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+  UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES ACT OF 1933  
+Release No. 10002 / January 12, 2016 
+ 
+SECURITIES EXCHANGE ACT OF 1934  
+Release No. 76876 / January 12, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No. 3731 / January 12, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-16729 
+ 
+ 
+ 
+ 
+In the Matter of 
+ 
+MILLER ENERGY 
+RESOURCES, INC., PAUL W. 
+BOYD, CPA, DAVID M. HALL, 
+AND CARLTON W. VOGT, III, 
+CPA 
+ 
+Respondents. 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ORDER MAKING FINDINGS AND 
+IMPOSING A 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 TO MILLER ENERGY RESOURCES, 
+INC. 
+ 
+   
+ 
+I. 
+ 
+ On August 6, 2015, 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 Miller Energy Resources, 
+Inc. (“Miller Energy” 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 
+ 
+ 2 
+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 Making Findings and Imposing a 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 To Miller Energy Resources, Inc. (the “Order”), as set forth below. 
+ 
+ 
+III. 
+ 
+ On the basis of this Order and Respondent’s Offer, the Commission finds1 that: 
+ 
+SUMMARY 
+ 
+1. This case involves financial accounting and reporting fraud, as well as audit 
+failures, related to the valuation of certain oil and gas assets acquired by Miller Energy, an oil and 
+gas company headquartered in Knoxville, Tennessee.  Miller Energy purchased these assets, which 
+are located in Alaska, for $2.25 million in cash – along with the assumption of certain liabilities it 
+valued at approximately $2 million – during a competitive bid in a bankruptcy proceeding in 
+December 2009.   
+  
+2. The Company subsequently reported those assets at an overstated value of $480 
+million, and recognized a one-time “bargain purchase” gain of $277 million for its fiscal third 
+quarter ended January 2010 and fiscal year ended April 2010.   
+ 
+3. Miller Energy failed to account for the acquisition in accordance with generally 
+accepted accounting principles (“GAAP”).  Accounting Standards Codification (“ASC”) 805, 
+Business Combinations, required Miller Energy to record the value of its acquired Alaska assets at 
+“fair value.”  However, contrary to authoritative accounting guidance, Miller Energy’s then-CFO 
+(“CFO”) used as fair value a reserve report that was prepared by a petroleum engineer firm using 
+the rules for supplemental oil and gas disclosures.  As set forth in GAAP, the numbers used in 
+these supplemental disclosures do not reflect fair value, and the reserve report used by the CFO 
+expressly disclaimed that the numbers therein represented the engineer firm’s opinion of fair value.  
+The reserve report the CFO used also contained expense numbers that were knowingly understated 
+by the CEO of Miller Energy’s Alaska operations (“Alaska CEO”).  In addition, the CFO double 
+counted $110 million of certain fixed assets that were already included in the reserve report.   
+RESPONDENT 
+4. Miller Energy Resources, Inc. is a Tennessee corporation with its principal place 
+of business in Knoxville, Tennessee.  It operates and develops oil and gas wells in north and south 
+central Alaska.  The Company operated oil and gas assets in the Appalachian region of east 
+Tennessee until selling them in November 2014 for $3.3 million in cash.  It changed its name from 
+                                                 
+1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding 
+on any other person in this or any other proceeding. 
+ 
+ 3 
+Miller Petroleum to Miller Energy Resources in April 2011.  Miller Energy’s securities, registered 
+pursuant to Exchange Act Section 12(b), were listed on the NYSE until September 2015, when the 
+securities were delisted.  On October 1, 2015, Miller Energy filed a voluntary petition for 
+reorganization under chapter 11 of title 11 of the U.S. Code in the United States Bankruptcy Court 
+for the District of Alaska (the “Bankruptcy Case”).    
+FACTS 
+Background 
+5. Miller Energy was founded in 1967 as an oil and gas exploration and production 
+company, and went public via a reverse merger in 1996.  Between early 2002 and December 2009, 
+Miller Energy’s stock price regularly traded below one dollar per share, falling to a low of $0.04 
+per share in December 2007.  In August 2008, Miller Energy named a new CEO.  Soon thereafter, 
+the Company began acquiring additional oil and gas properties. 
+ 
+Miller Energy Acquires and Overvalues the Alaska Assets 
+6. In the fall of 2009, Miller Energy became aware of certain oil and gas properties in 
+Alaska that were in the process of being “abandoned” as part of the bankruptcy proceedings of a 
+California-based energy company.   
+7. Unable to service its heavy debt and pay the significant monthly costs required to 
+operate the properties, the bankrupt entity unsuccessfully sought for almost a year to sell its Alaska 
+assets.  Beginning in December 2008, months before it filed for bankruptcy, the former owner of 
+the assets, with the help of one of the world’s leading financial advisory and asset management 
+firms, marketed the same group of assets that Miller Energy ultimately bought to 40 potential 
+buyers.  This process failed to attract any bidders, and the assets were auctioned by the bankruptcy 
+court in July 2009, with the winning bidder agreeing to a total purchase price of $8 million for the 
+assets.  A second entity, who bid $7 million, was designated as the back-up purchaser.  Neither 
+bidder closed.    
+8. As a result, the former owner of the assets sought in August 2009, and was granted 
+in September, an order from the bankruptcy court allowing it to abandon title to the assets due to a 
+lack of interest.   
