stock traded on the OTC +Markets. The issuer also had a fiscal year ending on the last day of December. + +FACTS +i. Commission Audit Partner Rotation Requirements and PCAOB “Cooling-Off” +Requirements +17. Under the Exchange Act, Regulation S-X, and PCAOB Auditing Standards, +registered public accounting firms and their associated persons are required to be independent of +their audit clients throughout the audit and professional engagement period. +18. Section 10A(j) of the Exchange Act, Audit Partner Rotation, states “[i]t shall be +unlawful for a registered public accounting firm to provide audit services to an issuer if the lead (or +coordinating) audit partner (having primary responsibility for the audit), or the audit partner +responsible for reviewing the audit, has performed audit services for that issuer in each of the 5 +previous fiscal years of that issuer.”4 +19. Rule 10A-2 of the Exchange Act, Auditor Independence, provides that it shall be +unlawful for an auditor not to be independent with respect to, among other requirements, the +partner rotation requirements of the Commission’s Regulation S-X. The Commission’s +independence rules allow lead and concurring partners to serve for five consecutive years, after +which they may not serve in either role for another period of five consecutive years. Rule 2- +01(c)(6)(i)(A)(1) of Regulation S-X. Similarly, PCAOB Rule 3520, Auditor Independence, requires +that a registered public accounting firm and its associated persons be independent of the Firm’s +issuer audit clients throughout the audit and professional engagement period. +20. PCAOB Auditing Standard (“AS”) 1220.08, Independence, Integrity, and +Objectivity, states that “[t]he person who served as the engagement partner during either of the two +audits preceding the audit subject to the engagement quality review may not be the engagement +quality reviewer.” (“Cooling-Off Requirements”). +ii. Davidson Violated Audit Partner Rotation Requirements and PCAOB EQR +Cooling-Off Requirements +21. Davidson failed to comply with the audit partner rotation requirements of the +Exchange Act and Regulation S-X, which impaired the Firm’s independence with respect to + +3 Issuer I’s Form S-1 included the company’s financial statements for 2021 that were audited by Davidson +pursuant to PCAOB Auditing Standards. Therefore, Davidson’s engagement of this issuer would be subject to the +PCAOB Auditing Standards including those related to independence. Because Issuer I withdrew its Form S-1 prior to +effectiveness, the company is not subject to the reporting requirements of the Exchange Act. + +4 Section 10A(f), Definitions, referring to Section 3, defines issuer as “any person who issues or proposes to +issue any security.” + +5 +engagements for the six issuer clients described below, impacting six annual audits and 18 interim +reviews during the relevant time period. + +Issuer Partner Description Number of Audits and +Interim Reviews +Impacted +Issuer A Partner A Partner A improperly served as the EQR +partner for the Q1, Q2 and Q3 2019 +reporting periods after previously serving +as the EQR or lead engagement partner for +the preceding five fiscal years (Q1 2014 to +EOY 2018). +Three Interim Reviews +Issuer B Partner B Partner B improperly served as the EQR +partner for the 2019 and Q1 and Q2 2020 +reporting periods after previously serving +as the EQR partner for the preceding five +fiscal years (Q1 2014 to EOY 2018). +One Audit +Five Interim Reviews +Issuer C Bahar Bahar improperly served as the EQR +partner for the 2020 audit5 of a foreign +private issuer after previously serving as +the EQR partner for the preceding five +fiscal years (2015 to 2019). +One Audit +Issuer D Bahar Bahar improperly served as the EQR +partner for the 2021 and 2022 reporting +periods after previously serving as the +EQR partner for the preceding five fiscal +years (Q1 2015 to EOY 2020). +Two Audits +Six Interim Reviews +Issuer E Block Block improperly served as the lead +engagement partner for the 2021 and Q1 +2022 reporting periods after previously +serving as the lead engagement partner for +the preceding five fiscal years (Q1 2016 to +EOY 2020). +One Audit +Four Interim Reviews +Issuer F Block Block improperly served as the EQR +partner for the 2021 audit6 of a foreign +private issuer after previously serving as +the EQR partner for the preceding five +fiscal years (2016 to 2020). +One Audit + +5 As a foreign private issuer, Issuer C is only required to furnish annual reports on Form 20 -F and is not +required to furnish quarterly reports to the Commission. + +6 As a foreign private issuer, Issuer F is only required to furnish annual reports on Form 20-F and is not required +to furnish quarterly reports to the Commission. + +6 +22. Davidson also failed to comply with the PCAOB EQR Cooling-Off Requirements +with respect to engagements of three additional issuer clients and Issuer A, (which are described +below), impacting five annual audits and 11 interim reviews during the relevant time period. + +Issuer Partner Description Number of Audits and +Interim Reviews Impacted +Issuer A Partner A Partner A improperly served as the EQR +partner for the 2018 audit and Q1, Q2 and +Q3 2019 reporting periods immediately after +serving as the lead engagement partner in +either of the two preceding audits. +One Audit +Three Interim Reviews +Issuer G Bahar Bahar improperly served as the EQR partner +for the 2021 and 2022 reporting periods +immediately after serving as the lead +engagement partner in either of the two +preceding audits. +Two Audits +Six Interim Reviews +Issuer H Bahar Bahar improperly served as the EQR partner +for the 2021 audit and Q2 and Q3 2022 +reporting periods7 immediately after serving +as the lead engagement partner in either of +the two preceding audits. +One Audit +Two Interim Reviews +Issuer I Bahar Bahar improperly served as the EQR partner +for the 2021 audit immediately after serving +as the lead engagement partner in either of +the two preceding audits. +One Audit +23. In connection with all of the engagements of the issuer clients, Davidson issued +audit reports erroneously stating that the Firm conducted its audits in accordance with PCAOB +standards. +iii. Davidson’s Deficient System of Quality Controls +24. During the relevant time period, Davidson tracked partner engagement assignments +through two different systems: (1) the Partner Rotation Schedule (“Rotation Spreadsheet”), an +Excel spreadsheet created by Block and manually maintained by him and the Firm’s Director of +Finance; and (2) the Firm’s time and billing software (“Software”) that was supposed to incorporate +partner assignments from the Spreadsheet. +25. However, these quality control systems were not appropriately designed, and Block +and the Firm did not implement a sufficient process to provide reasonable assurance of the + +7 Prior to the second quarter of 2022, Issuer H was a foreign private issuer and was not required to furnish +quarterly reports to the Commission. However, Issuer H lost its foreign private issuer status and became subject to SEC +reporting requirements applicable to U.S. domestic companies beginning with its second quarter financial statements +for 2022. + +7 +accuracy of the data in either system. The manual processes in the creation and maintenance of the +Rotation Spreadsheet and the lack of interaction between the Rotation Spreadsheet and the +Software risked discrepancies in partner assignments and caused discrepancies in partner +assignments. Additionally, during the relevant time period, neither Block nor Bahar implemented +any additional processes or testing to provide reasonable assurance of the accuracy of the data both +within and between the two systems. The Rotation Spreadsheet was only updated and reviewed +annually and there was no process for any other periodic review of the data in either system. +26. Furthermore, the Firm’s partners on the audit engagements referenced above did not +independently track or monitor the length of time that they had served as the lead engagement +partner or EQR partner on a particular assignment and relied solely on the data from the Firm’s +deficient systems to comply with audit partner rotation and cooling-off requirements. +27. During the relevant time period, Block, as the Firm’s managing partner, had control +of and final authority over Davidson’s system of quality controls for partner rotation and +engagement assignments yet failed to design or implement policies and procedures sufficient to +provide reasonable assurance of compliance with audit partner rotation and PCAOB Cooling-Off +Requirements. Additionally, during the relevant time period, Block and Bahar were members of the +Firm’s Executive Committee, which was responsible for all aspects of the Firm’s system of quality +management and which also failed to implement policies and procedures sufficient to provide +reasonable assurance of compliance with audit partner rotation and PCAOB Cooling-Off +Requirements. +28. Additionally, Bahar caused Davidson’s violations by personally failing to comply +with the audit partner rotation requirements and Cooling-Off Requirements when conducting seven +annual audits and 14 interim reviews for five different issuer engagements. Block caused +Davidson’s violations by personally failing to comply with the audit partner rotation requirements +when conducting two annual audits and four interim reviews for two different issuer engagements. + +VIOLATIONS +29. Section 10A(j) of the Exchange Act and Rule 10A-2 thereunder make it unlawful +for an auditor not to be independent with respect to, among other requirements, the partner +rotation requirements. As a result of the conduct described above, Davidson violated, and Bahar +and Block caused Davidson to violate, Section 10A(j) and Rule 10A-2 thereunder. +30. Rule 2-01(b)(1) of Regulation S-X requires an accountant’s report to state “the +applicable professional standards under which the audit was conducted.” Through the conduct +described above, Davidson violated, and Bahar and Block caused Davidson to violate, Regulation +S-X Rule 2-02(b)(1) when they issued audit reports stating that they had conducted their audits in +accordance with PCAOB standards when they had not. +31. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +issuers with securities registered under Section 12 of the Exchange Act to file annual and quarterly +reports with the Commission. The obligation to file such reports embodies the requirement that they +be true and correct. Regulation S-X requires that audits and reviews of such financial statements be +8 +done by an independent public accountant in accordance with PCAOB standards. Regulation S-X, +Rules 1-02(d) (annual audits) and 10-01(d) (quarterly reviews of interim financial statements). +The same requirements apply to smaller reporting companies. Regulation S-X, Rules 8-02 (annual +audits) and 8-03 (interim financial statements). Davidson and its partners authorized issuers to +include audit reports in their filings that falsely stated that the audits had been conducted by an +independent public accountant and in accordance with PCAOB standards. Thus, and through the +conduct described above, Davidson, Bahar, and Block caused the Firm’s issuer clients to violate +Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder when the issuer clients +failed to obtain audits and interim reviews of financial statements that had been performed by +independent public accountants in accordance with PCAOB standards. + + COOPERATION AND REMEDIAL EFFORTS +32. In determining to accept the Offers, the Commission considered the Firm’s +cooperation and remedial efforts, including that, after receiving a document request from +Commission staff, the Firm voluntarily and promptly performed an internal review of its +engagements, reported violations found during that review, and enhanced its controls, as +referenced in paragraph 33 below. + +UNDERTAKINGS +33. In connection with the conduct described above and prior to this action, +Davidson implemented enhanced controls related to audit partner rotation procedures +(“enhanced rotation controls”), and hired a consultant to evaluate these enhanced rotation +controls to date and provide the Commission staff with a report of its findings. In addition, +Respondent Davidson undertakes to: +a. Retain, within thirty (30) days of the entry of this Order, at its own expense, +the services of a qualified consultant (“Consultant”), not unacceptable to the +Commission staff, to review, test, and evaluate the implementation and +functioning of Davidson’s enhanced rotation controls (the “Review”). +b. Provide to the Commission staff, within forty-five (45) days of the entry of +this Order, a copy of the engagement letter detailing the Consultant’s +responsibilities, to Sarah Lamoree, Assistant Director, Division of +Enforcement, Securities and Exchange Commission, 100 F Street NE, +Washington, DC 20549. +c. Require the Consultant, within thirty (30) days after completion of the +Review, which in no event shall be more than 540 days after the entry of this +Order, to submit a detailed written report of its findings to Davidson and to +the Commission staff (the “Report”). Davidson shall require that the Report +include a description of the Review performed, the names of the individuals +who performed the Review, the conclusions reached by the Review, the +Consultant’s recommendations for changes in or improvements to Davidson’s +9 +enhanced rotation controls, if any, as a result of the Review, and a summary of +the plan for implementing any recommended changes in or improvements to +Davidson’s enhanced rotation controls. +d. Davidson shall adopt all recommendations regarding the enhanced rotation +controls contained in the Report within sixty (60) days of the date of the +Report; provided, however, that within fifteen (15) days after the date of +Report, Davison shall advise the Consultant and the Commission staff in +writing of any recommendations that Davidson considers to be unduly +burdensome, impractical, or inappropriate. With respect to any +recommendation that Davidson considers unduly burdensome, impractical, or +inappropriate, Davidson need not adopt such recommendation at that time, but +shall propose in writing an alternative policy, procedure, or disclosure +designed to achieve the same objective or purpose. +e. As to any recommendation concerning Davidson’s enhanced rotation controls +on which Davidson and the Consultant do not agree, Davidson and the +Consultant shall attempt in good faith to reach an agreement within thirty (30) +days after the date of the Report. Within fifteen (15) days after the conclusion +of the discussion and evaluation by Davidson and the Consultant, Davidson +shall require that the Consultant inform Davidson and the Commission staff in +writing of the Consultant’s final determination concerning any +recommendation that Davidson considers to be unduly burdensome, +impractical, or inappropriate. Davidson shall abide by the determinations of +the Consultant and, within sixty (60) days after final agreement between +Davidson and the Consultant or final determination by the Consultant, +whichever occurs first, Davidson shall adopt and implement all of the +recommendations regarding the enhanced rotation controls that the Consultant +deems appropriate. +f. Cooperate fully with the Consultant and shall provide the Consultant with +access to such of Davidson’s files, books, records, and personnel as are +reasonably requested by the Consultant for review. +34. Davidson shall not have the authority to terminate the Consultant or substitute +another consultant for the initial Consultant, without the prior written approval of the +Commission staff. Davidson shall compensate the Consultant and persons engaged to assist +the Consultant for services rendered under this Order at their reasonable and customary rates. +35. Davidson shall require the Consultant to enter into an agreement that provides +that for the period of engagement and for a period of two years from completion of the +engagement, the Consultant shall not enter into any employment, consultant, attorney-client, +auditing, or other professional relationship with Respondents, or any of their present or +former affiliates, directors, officers, employees, or agents acting in their capacity. The +agreement shall also provide that the Consultant will require that any firm with which he/she +10 +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 Commission staff, enter into any employment, consultant, attorney-client, auditing or +other professional relationship with Respondents, or any of their present or former affiliates, +directors, officers, employees, or agents acting in their capacity as such for the period of the +engagement and for a period of two years after the engagement. +36. The Report and related written communications of the Consultant 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 objectives of the reporting requirement. For +these reasons, among others, the reports and the contents thereof are intended to remain and +shall remain non-public, except (1) pursuant to court order, (2) as agreed to by the parties in +writing, (3) to the extent that the Commission determines in its sole discretion that disclosure +would be in furtherance of the Commission’s discharge of its duties and responsibilities, or +(4) as otherwise required by law. +37. 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. +38. Davidson agrees to 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 Davidson agrees to provide such evidence. The certification and supporting +material shall be submitted to Sarah Lamoree, Assistant Director, with a copy to the Office of +Chief Counsel of the Enforcement Division, no later than sixty (60) days from the date of the +completion of the undertakings. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Pursuant to Section 21C of the Exchange Act, Respondents Davidson, Bahar +and Block cease and desist from committing or causing any violations and any future violations +of Sections 10A(j) and 13(a) of the Exchange Act and Rules 10A-2, 13a-1, and 13a-13, +promulgated thereunder, and Rule 2-02(b)(1) of Regulation S- X. + +B. Respondent Davidson shall comply with the undertakings enumerated in Paragraphs +33 to 38 above. +11 + +C. Respondent Davidson shall pay a civil money penalty in the amount of $265,000 +to the Securities and Exchange Commission for transfer to the general fund of the United States +Treasury, subject to Exchange Act Section 21F(g)(3). Payment shall be made in the following +installments: + +i. $66,250 within 30 days of entry of this Order; +ii. $66,250 within 180 days of entry of this Order; +iii. $66,250 within 270 days of entry of this Order; and +iv. $66,250 within 364 days of entry of this Order. + +As to Respondent Davidson, 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, +Davidson shall contact the staff of the Commission for the amount due. If Davidson 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. + +D. Respondent Bahar 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. Respondent Block shall, within 10 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. + +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 +12 +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 making payment (i.e., Davidson & Company LLP, Erez Bahar, CA, CPA or Grant +Block, CA, CPA), and the file number of these proceedings; a copy of the cover letter and check or +money order must be sent to D. Mark Cave, Associate Director, Division of Enforcement, Securities +and Exchange Commission, 100 F Street 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, 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 Bahar and Block, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Respondents Bahar and Block 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 Bahar and Block 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/2024/AAER-4550.txt b/raw/aaer/2024/AAER-4550.txt new file mode 100644 index 0000000000000000000000000000000000000000..629d705b1110517d61bc5eba13c1e5991a0714cc --- /dev/null +++ b/raw/aaer/2024/AAER-4550.txt @@ -0,0 +1,518 @@ + + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101987 / December 19, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4550 / December 19, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22369 + + +In the Matter of + +AAR CORP., + +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 AAR CORP. (“AAR” 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 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 of Settlement, the Commission finds1 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”) by AAR, +a provider of aviation products and services, arising from two separate bribery schemes. One +scheme was in connection with the sale of two Airbus A330 aircraft to Nepal Airlines Corporation +(“Nepal Airlines”), a government-owned airline, and the second was in connection with the sale of +aftermarket aviation services to SAA Technical (SOC) Ltd. (“South African Airways Technical”), +a subsidiary of South African Airways (SOC) Ltd (“South African Airways”), a government- +owned airline. + +2. The improper payments were in the form of sham commissions and fees payable to +government officials through the use of a third-party agent and joint venture partner. The +misconduct also involved a now-former high-level employee of an AAR subsidiary, Deepak +Sharma. The payments were in violation of AAR policies and were falsely recorded on the +company’s books and records as legitimate expenses. + +RESPONDENT + +3. AAR is a provider of aviation products and services. AAR and its wholly owned +subsidiaries currently have approximately 5,700 employees and hold approximately $2.8 billion in +total assets. AAR is incorporated in Delaware with its principal executive offices in Illinois. The +company’s common stock is registered with the Commission pursuant to Section 12(b) of the +Exchange Act, and it files periodic reports with the Commission pursuant to Section 13 of the +Exchange Act. The company’s common stock trades on the New York Stock Exchange under the +ticker symbol AIR. + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + 3 +OTHER RELEVANT ENTITIES AND INDIVIDUALS + +4. Deepak Sharma (“Sharma”), age 46, was President of International Supply +Chain for a wholly owned AAR subsidiary, from November 2015 until his suspension in April +2019. He resigned from AAR in September 2019. Sharma, a UK citizen residing in the UK. +After starting at the AAR subsidiary, Sharma was the lead executive responsible for the Nepal +Airlines transaction. During the relevant period, Sharma signed SOX sub-certifications as +President of International Supply Chain. In August 2024, in connection with the Nepal Airlines +scheme, Sharma pleaded guilty to a one-count criminal information filed in the US charging him +with conspiracy to violate the anti-bribery provisions of the FCPA, in violation of 18 U.S.C. § +371. + +5. Nepal