+9. Due to renewed interest in the assets following their abandonment from Miller 
+Energy, the bankruptcy court permitted the debtor to reacquire the Alaska assets and sell them to 
+Miller Energy in a competitive auction for $2.25 million in cash and the assumption of certain 
+limited liabilities.  The transaction closed on December 10, 2009.   
+10. On March 22, 2010, Miller Energy filed its quarterly report on Form 10-Q for its 
+fiscal third quarter ended January 31, 2010 and reported a value of $480 million for the Alaska 
+acquisition, which amount was comprised of $368 million for oil and gas properties and $110 
+million for fixed assets.  Miller Energy also reported an after-tax $277 million “bargain purchase 
+gain,” which boosted net income for the quarter to $272 million – an enormous increase over the 
+$556,097 loss reported for the same period the year before. 
+ 
+ 4 
+11. As detailed below, these inflated balance sheet and income statement numbers were 
+repeated in numerous documents subsequently filed with the Commission.   
+12. The newly-booked value of the Alaska acquisition, which resulted in a nearly 
+5,000% increase in Miller Energy’s total assets, had a significant impact on Miller Energy’s stock 
+price.  On December 10, 2009, the date of the transaction, Miller Energy’s stock closed at $0.61 
+per share.  By March 31, 2010, Miller Energy’s stock closed 982% higher at $6.60 per share.  
+Weeks later, its stock began trading on NASDAQ and, after moving to the NYSE a year later, 
+reached an all-time high price on December 9, 2013 of $8.83 per share.   
+13. As described in detail below, Miller Energy materially overstated the value of its 
+Alaska assets by more than four hundred million dollars.     
+Under GAAP, Miller Energy Was Required 
+ to Record the Alaska Acquisition at Fair Value 
+14. ASC 805, Business Combinations – formerly Statement of Financial Accounting 
+Standards (“SFAS”) 141(R) – became effective in December 2008.  Among its principal revisions, 
+ASC 805 requires acquisitions that result in a “bargain purchase,” e.g., entities purchased at fire 
+sales prices in non-orderly transactions, to be measured at fair value, with any resulting gain 
+recorded on the income statement.    
+15. ASC 820, Fair Value Measurements (formerly SFAS 157), provides the framework 
+for measuring fair value.  “Fair value” is defined in ASC 820 as “the price that would be received 
+to sell an asset or paid to transfer a liability in an orderly transaction between market participants at 
+the measurement date.”  A reporting entity must determine an appropriate fair value using one or 
+more of the valuation techniques described in accounting literature.  
+16. ASC 820 outlines three broad approaches to measure fair value: the market 
+approach, income approach, and cost approach.  Under the market approach, prices and other 
+relevant information generated by market transactions involving identical or comparable assets or 
+liabilities are used to measure fair value.  The income approach utilizes valuation techniques to 
+convert future amounts to a single discounted present value amount.  Finally, the cost approach is 
+based on the amount that currently would be required to replace the assets in service, i.e., current 
+replacement cost.   
+17. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-
+specific measurement, and should be determined based on the assumptions market participants 
+would use in pricing the asset or liability.   
+18. ASC 820 emphasizes that when a price for an identical asset or liability is not 
+observable entities should use a “valuation technique that maximizes the use of relevant observable 
+ 
+ 5 
+inputs and minimizes the use of unobservable inputs” and entities may not ignore assumptions 
+market participants would use.2   
+19. When computing their estimate of fair value, Miller Energy and the CFO failed to 
+consider the existence of numerous, readily apparent data points strongly indicating that the assets 
+were worth substantially less than the $480 million value Miller Energy recorded.  In failing to do 
+so, Miller Energy and the CFO materially overstated the value of the newly acquired Alaska assets.   
+20. As described below, Miller Energy purported to value its Alaska acquisition using 
+the income approach for the oil and gas reserves and the cost approach for certain fixed assets. 
+The Valuation of the Acquired Oil and Gas Properties 
+Was Based Upon a Reserve Report, Which Does Not Represent Fair Value 
+21. To record the value of the acquired oil and gas properties, Miller Energy and the 
+CFO requested and improperly used a reserve report prepared by an independent petroleum 
+engineer firm.   
+22. Reserve reports are commonly used in the oil and gas industry to estimate quantities 
+of oil and gas (the reserves) expected to be recovered from existing properties.3  Generally, these 
+reports list reserves in categories based on a minimum estimated percentage probability of eventual 
+recovery and production, i.e., proved, probable, and possible.  Information in reserve reports that 
+are prepared in accordance with Commission regulations is frequently used, for among other 
+purposes, to satisfy supplemental accounting disclosure requirements concerning estimates of 
+                                                 
+2 ASC 820 defines “unobservable inputs” as “inputs that reflect the reporting entity’s own assumptions about the 
+assumptions market participants would use in pricing the asset or liability developed based on the best information 
+available in the circumstances” and “observable inputs” as “inputs that reflect the assumptions market participants 
+would use in pricing the asset or liability developed based on market data obtained from sources independent of the 
+reporting entity.”  