Airlines is a state-owned airline and the flag carrier for the government of +Nepal. It was founded in 1958 and is the oldest airline in the country. In 2015, it was looking to +expand its international fleet through the purchase of two wide-body aircraft. + +6. Consortium Party A, a German corporation, was part of a consortium with an +AAR subsidiary involved in bidding on the sale of two Airbus A330 aircraft to Nepal Airlines. It +established a special purpose vehicle to facilitate the sale. + +7. Consortium Party B, a Portuguese charter airline, was part of a consortium with +an AAR subsidiary involved in bidding on the sale of two Airbus A330 aircraft to Nepal Airlines. It +had the right to purchase the two Airbus planes, which it assigned to a special purpose vehicle. + +8. Special Purpose Vehicle was a special purpose vehicle established by Consortium +Party A for the purpose of facilitating the sale of two Airbus A330 aircraft to Nepal Airlines. + +9. Principal AB, a Nepalese national, controlled Third-Party Agent A and Third-Party +Agent B. In connection with the Nepal transaction, an AAR subsidiary, Consortium Party A , and +Special Purpose Vehicle retained Principal AB. + +10. Third-Party Agent A, a Hong Kong corporation, was controlled by Principal AB +and purportedly involved in the telecommunications business. + +11. Third-Party Agent B, a Dubai-based entity incorporated in the UAE, was formed +and controlled by Principal AB as a successor entity to Third-Party Agent A. + +12. South African Airways is a South African government-owned airline. + +13. South African Airways Technical is a state-owned subsidiary of South African +Airways that provides aircraft maintenance services to various commercial airlines. + + 4 +14. Joint Venture Party was formed in 2015 as a South African Broad-Based Black +Economic Empowerment (“BBBEE”) entity. The principals of Joint Venture Party were Principal +1, Principal 2, and two of Principal 2’s daughters. On January 4, 2022, after AAR had terminated +the relationship with Joint Venture Party and South African Airways Technical, an investigative +commission of the South African government found that Principal 1, Principal 2, and Joint Venture +Party bribed government officials in connection with a transaction unrelated to AAR. That +commission did not make findings of corruption as to AAR or its arrangement with Joint Venture +Party but found that the award of the component tender to Joint Venture Party was unlawful and +irregular. . + +FACTS + +Nepal Bribery Scheme + +15. From at least November 2015 through 2018, Sharma, a then senior executive at an +AAR subsidiary, orchestrated and implemented a bribery scheme to win a contract for the sale to +Nepal Airlines of two Airbus A330 aircraft valued at approximately $210 million. As part of the +scheme, an AAR subsidiary retained Third-Party Agent A, whose role was to pay bribes to +officials who had control over the Nepal Airlines contract. AAR terminated its relationship with +Third-Party Agent A prior to the transaction closing, resulting in Sharma arranging to have +Consortium Party A pay Third-Party Agent A and its successor entity, Third-Party Agent B, a +success fee for winning the Nepal Airlines contract. + +16. In 2015, Sharma was hired as President of the International Supply Chain for an +AAR subsidiary. At the time, Sharma suggested that he could help secure the Nepal Airlines +opportunity. Upon arriving at AAR, Sharma pursued the opportunity as the lead employee +responsible for winning the Nepal Airlines contract, reporting directly to an AAR executive. +Sharma’s internal communications to AAR personnel suggested that the Nepal Airlines request +for proposal (“RFP”) would be drafted to favor AAR. For example, on November 22, 2015, +Sharma sent an internal email conveying that he had a “good meeting” with the “CEO of [Nepal] +airlines” and that the RFP for the transaction would be written in favor of AAR. In a follow-up +December internal email, Sharma forwarded email correspondence between himself and the Nepal +Airlines’ Managing Director, adding that the Managing Director was “100% relying on us to bid +and win this aircraft sales” contract. + + 5 +17. Starting at least as early as December 2015, Sharma worked with Principal AB, a +Nepalese individual who controlled Third-Party Agent A, and its successor entity, Third-Party +Agent B, and with Nepalese officials to help AAR win the Nepal Airlines contract. In March, +2016, Sharma secured, and shared internally at AAR, an unpublished draft of the RFP for AAR +executives to “comment” on and “change any terms to suit AAR.” As a result, Sharma and others +at AAR proposed changes to the draft RFP to benefit AAR in the bidding process. A few months +later, Sharma emailed the Nepal Airlines’ Managing Director adding specifications to the RFP, and +then forwarded this email internally, writing that the “way this RFP is going no one else will +qualify to bid except AAR.” On September 26, 2016, the RFP was officially published. Upon +publication, Sharma reported in an internal email that the RFP was “designed for us.” + +18. Soon after the RFP was published, Sharma discussed internally the need to engage +Third-Party Agent A as an agent on the Nepal Airlines transaction. In doing so, Sharma noted that +he would “pull all political strings in Nepal” and that setting up a foreign representative agreement +(“FRA”) with Third-Party Agent A would help “lock . . . in” the Nepal Airlines transaction. Third- +Party Agent A, based in Hong Kong and purportedly a telecommunications business, was engaged +by an AAR subsidiary despite red flags raised during due diligence including: (1) its lack of any +aviation industry experience; (2) limited and vague descriptions of the services it would provide; +(3) that two customer references provided by Third-Party Agent A involved sales of cellphones +and electronics; and (4) a higher than normal commission rate. + +19. On November 1, 2016, Third-Party Agent A was officially engaged pursuant to the +FRA. Under the FRA, Third-Party Agent A would receive a commission payment of 7% of the +final sales price of the two aircraft, and the commission payment was estimated to be between $9.6 +and $14.6 million. An internal AAR PowerPoint noted the arrangement to be “necessary” for AAR +to win the Nepal Airlines transaction. + +20. On November 8, 2016, an AAR subsidiary formed a consortium through a +framework agreement with Consortium Party A and Consortium Party B (collectively the “AAR +Consortium”) to submit a bid on the Nepal Airlines transaction. Under the initial structure, AAR +would provide the aircraft, Consortium Party A would provide the financing, and Consortium Party +B would provide services, spare parts, and tooling. Consortium Party B would also assign the right +it held to purchase two A330 aircraft from Airbus to Special Purpose Vehicle, which would be +created by Consortium Party A. To purchase the aircraft, Consortium Party A would use Special +Purpose Vehicle to buy the two A330 aircraft from Airbus, and Special Purpose Vehicle would +then sell the aircraft to AAR, which in turn would sell the aircraft to Nepal Airlines. AAR +estimated that it would make between $8 million to $12 million from that transaction structure. + +21. On November 9, 2016, the AAR Consortium submitted its bid in response to the +RFP. The cover letter for the bid was addressed to Nepal Airlines’ Managing Director from +Sharma. The next day, Sharma texted an AAR executive “we got the Nepal deal.” + + 6 +22. On or around December 1, 2016, AAR executives learned from Sharma that money +going to Third-Party Agent A would be used to make donations to political parties in Nepal as part +of the Nepal Airlines transaction. On December 4, 2016, AAR received an anonymous email +alleging bribery related to the Nepal Airlines transaction. As a result of learning from Sharma that +Third-Party Agent A would be making these payments, AAR terminated Third-Party Agent A on +December 9, 2016. On January 16, 2017, Nepal Airlines notified AAR that its board had approved +the AAR Consortium’s bid. + + +23. The transaction was restructured such that Special Purpose Vehicle would buy the +two A330 aircraft from Airbus, but rather than selling them to AAR, Special Purpose Vehicle +would sell the aircraft directly to Nepal Airlines, and, for negotiating the transaction, AAR would +receive a $6 million commission (rather than the originally contemplated $9.6-14.6 million +commission). + +24. As part of the termination of the FRA, the AAR subsidiary and Third-Party Agent +A executed a termination and separate fee agreement that provided Third-Party Agent A with +$250,000 as “full payment to” Third-Party Agent A “for its time and costs associated with its +efforts relating to the sale of [the] aircraft” upon the delivery of the two aircraft to Nepal Airlines +and after payment to the AAR subsidiary. + +25. Sharma subsequently put in place a May 2017 agreement between Third-Party +Agent A and Consortium Party A pursuant to which Consortium Party A would pay Third-Party +Agent A a commission of $4 million per aircraft ($8 million for the two aircraft). The agreement +was backdated to October 7, 2016, to make it look like it was in place at the time the AAR +Consortium placed its bid. A subsequent July 2017 agreement replaced Consortium Party A with +Special Purpose Vehicle in Consortium Party A’s agreement with Third-Party Agent A, making +Special Purpose Vehicle the entity responsible for paying the relevant sales commission to Third- +Party Agent A. + +26. However, when the Nepal Airlines transaction closed, Consortium Party A’s +payments (through Special Purpose Vehicle) to Third-Party Agent A were blocked due to its +financial institution’s “Know Your Customer” rules. This resulted in Sharma working with +Principal AB to form a new company, Third-Party Agent B, to receive payments from Consortium +Party A. Third-Party Agent B was incorporated in UAE (Dubai) on October 22, 2017, with +Principal AB’s son as one of its two shareholders. Sharma then worked with Principal AB to assign +to Third-Party Agent B Third-Party Agent A’s rights under the Special Purpose Vehicle/Third- +Party Agent A agreement. In 2018, AAR paid Third-Party Agent A the $250,000 commission via a +wire transfer through at least one US correspondent bank and Consortium Party A/Special Purpose +Vehicle paid Third-Party Agent B $2.6 million. In coordinating the payment to Third Party Agent +A, Sharma communicated via email with AAR personnel located in the US. + + 7 +27. While the payment to Third-Party Agent A was part of the bribery scheme and the +AAR subsidiary lacked documentary evidence reflecting any legitimate services actually +performed by Third-Party Agent A, the $250,000 commission payment was recorded by the AAR +subsidiary as a legitimate commission expense. + +28. AAR failed to devise and maintain internal accounting controls related to vendor +management and accounts payable sufficient to provide reasonable assurances that AAR personnel +were adhering to AAR’s Global Anti-Corruption Policy and its procedures regarding the retention +of and payments to third-party agents. + +29. As a result of this misconduct, AAR was unjustly enriched by $6,000,000. + +South Africa Bribery Scheme + +30. From January 2016 through February 2020, Joint Venture Party, AAR’s agent in +South Africa, bribed South African government officials to obtain a contract for an AAR +subsidiary to provide aftermarket aviation services to South African Airways Technical. The bribes +were funded by money paid to Joint Venture Party from AAR as “success fee payments” and +“commissions” that were falsely designated in AAR’s books and records as legitimate business +expenses. Sharma facilitated these payments and Principal 1, a principal of Joint Venture Party, +arranged for and invoiced the bribes, while his partner, Principal 2, paid them to the officials. + +31. Between 2011 and 2015, AAR had repeatedly tried unsuccessfully to enter South +Africa’s aviation market. As a result, a now former AAR executive sought to cultivate +relationships with South African officials, including South African Airways Technical’s +Chairperson (Government Official 1) and South African Airways Technical’s Head of +Procurement (Government Official 2). + +32. Following a failed AAR bid on a South African Airways Technical contract using +a BBBEE +2 partner AAR had selected, Government Official 2 advised the former AAR executive +in an August 18, 2015 email that, “the selection [of a BBBEE partner] . . . should be a decision +by both the parties; however, it seems that AAR is far ahead with this without [South African +Airways Technical]’s involvement and input. We believe that being a State-Owned Company +[South African Airways Technical] is in the right position to drive the process.” Shortly +thereafter, at a September 2015 dinner in South Africa, Government Official 1 introduced the +former AAR executive to Principal 2, a principal of Joint Venture Party, which was an accredited +BBBEE partner and an approved aviation services vendor for South African Airways and South +African Airways Technical. On December 14, 2015, Joint Venture Party advised the former +AAR executive that Joint Venture Party had a “special relationship” with South African Airways +Technical. + + +2 BBBEE is a policy of the South African government which aims to facilitate broader participation in +the economy and viable economic empowerment by Black South Africans. It is intended to redress the +inequalities and inequities created by Apartheid. + 8 +33. Joint Venture Party described this “special” relationship to others at AAR, +including Sharma, and on December 3, 2015, an AAR subsidiary entered into a Collaboration +Agreement with Joint Venture Party. This initial agreement provided that Joint Venture Party +would assist AAR in obtaining supply parts and services contracts in exchange for a 5% +commission. The agreement contemplated the parties entering into an FRA, although that never +occurred. + +34. On December 8, 2015, South African Airways Technical issued a request for bids +for Component Support Services on its Boeing and Airbus fleets. + +35. In early January 2016, Joint Venture Party principals met with Government +Official 2, and they openly discussed that Government Official 1, Government Official 2, and +Government Official 3 (who was the acting Chief Executive Officer of South African Airways) +would be sharing in the AAR contract proceeds along with Joint Venture Party. In return for this +arrangement, Government Official 2 would ensure that AAR would be awarded the bid. + +36. In order for the contract to be economical for Joint Venture Party, Joint Venture +Party required an upfront success fee from AAR. Sharma was kept informed of this scheme and +clearly understood from Joint Venture Party that officials needed to be paid for AAR to win the +South African Airways Technical bid. + +37. The bid was due on January 18, 2016, and a Joint Venture Agreement was +executed between an AAR subsidiary and Joint Venture Party that day. However, to have +sufficient funds to pay the bribes going forward, prior to executing the Agreement, and prior to +submitting the bid, Joint Venture Party demanded a 3% success fee from AAR in addition to the +agreed upon 5% commission on all gross revenues. Sharma countered with a 1.5% success fee +made in equal payments at the end of every quarter from service commencement, for the first +service year. + +38. As part of ensuring AAR would be awarded the contract, one of the government +officials provided Joint Venture Party with guidance on how to best meet the specifics of the +request for bids as well as confidential nonpublic information, including notes of competitors’ +bids and pricing, which was shared with Sharma through emails and texts sent to Sharma and +others in the US, as well as to a principal of the Joint Venture Party who was, at times, in +California. AAR knew it was receiving inside information to secure the award of the bid but did +not inquire as to how that information was obtained. + +39. The AAR subsidiary was, in fact, awarded the contract, and in July 2016, the +AAR subsidiary, Joint Venture Party, and South African Airways Technical signed a Component +Support Agreement. After the contract was awarded, the incumbent service provider challenged +the award. A South African court rejected this challenge. Servicing pursuant to the Component +Support Agreement began in October 2016. + +40. The AAR subsidiary paid Joint Venture Party $150,000 on September 1, 2016, as +an advance on its first success fee payment, via a wire transfer through US bank accounts. This + 9 +initial payment was split among Principal 1 of the Joint Venture Party, Principal 2 of the Joint +Venture Party, Government Official 1, Government Official 2, and Government Official 3. The +bribe payments continued throughout the course of the contract and were tracked by and +accounted for monthly by Joint Venture Party. + +41. Throughout the contract term, Joint Venture Party continued to request more +money from AAR and continued to seek its originally requested 3% success fee. While Sharma +and a now former AAR executive together tried to find ways to increase Joint Venture Party’s +compensation through a rate increase, the success fee itself was not changed. Moreover, by +December 2019, South African Airways was in financial straits and could no longer assist in the +funding of South African Airways Technical. Thereafter, South African Airways Technical +suffered severe financial distress and was in turn unable to meet its payment obligations to AAR. + +42. When AAR asked Joint Venture Party to address reports of its potential corrupt +conduct made in certain testimony before a public commission in South Africa, including an +illicit payment made by Principal 2 to Government Official 2 in an unrelated, sham real estate +transaction not involving AAR, Joint Venture Party tendered false documents to AAR. As a +result, AAR terminated the Component Services Agreement and asked for an audit of Joint +Venture Party, which Joint Venture Party declined. Shortly after February 14, 2020, AAR +terminated the relationship with Joint Venture Party. In total, over the term of the Component +Support Agreement with South African Airways Technical AAR paid $1.24 million in success +fees and $4.16 million in commission payments to Joint Venture Party, for a total of $5.4 +million. + +43. As a result of this misconduct, AAR was unjustly enriched by $17,451,100. + +LEGAL STANDARDS AND VIOLATIONS + +44. Under Section 21C(a) of the Exchange Act, the Commission may impose a cease- +and-desist order upon any person who is violating, has violated, or is about to violate any provision +of the Exchange Act or any rule or regulation thereunder, and upon any other person that is, was, +or would be a cause of the violation, due to an act or omission the person knew or should have +known would contribute to such violation. + +45. Section 30A(a) of the Exchange Act, an anti-bribery provision of the Exchange Act, +provides, in relevant part, that it is unlawful for any issuer with a class of securities registered +pursuant to 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 of such issuer, to make use of the mails or any +means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, +promise to pay, or authorization of the payment of any money, or offer, gift or promise to give +anything of value to any foreign official for purposes of influencing any act or decision of such +foreign official in his official capacity, or to any foreign political party or party official for +purposes of influencing any act or decision of such party or party official in its official capacity, in +order to assist such issuer in obtaining or retaining business for or with any person. 15 U.S.C. § +78dd-1(a). As a result of improper payments made through an AAR subsidiary’s third-party agent + 10 +and joint venture partner to foreign officials in Nepal and South Africa, AAR was able to obtain +business from state-owned actors as described above. As a result of the conduct described above, +AAR violated Exchange Act Section 30A(a). + +46. Section 13(b)(2)(A) of the Exchange Act, part of the books and records provisions +of the FCPA, requires, in relevant part, that every issuer with a class of securities registered +pursuant to Section 12 of the Exchange Act or which is required to file reports under Section 15(d) +of the Exchange Act, to make and keep books, records, and accounts which, in reasonable detail, +accurately and fairly reflect the transactions and disposition of the assets of the issuer. 15 U.S.C. § +78m(b)(2)(A). As a result of the conduct described above, AAR’s books and records inaccurately +characterized commission payments and success fees to the third-party agent and joint venture +partner in connection with the Nepal and South Africa transactions. AAR failed to properly record +the true nature of these payments and falsely recorded the payments as legitimate expenses or +contra revenue. Therefore, AAR violated Exchange Act Section 13(b)(2)(A). + +47. Section 13(b)(2)(B) of the Exchange Act, part of the internal accounting controls +of the Exchange Act, requires, in relevant part, that issuers that have a class of securities registered +pursuant to Section 12 of the Exchange Act or reporting obligations pursuant to Section 15(d) of +the Exchange Act devise and maintain a system of internal accounting controls sufficient to +provide reasonable assurances that (i) transactions are executed in accordance with management’s +general or specific authorization; (ii) transactions are recorded as necessary (I) to permit +preparation of financial statements in conformity with generally accepted accounting principles or +any other criteria applicable to such statements, and (II) to maintain accountability for assets; (iii) +access to assets is permitted only in accordance with management’s general or specific +authorization; and (iv) the recorded accountability for assets is compared with the existing assets at +reasonable intervals and appropriate action is taken with respect to any differences. 