+3 Oil and gas reporting companies are subject to two principal authoritative pronouncements governing financial 
+accounting and reporting for oil and gas activities: Rule 4-10 of Regulation S-X (17 C.F.R. 210.4-10), Financial 
+Accounting and Reporting for Oil and Gas Producing Activities Pursuant to the Federal Securities Laws and the 
+Energy Policy and Conservation Act of 1975 (“Rule 4-10”); and ASC 932-235-50-29 through 33 (formerly SFAS 
+19, Financial Accounting and Reporting by Oil and Gas Producing Companies and SFAS 69, Disclosures About Oil 
+and Gas Producing Activities).  ASC 932 establishes disclosure requirements for significant oil and gas activities, 
+including disclosure of the “standardized measure,” which is the future after -tax net cash flows discounted at 10%. 
+A non-GAAP measure known as “PV-10” is similar to the standardized measure but is typically presented on a 
+pretax basis.  The FASB has noted that the standardized measure supplies investors with useful information, 
+however, they also noted their concern “that users of financial statements understand that it is neither fair market 
+value nor the present value of future cash flows. It is a rough surrogate for such measures, a tool to allow for a 
+reasonable comparison of mineral reserves and changes through the use of a standardized method that recognizes 
+qualitative, quantitative, geographic, and temporal characteristics.”  Paragraph 83 of the Basis for Conclusions of 
+SFAS 69.     
+ 
+ 6 
+future oil and gas production.  However, the numbers used in reserve reports for this purpose are 
+expressly not considered “an estimate of fair market value.”4 
+23. Shortly after the acquisition, the CFO asked the Alaska CEO – a non-accountant 
+with no formal accounting training – to obtain a reserve report for the Alaska properties in order to 
+determine the fair value of the acquired assets to be reported on Miller Energy’s Form 10-Q for the 
+quarter ended January 31, 2010.   
+24. On January 5, 2010, the Alaska CEO hired a petroleum engineer firm to prepare a 
+reserve report using a pretax present value of net cash flows discounted at 10% (“PV-10”), which, 
+while appropriate with further adjustments for SEC supplemental disclosures, was not indicative of 
+fair value.   
+25. The petroleum engineer firm did not know Miller Energy intended to use the report 
+for fair value purposes and believed that the purpose of the report was for use as supplemental data 
+in the company’s SEC disclosures.  Indeed, the two page engagement letter with the engineer firm 
+includes no language about “fair value,” “fair market value” or authoritative accounting literature.     
+26. The reserve report was finalized in February 2010 and reflected PV-10 of $368 
+million.  
+27. Upon receiving the reserve report, the CFO, without undertaking any additional 
+analysis, merely recorded as the fair value of the acquired oil and gas properties the sum of the PV-
+10 estimates for 100% of the proved, probable, and possible reserves, which increased the book 
+value of Miller Energy’s oil and gas properties on its balance sheet by $368 million.   
+28. The reserve report itself clearly stated that the numbers therein were not an estimate 
+of fair market value.  Specifically, on page 3 of the report, it states that “[t]he discounted values 
+shown are for your information and should not be construed as our estimate of fair market value.”  
+the CFO never reviewed or questioned any of the reserve report’s assumptions or calculations, nor 
+did he communicate with the engineer firm about the reserve report.  
+29. The use of the PV-10 numbers as fair value conflicted with contemporaneous 
+representations Miller Energy made to investors.  Specifically, in its fiscal 2010 Form 10-K, which 
+was the first annual report that included the inflated values, Miller Energy expressly told investors 
+that “[o]ur PV-10 measure and the standardized measure of discounted future net cash flows do not 
+purport to present the fair value of our natural gas and oil reserves.”  Despite that disclosure, Miller 
+Energy had actually used its PV-10 measure in that very same report as the fair value of its 
+acquired properties.    
+30. The $368 million reserve report value did not represent fair value for several 
+reasons.   
+                                                 
+4 See Paragraph 77 of the Basis for Conclusion of  SFAS 69 (“Although it cannot be considered an estimate of fair 
+market value, the standardized measure of discounted net cash flows should be responsive to some of the key variables 
+that affect fair market value, namely, changes in reserve quantities, selling prices, production costs, and tax rates.”).   
+ 
+ 7 
+31. Despite showing years of net profit that market participants would expect to be 
+taxable, the reserve report did not make any adjustments for income taxes.    
+32. At Miller Energy’s request, the reserve report used a 10% discount rate that was 
+inappropriate under GAAP for determining fair value.  In a discounted cash flow model, a discount 
+rate is used to account for the uncertainties associated with risk and the time value of money.  A 
+discount rate is the required rate of return that an investor would demand – based on the risks 
+associated with the benefit stream under consideration – to induce the investor to make an 
+investment.  By failing to consider the discount rate using assumptions market participants would 
+use, Miller Energy materially overstated the value of the acquired oil and gas properties.       
+33. The valuation also overstated cash flows from certain categories of reserve 
+estimates (e.g., “probable” and “possible” reserves) by failing to apply any risk weight to such 
+reserves and the resulting cash flows.  Given the high degree of uncertainty associated with cash 
+flows from these reserve estimate categories, they are required to be risk weighted in order to 
+reflect an appropriate valuation. 
+34. The reserve report did not include amounts for certain asset retirement obligations, 
+i.e., the legal obligations associated with the retirement of tangible long-lived assets.    
+35. Finally, the $237 million of projected operating and capital expenses in the reserve 
+report, which were provided by Miller Energy and the Alaska CEO, were intentionally understated, 
+resulting in an overstated valuation.   
+36. In fact, one petroleum engineer firm contacted but not used by Miller Energy 
+thought that the expected level of expenses made a significant portion of the acquisition 
+unprofitable.  Initially, the Alaska CEO contacted the petroleum engineer firm who had previously 
+provided the past two owners of the properties with reserve reports, and thus had unfettered access 
+to past operating data, and requested a quote for “updating” a prior reserve report.  That firm told 
+the Alaska CEO that it would not assign any value to one of the largest fields acquired, the 
+Redoubt Shoal field, because it was uneconomical – i.e., expected future expenses exceeded 
+expected future cash flows – and explained that it would not put its “name on a report that implies 
+value exists where it likely does not.”5   
+37. The CFO was aware that Miller Energy chose the new firm because the prior firm 
+would not assign any value to the Redoubt Shoal field.  The Redoubt Shoal field – which 
+represented $291 million of the $368 million in fair value recorded by Miller Energy – showed 
+positive future cash flows in the reserve report primarily because the Alaska CEO gave the new 
+engineer firm understated and unsubstantiated expense numbers.  The CFO had previously been 
+                                                 
+5 Unique among the oil and gas properties purchased by Miller Energy, Redoubt Shoal is an offshore field in Cook 
+Inlet, Alaska, which requires the use of an offshore platform that sits in seventy feet of w ater, is accessible only by 
+boat or helicopter, and drills to depths in excess of 12,000 feet.  Offshore drilling presents risks and costs not 
+associated with onshore operations.           
+ 
+ 8 
+advised by Miller Energy’s independent auditor that the lack of any controls over the Alaska 
+CEO’s expense estimates was a “concerning void.”             
+38. Miller Energy and the Alaska CEO provided expense projections that, in many 
+cases, were significantly lower than past actual experience.  For example, internal documents 
+maintained by the Alaska CEO indicate that the cost to drill a new well in the Redoubt field was 
+roughly $13 million.  However, the Alaska CEO told the engineer firm to use a cost of $4.6 million 
+per well in its reserve report.  And instead of using recent expense data the Alaska CEO gave the 
+engineer firm nearly three year old operating expense data, which he revised down on the pretext 
+that Miller Energy could run a leaner operation than former operators of the properties.  By way of 
+example, the Alaska CEO told the engineer firm that the offshore Redoubt field would cost 
+$399,000 per month to operate when it actually cost the seller more than $600,000 per month and 
+when internal estimates show that Miller Energy and the Alaska CEO expected the field to cost 
+more than $800,000 per month once fully operational.  Additionally, in some years, the report 
+included zero expenses for operating the facilities in Redoubt and another field.    
+39. Overall, the reserve report implied operating expenses of $4 per barrel of oil 
+equivalent (“boe”) for all categories of reserves.  That level of operating expenses was 
+unreasonable in light its predecessor’s actual operating expenses of $32.50/boe in 2008 and 
+$55.42/boe in the first half of 2009 before the wells were shut-in.   
+40. By understating the expense numbers, Miller Energy overvalued its oil and gas 
+properties by tens of millions of dollars. 
+The Fair Value of the Acquired Fixed Assets Was Double-Counted and Overstated 
+41. In addition to the $368 million value recorded for the oil and gas properties, Miller 
+Energy also erroneously recorded a separate value of $110 million for acquired fixed assets, such 
+as facilities and pipelines ancillary to the oil and gas reserves.   
+42. In a February 8, 2010 email, the CFO informed the Alaska CEO that he needed an 
+amount to use as fair value for the fixed assets obtained as part of the Alaska acquisition.  He noted 
+that, ideally, the value should be what a willing buyer would pay for the assets, but “[i]n the 
+absence of that, replacement values or something similar would probably work.”  Two days later, 
+the CFO was sent an “asset replacement cost study” purportedly provided by an independent 
+insurance broker, which appeared to list the replacement cost for the assets as $110 million.  The 
+“study” was dated September 5, 2008, but “revised” on February 9, 2010.   
+43. Without any additional analysis, the CFO recorded the amount in the revised 
+insurance study on Miller Energy’s balance sheet.   
+44. The recording of assets at a value of $110 million was improper for several reasons.     
+45. Miller Energy’s use of the values in the insurance study resulted in counting the 
+value of the fixed assets twice, thereby overstating the value of such assets.  The reserve report 
+Miller Energy relied on to value the acquired oil and gas properties used a discounted cash flow 
+model.  Valuation specialists use such models to estimate the value of an enterprise’s “operating 
+ 
+ 9 
+assets” – i.e., the assets employed to generate future cash flows – by converting future benefit 
+streams into a net present value.  In Miller Energy’s case, the fixed assets in the insurance study 
+were the very same operating assets that were expected to generate the future cash flows in the 
+reserve report.  Accordingly, they should not have been separately valued.   
+46. Prior to the acquisition, all of the production from the offshore Redoubt Shoal field 
+ran through the Osprey platform, which had no processing facilities or power generating capability 
+of its own.  Power was sent from generators housed within the Kustatan Production Facility to the 
+platform via a subsea line, which was connected to an underground power grid that ran throughout 
+all of the acquired properties.  Moreover, production from the offshore platform was sent onshore 
+for processing through pipes to the Kustatan Production Facility.  Absent the platform, there would 
+have been no way to obtain oil and gas from Redoubt Shoal without incurring upfront capital 
+expenditures to replace the platform and its related infrastructure.  Similarly, without the other 
+production facilities, the platform would have lacked power and somewhere to process its oil and 
+gas.   