15 U.S.C. § +78m(b)(2)(B). As described above, AAR failed to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that transactions were executed and +access to assets was permitted only in accordance with management’s general or specific +authorization. Specifically, AAR had insufficient internal accounting controls over vendor +management and accounts payable to provide reasonable assurances that the AAR personnel were +adhering to AAR’s Global Anti-Corruption Policy and procedures regarding the retention of and +payments to agents. By this conduct, AAR violated Exchange Act Section 13(b)(2)(B). + + + 11 +DISGORGEMENT AND NON-IMPOSITION OF CIVIL PENALTIES + +48. The disgorgement and prejudgment interest ordered in Section IV below is +consistent with equitable principles, does not exceed Respondent’s net profits from its violations, +and returning the money to Respondent would be inconsistent with equitable principles. Therefore, +in these circumstances, distributing disgorged funds to the US Treasury is the most equitable +alternative. The disgorgement and prejudgment interest ordered in Section IV below shall be +transferred to the general fund of the US Treasury, subject to Section 21F(g)(3) of the Exchange +Act. + +49. Respondent acknowledges that the Commission is not imposing a civil penalty, +based upon the imposition of a $26,363,029 criminal penalty as part of AAR’s related resolution +with the US Department of Justice. + +COOPERATION AND REMEDIATION + +50. In determining to accept the Offer, the Commission considered that AAR reported +its misconduct after learning of press reports of potential corruption in connection with this +transaction in Nepal, implemented remedial measures, and cooperated with the Commission +staff. + +51. Respondent’s cooperation included, among other things, proactively preserving, +imaging, and conducting forensic analysis of key electronic evidence, providing translations of +certain relevant documents, making current and former employees available to the Commission +staff (including witnesses located overseas), and timely and voluntarily providing the details of +facts developed during its internal investigation, including the sharing of forensic accounting +analysis, relevant emails and company documents, and information pertaining to current and +former employees. + +52. Respondent’s remediation included separating from employees responsible for the +misconduct or who inadequately responded to red flags, initiating improvements to its internal +audit and compliance programs by enhancing its compliance resources and hiring personnel such +as a new Chief Ethics and Compliance Officer, applying controls improvements to acquired +entities, amending public bidding policies and implementing monitoring processes including a +messaging application retention tool and periodic anti-corruption site reviews. Respondent also +increased training on anti-bribery issues. Respondent has also undertaken an analysis of its +compliance program and continues to make improvements utilizing anticorruption risk +assessments, data analytics, internal audits, and internal accounting controls related to third-party +management. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + 12 +Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent AAR 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. AAR shall, within 10 days of the entry of this Order, pay disgorgement of $23,451,100 +and prejudgment interest of $5,785,524 +to the Securities and Exchange Commission for transfer +to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to SEC Rule of Practice +600. + + +C. Payment must be made in one of the following ways: + +(1) AAR may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) AAR 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) AAR 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 +AAR as Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Charles E. Cain, Chief of the FCPA +Unit, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-5631B. + + By the Commission. + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4551.txt b/raw/aaer/2024/AAER-4551.txt new file mode 100644 index 0000000000000000000000000000000000000000..5eba3d546dbf3a868c3953ab14bb48b1372268e6 --- /dev/null +++ b/raw/aaer/2024/AAER-4551.txt @@ -0,0 +1,548 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 101988 / December 19, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4551 / December 19, 2024 + +ADMINISTRATIVE PROCEEDING +File No. 3-22370 + + + +In the Matter of + +DEEPAK SHARMA, + +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 Deepak Sharma (“Sharma” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, Respondent admits the Commission’s jurisdiction over him and +the subject matter of these proceedings, and except as provided herein in Section V, 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 of Settlement, the Commission finds1 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”) by AAR, +a provider of aviation products and services, arising from two separate bribery schemes. One +scheme was in connection with the sale of two Airbus A330 aircraft to Nepal Airlines Corporation +(“Nepal Airlines”), a government-owned airline, and the second was in connection with the sale of +aftermarket aviation services to SAA Technical (SOC) Ltd. (“South African Airways Technical”), +a subsidiary of South African Airways (SOC) Ltd (“South African Airways”), a government- +owned airline. + +2. The improper payments were in the form of sham commissions and fees payable to +government officials through the use of a third-party agent and joint venture partner. The +misconduct also involved a now-former high-level employee of an AAR subsidiary, Deepak +Sharma. The payments were in violation of AAR policies and were falsely recorded on the +company’s books and records as legitimate expenses. + +RESPONDENT + +3. Sharma, age 46, was President of International Supply Chain for a wholly owned +AAR subsidiary, from November 2015 until his suspension in April 2019. He resigned from +AAR in September 2019. Sharma is a UK citizen residing in the UK. After starting at the AAR +subsidiary, Sharma was the lead executive responsible for the Nepal Airlines transaction. During +the relevant period, Sharma signed SOX sub-certifications as President of International Supply +Chain. In August 2024, in connection with the Nepal Airlines scheme, Sharma pleaded guilty to a +one-count criminal information filed in the US charging him with conspiracy to violate the anti- +bribery provisions of the FCPA, in violation of 18 U.S.C. § 371. + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + 3 +OTHER RELEVANT ENTITIES AND INDIVIDUALS + +4. AAR is a provider of aviation products and services. AAR and its wholly owned +subsidiaries currently have approximately 5,700 employees and hold approximately $2.8 billion in +total assets. AAR is incorporated in Delaware with its principal executive offices in Illinois. The +company’s common stock is registered with the Commission pursuant to Section 12(b) of the +Exchange Act, and it files periodic reports with the Commission pursuant to Section 13 of the +Exchange Act. The company’s common stock trades on the New York Stock Exchange under the +ticker symbol AIR. + +5. Nepal Airlines is a state-owned airline and the flag carrier for the government of +Nepal. It was founded in 1958 and is the oldest airline in the country. In 2015, it was looking to +expand its international fleet through the purchase of two wide-body aircraft. + +6. Consortium Party A, a German corporation, was part of a consortium with an +AAR subsidiary involved in bidding on the sale of two Airbus A330 aircraft to Nepal Airlines. It +established a special purpose vehicle to facilitate the sale. + +7. Consortium Party B, a Portuguese charter airline, was part of a consortium with +an AAR subsidiary involved in bidding on the sale of two Airbus A330 aircraft to Nepal Airlines. It +had the right to purchase the two Airbus planes, which it assigned to a special purpose vehicle. + +8. Special Purpose Vehicle was a special purpose vehicle established by Consortium +Party A for the purpose of facilitating the sale of two Airbus A330 aircraft to Nepal Airlines. + +9. Principal AB, a Nepalese national, controlled Third-Party Agent A and Third-Party +Agent B. In connection with the Nepal transaction, an AAR subsidiary, Consortium Party A, and +Special Purpose Vehicle retained Principal AB. + +10. Third-Party Agent A, a Hong Kong corporation, was controlled by Principal AB +and purportedly involved in the telecommunications business. + +11. Third-Party Agent B, a Dubai-based entity incorporated in the UAE, was formed +and controlled by Principal AB as a successor entity to Third-Party Agent A. + +12. South African Airways is a South African government-owned airline. + + 4 +13. South African Airways Technical is a state-owned subsidiary of South African +Airways that provides aircraft maintenance services to various commercial airlines. + +14. Joint Venture Party was formed in 2015 as a South African Broad-Based Black +Economic Empowerment (“BBBEE”) entity. The principals of Joint Venture Party were Principal +1, Principal 2, and two of Principal 2’s daughters. On January 4, 2022, after AAR had terminated +the relationship with Joint Venture Party and South African Airways Technical, an investigative +commission of the South African government found that Principal 1, Principal 2, and Joint Venture +Party bribed government officials in connection with a transaction unrelated to AAR. That +commission did not make findings of corruption as to AAR or its arrangement with Joint Venture +Party but found that the award of the component tender to Joint Venture Party was unlawful and +irregular. + +FACTS + +Nepal Bribery Scheme + +15. From at least November 2015 through 2018, Sharma, a then senior executive at an +AAR subsidiary, orchestrated and implemented a bribery scheme to win a contract for the sale to +Nepal Airlines of two Airbus A330 aircraft valued at approximately $210 million. As part of the +scheme, an AAR subsidiary retained Third-Party Agent A, whose role was to pay bribes to +officials who had control over the Nepal Airlines contract. AAR terminated its relationship with +Third-Party Agent A prior to the transaction closing, resulting in Sharma arranging to have +Consortium Party A pay Third-Party Agent A and its successor entity, Third-Party Agent B, a +success fee for winning the Nepal Airlines contract. + +16. In 2015, Sharma was hired as President of the International Supply Chain for an +AAR subsidiary. At the time, Sharma suggested that he could help secure the Nepal Airlines +opportunity. Upon arriving at AAR, Sharma pursued the opportunity as the lead employee +responsible for winning the Nepal Airlines contract, reporting directly to an AAR executive. +Sharma’s internal communications to AAR personnel suggested that the Nepal Airlines request +for proposal (“RFP”) would be drafted to favor AAR. For example, on November 22, 2015, +Sharma sent an internal email conveying that he had a “good meeting” with the “CEO of [Nepal] +airlines” and that the RFP for the transaction would be drafted in favor of AAR. In a follow-up +December internal email, Sharma forwarded email correspondence between himself and the Nepal +Airlines’ Managing Director, adding that the Managing Director was “100% relying on us to bid +and win this aircraft sales” contract. + + 5 +17. Starting at least as early as December 2015, Sharma worked with Principal AB, a +Nepalese individual who controlled Third-Party Agent A, and its successor entity, Third-Party +Agent B, and with Nepalese officials to help AAR win the Nepal Airlines contract. In March, +2016, Sharma secured, and shared internally at AAR, an unpublished draft of the RFP for AAR +executives to “comment” on and “change any terms to suit AAR.” As a result, Sharma and others +at AAR proposed changes to the draft RFP to benefit AAR in the bidding process. A few months +later, Sharma emailed the Nepal Airlines’ Managing Director adding specifications to the RFP, and +then forwarded this email internally, writing that the “way this RFP is going no one else will +qualify to bid except AAR.” On September 26, 2016, the RFP was officially published. Upon +publication, Sharma reported in an internal