+47. The reserve report Miller Energy used for the valuation recognized the 
+interconnectedness of the properties, as it expressly listed the facilities and the offshore platform as 
+assets used to generate the future cash flows.   
+48. In short, because the fixed assets were integral to the operations of the acquired 
+properties, their values were captured in the reserve report’s cash flows.  Consequently, by 
+separately valuing the same operating assets, Miller Energy overstated the value of the Alaska 
+assets by as much as $110 million.   
+49. The insurance study also did not reflect fair value because the version of the 
+insurance study used by the CFO purported to show “asset replacement cost.”   Absent further 
+adjustments, replacement cost new does not qualify as fair value under GAAP.   
+50. Miller Energy, at the direction of the CFO and the Alaska CEO, also refashioned a 
+preexisting insurance study to make it appear that its own value of $110 million derived from a 
+third party.  The numbers in the fixed asset study were given to the insurance broker, and its 
+predecessor, by its clients (i.e., Miller Energy and the previous owners of the fixed assets) as far 
+back as 2007 and were used as starting points for other types of estimates, such as estimates for 
+possible losses resulting from fire or natural disasters.  The two employees at the insurance broker 
+who were most familiar with the original “Loss Estimates Study,” including the engineer who 
+authored it, confirmed that no one at the broker ever tested or in any way double-checked the 
+values given to them.   
+51. The CFO and the Alaska CEO knew or knowingly disregarded the fact that the 
+insurance study did not reflect fair value or any analysis by the insurance broker.   
+52. On February 8, 2010, the Alaska CEO directed Alaska personnel to contact the 
+insurance broker and another oil and gas consulting company to ask them for a report reflecting 
+fair value or replacement cost.  The insurance broker responded on February 9, and told Miller 
+ 
+ 10 
+Energy in an email copied to the Alaska CEO that it could not provide a report showing 
+replacement costs.   
+53. Miller Energy also contacted a separate consulting firm and sent it the insurance 
+broker’s original 2008 insurance report.  Late on February 8, the consulting firm informed Miller 
+Energy that the insurance study it sent was a “good reference” but the report did not state “value or 
+replacement cost.”  The firm offered to conduct its own analysis, but advised that the estimate 
+would take “approximately 2-3 weeks to complete” and “cost around $15,000-$18,000.”   
+54. Upon hearing the news that a new report might take two to three weeks, Alaska 
+personnel, including the Alaska CEO, called the CFO.  According to one participant on this call, 
+the CFO said he could not wait weeks for a new report.  He “needed it quickly and he needed to 
+base it on something . . . a professional had to sign off on it, not us, some third party. . . .”  During 
+the call, the CFO and the Alaska CEO decided to rely on numbers in the insurance report as 
+replacement costs, despite the Alaska CEO having been told by the broker that it could not provide 
+Miller Energy with replacement costs.   
+55. With the aim of making the report appear as though it reflected replacement costs, 
+the Alaska CEO provided a subordinate with edits to the 2008 insurance report that significantly 
+altered its appearance, including changing its name from “Loss Estimates Study” to “Asset 
+replacement cost study.”  The revised report, which Miller Energy gave to Sherb & Co., omitted 
+the insurance broker’s methodology and analysis.  As a result, the only numbers reflected in the 
+revised report were the ones provided to the broker by Miller Energy and its predecessors. 
+56. As a result of the foregoing, Miller Energy overvalued the Alaska assets by more 
+than $400 million. 
+57. As a result of the fraudulent valuation, Miller Energy filed with the Commission 
+financial reports that materially misstated the value of its assets, as follows:  Forms 10-Q for the 
+third quarter of fiscal year 2010 and all three quarters of fiscal years 2011 through 2015; Forms 10-
+K for fiscal years ended 2010 through 2014; the Form S-1 filed on August 8, 2010; the Forms S-3 
+filed on September 6, 2012 and October 5, 2012; and prospectuses filed between August 25, 2010 
+through August 21, 2014 pursuant to Rule 424.  The fraudulent valuation also resulted in Miller 
+Energy filing with the Commission financial reports that materially misstated its net income, as 
+follows: Forms 10-Q for the third quarter of fiscal year 2010, all three quarters of fiscal 2011, and 
+the first two quarter of 2012; Forms 10-K for fiscal years ended 2010 through 2012; the Form S-1 
+filed on August 8, 2010; the Forms S-3 filed on September 6, 2012 and October 5, 2012; and 
+prospectus supplements filed between August 25, 2010 through August 21, 2014 pursuant to Rule 
+424.  In addition, the fraudulent valuation rendered no fewer than 15 Forms 8-K filed between 
+March 2010 through at least December 2014 materially false and misleading.  
+VIOLATIONS 
+58. As a result of the conduct described above, Miller Energy violated Section 17(a)(2) 
+and (3) of the Securities Act which prohibit fraudulent conduct in the offer or sale of securities.   
+ 
+ 11 
+59.   As a result of the conduct described above, Miller Energy 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, current, and quarterly reports as the Commission may require.    
+60. As a result of the conduct described above, Miller 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.   
+61. As a result of the conduct described above, Miller Energy 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 GAAP.  
+62. As a result of the conduct described above, Miller Energy 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.   
+UNDERTAKINGS 
+Miller Energy undertakes to: 
+63. Terminate the registration of any and all the Company’s securities with the 
+Commission and suspend any continuing reporting obligations of the Company by the earlier of  
+the effective date of Miller Energy’s Joint Plan of Reorganization [Docket No. 364 in Case No. 15-
+00236 (the “Bankruptcy Case”) pending in the United States Bankruptcy Court for the District of 
+Alaska (the “Bankruptcy Court”)], as approved by the Bankruptcy Court in the Bankruptcy Case, 
+or June 30, 2016 (or such later date as the Commission may agree to in its sole discretion); 
+ 
+64. Cooperate fully with the Commission’s staff (“Staff”) in any and all respects 
+relating to or arising from the matters described in the Offer. In connection with such cooperation, 
+Miller Energy undertakes to:  
+a.  produce, without service of a notice or subpoena, any and all documents and 
+other information requested by the Staff;  
+b.  use its best efforts to cause its current and former employees to be interviewed 
+by the Staff at such times as the Staff reasonably may direct;  
+c.  use its best efforts to cause its current and former employees to appear and 
+testify truthfully and completely without service of a notice or subpoena as may 
+be requested by the Staff;   
+ 
+ 12 
+65. For good cause shown, the 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. 
+66. Miller Energy 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 Peter J. Diskin, Assistant Regional Director, U.S. Securities and Exchange 
+Commission, 950 E. Paces Ferry Road, N.E., Atlanta, GA 30326, 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. In determining whether to accept Miller Energy’s 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 the Respondent’s Offer. 
+Accordingly, it is hereby ORDERED that: 
+A.  Respondent Miller Energy cease and desist from committing or causing any 
+violations and any future violations of Section 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-11, and 
+13a-13 thereunder.  
+B.  Respondent Miller Energy shall pay a civil money penalty in the amount of 
+$5,000,000.  In the event Miller Energy’s Plan is confirmed by the Bankruptcy Court, the payment 
+of such $5,000,000 civil penalty shall be accomplished by the Commission having an allowed 
+general unsecured claim in Class 4 of the Plan in the amount of $5,000,000 and such claim shall be 
+paid consistently with the payments made to Miller Energy’s other general unsecured creditors in 
+Class 4 pursuant to the terms of the Plan.  In the event the Bankruptcy Case is dismissed without 
+the confirmation by the Bankruptcy Court in the Bankruptcy Case of either (i) the Plan, or (ii) any 
+other plan of reorganization for Miller Energy that treats the Commission’s $5,000,000 civil 
+penalty as a general unsecured claim consistently with other allowed general unsecured claims 
+against Miller Energy, then such civil penalty shall be paid by Miller Energy directly to the 
+Securities and Exchange Commission in the following installments:  (i) $625,000 within five 
+business days of the termination of the Bankruptcy Case, and (ii) three installments of $1,458, 
+333.33 each due no later than the first, second and third annual anniversary of the entry of the 
+Order, respectively. The Commission may distribute civil money penalties collected in this 
+proceeding if, in its discretion, the Commission orders the establishment of a Fair Fund pursuant to 
+15 U.S.C. § 7246, Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended. The 
+Commission will hold funds paid pursuant to this paragraph in an account at the United States 
+ 
+ 13 
+Treasury pending a decision whether the Commission, in its discretion, will seek to distribute funds 
+or, subject to Exchange Act Section 21F(g)(3), transfer them to the general fund of the United 
+States Treasury.   If timely payment is not made, additional interest shall accrue pursuant to 31 
+U.S.C. §3717, and the entire outstanding balance of civil penalty, plus any additional interest 
+accrued pursuant to 31 U.S.C. 3717, shall be due and payable immediately, without further 
+application.  
+Any payment made outside of the Bankruptcy Case 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 
+Miller Energy Resources, 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 Peter J. Diskin, 
+Division of Enforcement, U.S. Securities and Exchange Commission, 950 East Paces Ferry Road, 
+N.E., Atlanta, GA 30326-1382 
+D. 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 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 
+ 
+ 14 
+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 

raw/aaer/2016/AAER-3732.txt

@@ -0,0 +1,305 @@
+ 
+ 
+ 
+  UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 76879 / January 12, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3732 / January 12, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No.  3-17047 
+ 
+ 
+ 
+In the Matter of 
+ 
+REID A. HACKNEY, CPA  
+ 
+Respondent. 
+ 
+ 
+ 
+ 
+ORDER INSTITUTING PUBLIC 
+ADMINISTRATIVE AND CEASE- 
+ AND-DESIST PROCEEDINGS 
+PURSUANT TO SECTIONS 4C AND 21C 
+OF THE SECURITIES EXCHANGE ACT 
+OF 1934 AND RULE 102(e) OF THE 
+COMMISSION’S RULES OF PRACTICE, 
+MAKING FINDINGS, AND IMPOSING 
+REMEDIAL SANCTIONS AND A 
+CEASE-AND-DESIST ORDER 
+ 
+I. 
+ 
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that public 
+administrative and cease-and-desist proceedings be, and hereby are, instituted against Reid A. 
+Hackney, CPA (“Respondent” or “Hackney”) pursuant to Sections 4C1 and 21C of the Securities 
+                                                 
+1  Section 4C provides, in relevant part, that:  
+ 
+ The Commission may censure any person, or deny, temporarily or permanently, 
+to any person the privilege of appearing or practicing before the Commission in 
+any way, if that person is found . . . (1) not to possess the requisite qualifications 
+to represent others; (2) to be lacking in character or integrity, or to have engaged 
+in unethical or improper professional conduct; or (3) to have willfully violated, or 
+willfully aided and abetted the violation of, any provision of the securities laws or 
+the rules and regulations issued thereunder. 