email that the RFP was “designed for us.” + +18. Soon after the RFP was published, Sharma discussed internally the need to engage +Third-Party Agent A as an agent on the Nepal Airlines transaction. In doing so, Sharma noted that +he would “pull all political strings in Nepal” and that setting up a foreign representative agreement +(“FRA”) with Third-Party Agent A would help “lock . . . in” the Nepal Airlines transaction. Third- +Party Agent A, based in Hong Kong and purportedly a telecommunications business, was engaged +by an AAR subsidiary despite red flags raised during due diligence including: (1) its lack of any +aviation industry experience; (2) limited and vague descriptions of the services it would provide; +(3) that two customer references provided by Third-Party Agent A involved sales of cellphones +and electronics; and (4) a higher than normal commission rate. + +19. On November 1, 2016, Third-Party Agent A was officially engaged pursuant to the +FRA. Under the FRA, Third-Party Agent A would receive a commission payment of 7% of the +final sales price of the two aircraft, and the commission payment was estimated to be between $9.6 +and $14.6 million. An internal AAR PowerPoint noted the arrangement to be “necessary” for AAR +to win the Nepal Airlines transaction. + +20. On November 8, 2016, an AAR subsidiary formed a consortium through a +framework agreement with Consortium Party A and Consortium Party B (collectively the “AAR +Consortium”) to submit a bid on the Nepal Airlines transaction. Under the initial structure, AAR +would provide the aircraft, Consortium Party A would provide the financing, and Consortium Party +B would provide services, spare parts, and tooling. Consortium Party B would also assign the right +it held to purchase two A330 aircraft from Airbus to Special Purpose Vehicle, which would be +created by Consortium Party A. To purchase the aircraft, Consortium Party A would use Special +Purpose Vehicle to buy the two A330 aircraft from Airbus, and Special Purpose Vehicle would +then sell the aircraft to AAR, which in turn would sell the aircraft to Nepal Airlines. AAR +estimated that it would make between $8 million to $12 million from that transaction structure. + +21. On November 9, 2016, the AAR Consortium submitted its bid in response to the +RFP. The cover letter for the bid was addressed to Nepal Airlines’ Managing Director from +Sharma. The next day, Sharma texted an AAR executive “we got the Nepal deal.” + + 6 +22. On or around December 1, 2016, AAR executives learned from Sharma that money +going to Third-Party Agent A would be used to make donations to political parties in Nepal as part +of the Nepal Airlines transaction. On December 4, 2016, AAR received an anonymous email +alleging bribery related to the Nepal Airlines transaction. As a result of learning from Sharma that +Third-Party Agent A would be making these payments, AAR terminated Third-Party Agent A on +December 9, 2016. On January 16, 2017, Nepal Airlines notified AAR that its board had approved +the AAR Consortium’s bid. + +23. The transaction was ultimately restructured such that Special Purpose Vehicle +would buy the two A330 aircraft from Airbus, but rather than selling them to AAR, Special +Purpose Vehicle would sell the aircraft directly to Nepal Airlines, and, for negotiating the +transaction, AAR would receive a $6 million commission (rather than the originally contemplated +$9.6-14.6 million commission). + +24. As part of the termination of the FRA, the AAR subsidiary and Third-Party Agent +A executed a termination and separate fee agreement that provided Third-Party Agent A with +$250,000 as “full payment to” Third-Party Agent A “for its time and costs associated with its +efforts relating to the sale of [the] aircraft” upon the delivery of the two aircraft to Nepal Airlines +and after payment to the AAR subsidiary. + +25. Sharma subsequently put in place a May 2017 agreement between Third-Party +Agent A and Consortium Party A pursuant to which Consortium Party A would pay Third-Party +Agent A a commission of $4 million per aircraft ($8 million for the two aircraft). The agreement +was backdated to October 7, 2016, to make it look like it was in place at the time the AAR +Consortium placed its bid. A subsequent July 2017 agreement replaced Consortium Party A with +Special Purpose Vehicle in Consortium Party A’s agreement with Third-Party Agent A, making +Special Purpose Vehicle the entity responsible for paying the relevant sales commission to Third- +Party Agent A. + +26. However, when the Nepal Airlines transaction closed, Consortium Party A’s +payments (through Special Purpose Vehicle) to Third-Party Agent A were blocked due to its +financial institution’s “Know Your Customer” rules. This resulted in Sharma working with +Principal AB to form a new company, Third-Party Agent B, to receive payments from Consortium +Party A. Third-Party Agent B was incorporated in UAE (Dubai) on October 22, 2017, with +Principal AB’s son as one of its two shareholders. Sharma then worked with Principal AB to assign +to Third-Party Agent B Third-Party Agent A’s rights under the Special Purpose Vehicle/Third- +Party Agent A agreement. In 2018, AAR paid Third-Party Agent A the $250,000 commission via a +wire transfer through at least one US correspondent bank and Consortium Party A/Special Purpose +Vehicle paid Third-Party Agent B $2.6 million. In coordinating the payment to Third Party Agent +A, Sharma communicated via email with AAR personnel located in the US. + + + 7 +27. While the payment to Third-Party Agent A was part of the bribery scheme and the +AAR subsidiary lacked documentary evidence reflecting any legitimate services actually +performed by Third-Party Agent A, the $250,000 commission payment was recorded by the AAR +subsidiary as a legitimate commission expense. + +28. AAR failed to devise and maintain internal accounting controls related to vendor +management and accounts payable sufficient to provide reasonable assurances that AAR personnel +were adhering to AAR’s Global Anti-Corruption Policy and its procedures regarding the retention +of and payments to third-party agents. + +29. As a result of Sharma’s misconduct, he received $130,835 as compensation from +AAR in connection with the Nepal contract. + +South Africa Bribery Scheme + +30. From January 2016 through February 2020, Joint Venture Party, AAR’s agent in +South Africa, bribed South African government officials to obtain a contract for an AAR +subsidiary to provide aftermarket aviation services to South African Airways Technical. The bribes +were funded by money paid to Joint Venture Party from AAR as “success fee payments” and +“commissions” that were falsely designated in AAR’s books and records as legitimate business +expenses. Sharma facilitated these payments and Principal 1, a principal of Joint Venture Party, +arranged for and invoiced the bribes, while his partner, Principal 2, paid them to the officials. + +31. Between 2011 and 2015, AAR had repeatedly tried unsuccessfully to enter South +Africa’s aviation market. As a result, a now former AAR executive sought to cultivate +relationships with South African officials, including South African Airways Technical’s +Chairperson (Government Official 1) and South African Airways Technical’s Head of +Procurement (Government Official 2). + +32. Following a failed AAR bid on a South African Airways Technical contract using +a BBBEE +2 partner AAR had selected, Government Official 2 advised the former AAR executive +in an August 18, 2015 email that, “the selection [of a BBBEE partner] . . . should be a decision +by both the parties; however, it seems that AAR is far ahead with this without [South African +Airways Technical]’s involvement and input. We believe that being a State-Owned Company +[South African Airways Technical] is in the right position to drive the process.” Shortly +thereafter, at a September 2015 dinner in South Africa, Government Official 1 introduced the +former AAR executive to Principal 2, a principal of Joint Venture Party, which was an accredited +BBBEE partner and an approved aviation services vendor for South African Airways and South +African Airways Technical. On December 14, 2015, Joint Venture Party advised the former +AAR executive that Joint Venture Party had a “special relationship” with South African Airways +Technical. + + +2 BBBEE is a policy of the South African government which aims to facilitate broader participation in +the economy and viable economic empowerment by Black South Africans. It is intended to redress the +inequalities and inequities created by Apartheid. + 8 +33. Joint Venture Party described this “special” relationship to others at AAR, +including Sharma, and on December 3, 2015, an AAR subsidiary entered into a Collaboration +Agreement with Joint Venture Party. This initial agreement provided that Joint Venture Party +would assist AAR in obtaining supply parts and services contracts in exchange for a 5% +commission. The agreement contemplated the parties entering into an FRA, although that never +occurred. + +34. On December 8, 2015, South African Airways Technical issued a request for bids +for Component Support Services on its Boeing and Airbus fleets. + +35. In early January 2016, Joint Venture Party principals met with Government +Official 2, and they openly discussed that Government Official 1, Government Official 2, and +Government Official 3 (who was the acting Chief Executive Officer of South African Airways) +would be sharing in the AAR contract proceeds along with Joint Venture Party. In return for this +arrangement, Government Official 2 would ensure that AAR would be awarded the bid. + +36. In order for the contract to be economical for Joint Venture Party, Joint Venture +Party required an upfront success fee from AAR. Sharma was kept informed of this scheme and +clearly understood from Joint Venture Party that officials needed to be paid for AAR to win the +South African Airways Technical bid. + +37. The bid was due on January 18, 2016, and a Joint Venture Agreement was +executed between an AAR subsidiary and Joint Venture Party that day. However, to have +sufficient funds to pay the bribes going forward, prior to executing the Agreement, and prior to +submitting the bid, Joint Venture Party demanded a 3% success fee from AAR in addition to the +agreed upon 5% commission on all gross revenues. Sharma countered with a 1.5% success fee +made in equal payments at the end of every quarter from service commencement, for the first +service year. + +38. As part of ensuring AAR would be awarded the contract, one of the government +officials provided Joint Venture Party with guidance on how to best meet the specifics of the +request for bids as well as confidential nonpublic information, including notes of competitors’ +bids and pricing, which was shared with Sharma through emails and texts sent to Sharma and +others in the US, as well as to a principal of the Joint Venture Party who was, at times, in +California. AAR knew it was receiving inside information to secure the award of the bid but did +not inquire as to how that information was obtained. + +39. The AAR subsidiary was, in fact, awarded the contract, and in July 2016, the +AAR subsidiary, Joint Venture Party, and South African Airways Technical signed a Component +Support Agreement. After the contract was awarded, the incumbent service provider challenged +the award. A South African court rejected this challenge. Servicing pursuant to the Component +Support Agreement began in October 