+ 
+ 
+2 
+ 
+Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of 
+Practice.2 
+ 
+II. 
+ 
+In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
+of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 
+purpose of these proceedings and any other proceedings brought by or on behalf of the 
+Commission, or to which the Commission is a party, and without admitting or denying the findings 
+herein, except as to the Commission’s jurisdiction over him and the subject matter of these 
+proceedings, which are admitted, and except as provided herein in Section V, Respondent consents 
+to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings 
+Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the 
+Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-
+and-Desist Order (“Order”), as set forth below. 
+ 
+III. 
+ 
+ On the basis of this Order and Respondent’s Offer, the Commission finds that:  
+A. SUMMARY 
+ 
+This matter involves insider trading by Reid A. Hackney, Chief Financial Officer and Senior 
+Vice President of the Dress Barn subsidiary of Ascena Retail Group, Inc. (“Ascena”), in advance of 
+two public announcements on the basis of material nonpublic information he obtained from his 
+employer.  In January 2012, Hackney became aware of Ascena’s positive holiday sales results.  In 
+breach of his duty to Ascena’s shareholders, he traded Ascena securities in advance of the public 
+release of this information and realized ill-gotten gains of $3,300.  In March 2012, Hackney became 
+aware of Ascena’s plans to acquire Charming Shoppes, Inc. (“Charming Shoppes”).  In breach of 
+his duty to Ascena, he traded Charming Shoppes securities before the public announcement of the 
+transaction and realized ill-gotten gains of $44,750.  By engaging in this conduct, Hackney violated 
+Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 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 
+ 
+B. RESPONDENT 
+ 
+Reid A. Hackney, age 58, is a resident of Texas.  From at least November 2011 through 
+March 2012, Hackney served as the Chief Financial Officer and Senior Vice President of the Dress 
+Barn subsidiary of Ascena Retail Group, Inc.  Hackney was licensed as a certified public 
+accountant in the State of New York, but his licensure status is currently listed as “not registered.” 
+ 
+C. OTHER RELEVANT ENTITIES 
+ 
+1. Ascena Retail Group, Inc. is a Delaware corporation headquartered in Mahwah, 
+New Jersey engaged in the business of selling clothing, shoes and accessories.  The common stock 
+of Ascena is registered under Section 12(b) of the Exchange Act and trades on the NASDAQ 
+Global Select Market under the ticker symbol “ASNA.” 
+2. Charming Shoppes, Inc. was a Pennsylvania corporation headquartered in 
+Bensalem, Pennsylvania engaged in the business of selling clothing, shoes, accessories, food and 
+gifts.  The common stock of Charming Shoppes was registered under Section 12(b) of the 
+Exchange Act and traded on the NASDAQ Global Select Market under the ticker symbol “CHRS.”  
+Ascena acquired Charming Shoppes in 2012 via a tender offer. 
+D. FACTS 
+ 
+Hackney Was Subject to His Employer’s Insider Trading Policies 
+1. As Chief Financial Officer and Senior Vice President of the Dress Barn subsidiary 
+of Ascena, Hackney was subject to the company’s code of business conduct, which prohibited 
+employees from “profit[ing] in the stock market(s) from the improper use of material non-public 
+information that [employees] learn during [their] employment.”  The code required employees to 
+“keep any material non-public information confidential” and further provided that “examples of 
+material information include financial information that has not been released to the public such 
+as Ascena’s or a specific brand’s monthly, quarterly or annual sales, comp store sales, earnings 
+and trends, news of a planned acquisition or disposition, [etc.] …”  Hackney signed 
+acknowledgements that he received, read and agreed to comply with this code. 
+2. Ascena also designated Hackney as a “Key Officer,” meaning that he was subject 
+to additional Ascena policies that prohibited him from, among other things: (i) trading in Ascena 
+securities while aware of material nonpublic information regarding Ascena; (ii) trading in the 
+securities of any other company while aware of material nonpublic information regarding that 
+company; (iii) trading for one full business day following the public release of material and 
+previously nonpublic information; (iv) trading in options on Ascena’s common stock; and (v) 
+engaging in short swing transactions such as the purchase and sale of Ascena equity securities 
+within any period of six months. 
+ 
+ 
+4 
+ 
+Hackney’s Insider Trading in the Securities of Ascena Retail Group, Inc. 
+3. In his role as Chief Financial Officer and Senior Vice President, Hackney 
+received notice of Ascena’s comparable store sales figures before they were released to the 
+public.  Specifically, on January 1, 2012, Hackney received an internal Ascena weekly sales 
+flash email which provided weekly and monthly sales figures for Ascena and its subsidiary retail 
+companies, including Dress Barn.  Among other upbeat sales statistics, the email provided that 
+Ascena’s comparable store sales for the month of December had increased 14% over the prior 
+year and that Dress Barn’s had increased 12%. 
+4. Based on this material nonpublic information, and in violation of Ascena’s 
+policies, on January 3, 2012, Hackney purchased 15 Ascena call option contracts with a strike 
+price of $29.00 and an expiration date of January 21, 2012.3   
+5. By purchasing Ascena securities on the basis of material nonpublic information 
+concerning Ascena’s sales results, Hackney breached the duty he owed to Ascena’s shareholders. 