2016. + +40. The AAR subsidiary paid Joint Venture Party $150,000 on September 1, 2016, as +an advance on its first success fee payment, via a wire transfer through US bank accounts. This + 9 +initial payment was split among Principal 1 of the Joint Venture Party, Principal 2 of the Joint +Venture Party, Government Official 1, Government Official 2, and Government Official 3. The +bribe payments continued throughout the course of the contract and were tracked by and +accounted for monthly by Joint Venture Party. + +41. Throughout the contract term, Joint Venture Party continued to request more +money from AAR and continued to seek its originally requested 3% success fee. While Sharma +and a now former AAR executive together tried to find ways to increase Joint Venture Party’s +compensation through a rate increase, the success fee itself was not changed. Moreover, by +December 2019, South African Airways was in financial straits and could no longer assist in the +funding of South African Airways Technical. Thereafter, South African Airways Technical +suffered severe financial distress and was in turn unable to meet its payment obligations to AAR. + +42. When AAR asked Joint Venture Party to address reports of its potential corrupt +conduct made in certain testimony before a public commission in South Africa, including an +illicit payment made by Principal 2 to Government Official 2 in an unrelated, sham real estate +transaction not involving AAR, Joint Venture Party tendered false documents to AAR. As a +result, AAR terminated the Component Services Agreement and asked for an audit of Joint +Venture Party, which Joint Venture Party declined. Shortly after February 14, 2020, AAR +terminated the relationship with Joint Venture Party. In total, over the term of the Component +Support Agreement with South African Airways Technical AAR paid $1.24 million in success +fees and $4.16 million in commission payments to Joint Venture Party, for a total of $5.4 +million. + +LEGAL STANDARDS AND VIOLATIONS + +43. Under Section 21C(a) of the Exchange Act, the Commission may impose a cease- +and-desist order upon any person who is violating, has violated, or is about to violate any provision +of the Exchange Act or any rule or regulation thereunder, and upon any other person that is, was, +or would be a cause of the violation, due to an act or omission the person knew or should have +known would contribute to such violation. + +44. Section 30A(a) of the Exchange Act, an anti-bribery provision of the Exchange Act, +provides, in relevant part, that it is unlawful for any issuer with a class of securities registered +pursuant to 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 of such issuer, to make use of the mails or any +means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, +promise to pay, or authorization of the payment of any money, or offer, gift or promise to give +anything of value to any foreign official for purposes of influencing any act or decision of such +foreign official in his official capacity, or to any foreign political party or party official for +purposes of influencing any act or decision of such party or party official in its official capacity, in +order to assist such issuer in obtaining or retaining business for or with any person. 15 U.S.C. § +78dd-1(a). As a result of improper payments made through AAR’s third-party and joint venture +agents to foreign officials in Nepal and South Africa, AAR, through Sharma, was able to obtain + 10 +business from state-owned actors as described above. As a result of the conduct described above, +Sharma violated Exchange Act Section 30A(a). + +45. Section 13(b)(2)(A) of the Exchange Act, part of the books and records provisions +of the FCPA, requires, in relevant part, that every issuer with a class of securities registered +pursuant to Section 12 of the Exchange Act or which is required to file reports under Section 15(d) +of the Exchange Act, to make and keep books, records, and accounts which, in reasonable detail, +accurately and fairly reflect the transactions and disposition of the assets of the issuer. 15 U.S.C. § +78m(b)(2)(A). As a result of the conduct described above, and in violation of Section 13(b)(2)(A), +AAR’s books and records inaccurately characterized commission payments and success fees to +third-party and joint venture agents in connection with the Nepal and South Africa transactions. +AAR failed to properly record the true nature of these payments and falsely recorded the payments +as legitimate expenses or contra revenue. + +46. Through his involvement in the Nepal and South Africa transactions as described +above, including his failure to disclose the improper payment arrangements, Sharma caused +expenses related to the bribe schemes to be falsely recorded in AAR’s books and records as +legitimate payments in circumstances where he knew, or should have known, that his conduct +would contribute to the violations. As a result, Sharma caused AAR to violate Exchange Act +Section 13(b)(2)(A), through his conduct. + +47. Section 13(b)(2)(B) of the Exchange Act, part of the internal accounting controls of +the Exchange Act, requires, in relevant part, that issuers that have a class of securities registered +pursuant to Section 12 of the Exchange Act or reporting obligations pursuant to Section 15(d) of +the Exchange Act devise and maintain a system of internal accounting controls sufficient to +provide reasonable assurances that (i) transactions are executed in accordance with management’s +general or specific authorization; (ii) transactions are recorded as necessary (I) to permit +preparation of financial statements in conformity with generally accepted accounting principles or +any other criteria applicable to such statements, and (II) to maintain accountability for assets; (iii) +access to assets is permitted only in accordance with management’s general or specific +authorization; and (iv) the recorded accountability for assets is compared with the existing assets at +reasonable intervals and appropriate action is taken with respect to any differences. 15 U.S.C. § +78m(b)(2)(B). As described above, and in violation of Section 13(b)(2)(A), AAR failed to devise +and maintain a system of internal accounting controls sufficient to provide reasonable assurances +that transactions were executed and access to assets was permitted only in accordance with +management’s general or specific authorization. Specifically, AAR had insufficient internal +accounting controls over vendor management and accounts payable to provide reasonable +assurances that the AAR personnel were adhering to AAR’s Global Anti-Corruption Policy and +procedures regarding the retention of and payments to agents. + +48. As President of International Supply Chain, Sharma signed false SOX sub- +certifications during the relevant years on behalf of an AAR subsidiary, in which he attested to his +compliance with AAR policies and internal accounting controls and sufficiency of documentation +to substantiate that procedures operated effectively in circumstances in which he knew of +deficiencies in those controls and had in fact taken advantage of the deficiencies in the course of + 11 +conduct described above. AAR relied on the accuracy of Sharma’s sub-certifications in making +required disclosures, representations, and certifications to its outside auditors and other +stakeholders that AAR was in compliance with applicable laws and its internal accounting +controls. Sharma knew, or should have known, that his conduct would contribute to AAR’s +violation (because such certifications constitute controls over the use of company assets and +disclosures). By this conduct, Sharma caused AAR to violate Exchange Act Section13(b)(2)(B). + +49. Section 13(b)(5) of the Exchange Act, part of the internal accounting controls of +the Exchange Act, provides, in relevant part, that no person shall knowingly circumvent or +knowingly fail to implement a system of internal accounting controls or knowingly falsify any +book, record, or account. 15 U.S.C § 78m(b)(5). Exchange Act Rule 13b2-1 prohibits persons +from directly or indirectly falsifying or causing to be falsified any book, record, or account. 17 +CFR § 240.13b2-1. Sharma violated Section 13(b)(5) of the Exchange Act by knowingly +circumventing AAR’s internal accounting controls when he concealed arrangements to pay +bribes and failed to report them to AAR’s Chief Financial Officer or General Counsel. He further +violated Section 13(b)(5) and Rule 13b2-1 by participating in schemes to falsify the company’s +books and records with respect to bribe payments to Nepalese and South African government +officials. + +DISGORGEMENT AND NON-IMPOSITION OF CIVIL PENALTIES + +50. The disgorgement and prejudgment interest ordered in Section IV below is +consistent with equitable principles, does not exceed Respondent’s net profits from its violations, +and returning the money to Respondent would be inconsistent with equitable principles. Therefore, +in these circumstances, distributing disgorged funds to the US Treasury is the most equitable +alternative. The disgorgement and prejudgment interest ordered in Section IV below shall be +transferred to the general fund of the US Treasury, subject to Section 21F(g)(3) of the Exchange +Act. + +51. Respondent acknowledges that the Commission is not imposing a civil penalty +based upon Respondent’s guilty plea to criminal conduct relating to the findings in the Order as +part of his resolution with the US Department of Justice in United States v. Sharma (No. 1:24-cr- +00302 (APM) (D.D.C. 2024)). Sharma pleaded guilty to one count of Conspiracy to Violate the +FCPA. As part of his guilty plea, Sharma agreed to forfeit $130,835. + +COOPERATION + +52. In determining to accept the Offer, the Commission considered cooperation +undertaken by Sharma to the Commission staff. Respondent’s cooperation included travelling to +the US from overseas and voluntarily making himself available for interviews and providing +information pertaining to current and former AAR employees. + +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + 12 + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Sharma cease and +desist from committing or causing any violations and any future violations of Exchange Act +Sections 30A, 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), and Rule 13b2-1 thereunder. + +B. Sharma shall, within 10 days of the entry of this Order, pay disgorgement of +$130,835 and prejudgment interest of $53,762 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) but payment of such amount, except for prejudgment interest of $53,762, is deemed +satisfied based upon Respondent’s Order of Forfeiture of $130,835 in United States v. Sharma (No. +1:24-cr-00302 (APM) (D.D.C. 2024)). If timely payment is not made, additional interest shall +accrue pursuant to SEC Rule of Practice 600. + +C. Payment must be made in one of the following ways: + +(1) Sharma may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Sharma 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) Sharma 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 +Sharma as Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Charles E. Cain, Chief of the FCPA +Unit, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-5631B. + + + + + + + + + 13 + +V. + +It is further Ordered that, for purposes of exceptions to discharge set forth in Section 523 +of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as +set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19). + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4552.pdf b/raw/aaer/2024/AAER-4552.pdf new file mode 100644 index 0000000000000000000000000000000000000000..af929e46c83cc5d678fb120ad07dc31bd405b392 Binary files /dev/null and b/raw/aaer/2024/AAER-4552.pdf differ diff --git a/raw/aaer/2024/AAER-4552.txt b/raw/aaer/2024/AAER-4552.txt new file mode 100644 index 0000000000000000000000000000000000000000..bc5e570e493ab9d86ca57ce755d10f630e8a8bc7 --- /dev/null +++ b/raw/aaer/2024/AAER-4552.txt @@ -0,0 +1,111 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 102020 / December 20, 2024 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4552 / December 20, 2024 +ADMINISTRATIVE PROCEEDING +File No. 3-20229 +In the Matter of +CHRISTOPHER L. +STANLEY, CPA +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN +ACCOUNTANT RESPONSIBLE FOR THE +PREPARATION OR REVIEW OF FINANCIAL +STATEMENTS REQUIRED TO BE FILED WITH +THE COMMISSION OTHER THAN AS A MEMBER +OF AN AUDIT COMMITTEE +On February 23, 2021, the Commission issued a consented 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 (the “Suspension Order”) against Respondent Christopher L. Stanley, CPA.1 The +Suspension Order denied Stanley the privilege of appearing or practicing before the Commission +as an accountant but permitted him, after three years from the date of the Suspension Order and +if certain conditions were met, to request that the Commission consider his reinstatement to +resume appearing or practicing before the Commission as (1) a preparer or reviewer, or a person +responsible for the preparation or review, of financial statements that are 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”); (2) a preparer or reviewer, or +a person responsible for the preparation or review, of financial statements that are required to be +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; or (3) an independent accountant. +This order is issued in response to Stanley’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. +1 See Accounting and Auditing Enforcement Release No. 4204, dated February 23, 2021. + + 2 + +In the Suspension Order, the Commission found that Stanley had engaged in improper +professional conduct in connection with his work as the engagement partner for the KPMG +LLP’s audit of the fiscal year 2015 financial statements for the College of New Rochelle. +Specifically, in connection with that audit, Stanley failed to comply with Generally Accepted +Auditing Standards (“GAAS”) by failing to: (1) obtain sufficient appropriate audit evidence; (2) +properly prepare audit documentation; (3) properly examine journal entries for evidence of fraud +due to management override; (4) adequately assess the risk of material misstatement; (5) +communicate significant audit challenges to those charged with governance; (6) properly +supervise the audit; and, (7) exercise due professional care and professional skepticism. +Notwithstanding those failures, Stanley approved the issuance of an audit report stating that the +audit was performed in accordance with GAAS. + +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 which determination is necessarily +highly fact specific. + +Stanley has shown good cause for reinstatement and has met the conditions set forth in +the Suspension Order to be reinstated to appear and practice before the Commission as a person +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. In his capacity as a person +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, Stanley attests that he will have his +work reviewed by the independent audit committee of any company for which he works, or in +some other manner acceptable to the Commission, while practicing before the Commission in +this capacity. + +Stanley is not, at this time, seeking to appear or practice before the Commission as a +person responsible for the preparation or review of financial statements required to be filed with +the Commission as a member of an audit committee or as an independent accountant. If, in the +future, Stanley should wish to resume appearing and practicing before the Commission in such a +capacity, he will be required to submit an application to the Commission showing, among other +things, that he has complied and will comply with the terms of the Suspension Order. + +On the basis of information supplied, representations made, and undertakings agreed to +by Stanley, and for the reasons stated immediately above, it appears that he has complied with +the terms of the Suspension Order denying him the privilege of appearing or practicing before +the Commission as an accountant. No information has come to the attention of the Commission +relating to his character, integrity, professional conduct, or qualifications to practice before the + +2 Rule 102(e)(5)(i) provides: + +“[a]n 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 +Commission that would be a basis for adverse action against him pursuant to Rule 102(e) of the +Commission's Rules of Practice. As a result, Stanley has shown good cause for reinstatement. +Therefore, it is accordingly, + +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +Christopher L. Stanley, 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. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2024/AAER-4553.txt b/raw/aaer/2024/AAER-4553.txt new file mode 100644 index 0000000000000000000000000000000000000000..0c86d189473846d182ae1ddff0065a3afd8af28d --- /dev/null +++ b/raw/aaer/2024/AAER-4553.txt @@ -0,0 +1,109 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 102047 / December 27, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4553 + +ADMINISTRATIVE PROCEEDING +File No. 3-22384 + +In the Matter of + +CHRISTOPHER HIESTAND, +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 +Christopher Hiestand (“Respondent” or “Hiestand”) pursuant to Rule 102(e)(3)(i) of the +Commission’s Rules of Practice. +1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in paragraph 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. Hiestand, age 53, is and has been a certified public accountant licensed to practice in +the state of Florida. He is the founding partner and manager of Accell Audit & Compliance, PA +(“Accell”), a public accounting firm headquartered in Tampa, Florida. From 2020 to 2022, Accell +served as auditor for Ignite International Brands, Ltd. (“Ignite”), a Canadian company +headquartered in Ontario, Canada. Hiestand was the engagement partner for Accell’s audits of +Ignite. + +2. On December 20, 2024, a final judgment was entered against Hiestand, +permanently enjoining him from future violations of Section 10(b) of the Exchange Act and Rule +10b-5 thereunder, as set forth in the judgment entered in the civil action entitled Securities and +Exchange Commission v. Ignite International Brands, Ltd. et al., Case Number 1:24-cv-07331- +VM, in the United States District Court for the Southern District of New York. Hiestand was also +ordered to pay a $50,000 civil money penalty. + +3. The Commission’s complaint alleged, among other things, that, under Hiestand’s +oversight, Accell failed to exercise due professional care or skepticism, or to otherwise obtain +sufficient appropriate audit evidence for a significant, unusual sale to an Ignite-related party that +purportedly took place on the last day of the 2020 fiscal year, but in fact did not occur during the +reporting period. The Complaint also alleged that Hiestand knew about, but failed to address, +inconsistencies and contradictory evidence, and misrepresented the timing and facts of the +supposed sale to Accell’s Engagement Quality Control Reviewer, who ultimately signed off on +the inclusion of the purported sale in Ignite’s 2020 financial results. The Complaint alleged that, +as a result of these failings, Hiestand caused Accell to issue an unqualified audit opinion on +Ignite’s 2020 financial statements, falsely stating Accell’s opinion that the statements “present +fairly, in all material respects, the financial position of the company” as of December 31, 2020, +and that Accell’s audit had been conducted “in accordance with Canadian generally accepted +auditing standards.” The Complaint further alleged that Hiestand’s actions aided and abetted +Ignite’s fraudulent financial reporting. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Hiestand’s Offer. + 3 + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Hiestand 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/2024/AAER-4554.txt b/raw/aaer/2024/AAER-4554.txt new file mode 100644 index 0000000000000000000000000000000000000000..378b59225549ef072d2b715cfe12b93d4305eb5a --- /dev/null +++ b/raw/aaer/2024/AAER-4554.txt @@ -0,0 +1,108 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 102060 / December 31, 2024 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4554 / December 31, 2024 + + +ADMINISTRATIVE PROCEEDING +File No. 3-22386 + +In the Matter of + +ACCELL AUDIT & +COMPLIANCE, PA, +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 Accell +Audit & Compliance, PA (“Respondent” or “Accell”) pursuant to Rule 102(e)(3)(i) of the +Commission’s Rules of Practice.1 + +II. + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, and the findings contained in paragraph 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. Accell was, at all relevant times, a public accounting firm headquartered in Tampa, +Florida. Accell was incorporated in Florida in 2009, and has been registered with the Public +Company Accounting Oversight Board since that time. From 2020 to 2022, Accell served as auditor +for Ignite International Brands, Ltd. (“Ignite”), a Canadian company headquartered in Ontario, +Canada. + +2. On December 20, 2024, a final judgment was entered against Accell, permanently +enjoining it from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 +thereunder, as set forth in the judgment entered in the civil action entitled Securities and Exchange +Commission v. Ignite International Brands, Ltd. et al., Case Number 1:24-cv-07331-VM, in the +United States District Court for the Southern District of New York. Accell was also ordered to pay +a $75,000 civil money penalty. + +3. The Commission’s complaint alleged, among other things, that Accell failed to +exercise due professional care or skepticism, or to otherwise obtain sufficient appropriate audit +evidence for a significant, unusual sale to an Ignite-related party that purportedly took place on +the last day of the 2020 fiscal year, but in fact did not occur during the reporting period. The +Complaint also alleged that Accell staff knew about, but failed to address, inconsistencies and +contradictory evidence, and misrepresented the timing and facts of the supposed sale to its +Engagement Quality Control Reviewer, who ultimately signed off on the inclusion of the +purported sale in Ignite’s 2020 financial results. The Complaint alleged that, as a result of these +failings, Accell issued an unqualified audit opinion on Ignite’s 2020 financial statements, falsely +stating its opinion that the statements “present fairly, in all material respects, the financial position +of the company” as of December 31, 2020, and that Accell’s audit had been conducted “in +accordance with Canadian generally accepted auditing standards.” The Complaint further alleged +that Accell’s actions aided and abetted Ignite’s fraudulent financial reporting. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Accell’s Offer. + 3 + + +Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Accell 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