+6. Hackney knew that these securities transactions were in breach of the duty he 
+owed to Ascena’s shareholders. 
+7. On the morning of January 5, 2012, Ascena issued a press release announcing its 
+“strong holiday sales” and raising its earnings per share guidance.  The press release highlighted 
+Ascena’s 14% increase in comparable store sales for the fiscal month of December 2011 versus 
+December 2010, including a 12% increase at the Dress Barn subsidiary.  Ascena’s stock price 
+closed at $32.60 that day, an increase of $1.74 or 5.64% above the prior trading day’s closing 
+price. 
+8. On January 5, 2012, just after Ascena’s favorable press release had been issued, 
+Hackney sold his 15 Ascena call option contracts, realizing profits of $3,300. 
+Hackney’s Insider Trading in the Securities of Charming Shoppes, Inc. 
+9. By March 27, 2012, Ascena had taken substantial steps in furtherance of a cash 
+tender offer for all of the outstanding shares of Charming Shoppes common stock.  For instance, 
+Ascena had entered into a confidentiality agreement with Charming Shoppes, retained lawyers 
+and financial advisors, conducted significant due diligence related to the transaction, and notified 
+                                                 
+3 A stock option, commonly referred to as an “option,” gives its purchaser-holder the 
+option to buy or sell shares of an underlying stock at a specified price (the “strike” price) prior to 
+the expiration date.  Options generally are sold in “contracts,” which give the option holder the 
+opportunity to buy or sell 100 shares of an underlying stock.  A “call” option gives the 
+purchaser-holder of the option the right, but not the obligation, to purchase a specified amount of 
+an underlying security at a specified strike price within a specific time period.  Generally, the 
+buyer of a call option anticipates that the price of the underlying security will increase during a 
+specified amount of time. 
+ 
+5 
+ 
+the board of directors of Charming Shoppes of its interest in acquiring the company for cash at a 
+purchase price of $6.25 per share. 
+10. On or before March 27, 2012, during the course of his employment at Ascena, 
+Hackney became aware of confidential information concerning Ascena’s plans to acquire 
+Charming Shoppes that convinced him the transaction was imminent. 
+11. Between March 27 and March 30, 2012, on the basis of material nonpublic 
+information concerning Ascena’s plans to acquire Charming Shoppes, and in violation of 
+Ascena’s policies, Hackney purchased 350 Charming Shoppes call option contracts with a strike 
+price of $5.00 and an expiration date of May 19, 2012. 
+12. Hackney knew that these securities transactions were in breach of the duty of trust 
+or confidence he owed to Ascena. 
+13. On the morning of May 2, 2012, Ascena announced its entry into an agreement to 
+acquire Charming Shoppes via a tender offer for $7.35 per share of Charming Shoppes common 
+stock.  That day, the price of Charming Shoppes common stock closed at $7.31 per share, an 
+increase of $1.41 or 24% above the prior trading day’s closing price. 
+14. After the May 2, 2012 public announcement of the tender offer, Hackney sold all 
+350 of his Charming Shoppes call option contracts, realizing profits of $44,750. 
+15. On May 15, 2012, Ascena, through an affiliate, commenced a tender offer for all 
+outstanding shares of Charming Shoppes common stock. 
+16. Hackney knew that the information he learned through his employment 
+concerning the impending acquisition was material and nonpublic.  By purchasing Charming 
+Shoppes securities on the basis of that information, and in violation of Ascena’s policies, 
+Hackney misappropriated the information and breached a duty of trust or confidence that he 
+owed to Ascena. 
+E. FINDINGS 
+1. Based on the foregoing, the Commission finds that Hackney willfully violated 
+Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder. 
+2. Based on the foregoing, the Commission finds that Hackney engaged in conduct 
+within the meaning of Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the 
+Commission’s Rules of Practice.    
+IV. 
+ 
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
+agreed to in Respondent Hackney’s Offer. 
+ 
+6 
+ 
+ 
+ Accordingly, it is hereby ORDERED, effective immediately, that: 
+ 
+ A. Hackney shall cease and desist from committing or causing any violations and any 
+future violations of Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 
+thereunder. 
+ 
+ B. Hackney is denied the privilege of appearing or practicing before the Commission 
+as an accountant. 
+ 
+ C. Hackney is prohibited for a period of five (5) years from the date of the Order from 
+acting as an officer or director of any issuer that has a class of securities registered pursuant to 
+Section 12 of the Exchange Act, or that is required to file reports pursuant to Section 15(d) of the 
+Exchange Act. 
+ 
+ D. Respondent shall, within 10 days of the entry of this Order, pay disgorgement of 
+$48,050, prejudgment interest thereon of $4,670, and a civil money penalty of $48,050, for a total 
+of $100,770 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. 
+   
+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 Reid 
+A. Hackney as a Respondent in these proceedings, and the file number of these proceedings; a 
+ 
+7 
+ 
+copy of the cover letter and check or money order must be sent to G. Jeffrey Boujoukos, Associate 
+Regional Director, Division of Enforcement, Securities and Exchange Commission, Philadelphia 
+Regional Office, 1617 JFK Boulevard, Suite 520, Philadelphia, PA 19103.   
+ 
+ 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, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any 
+award of compensatory damages by the amount of any part of Respondent’s payment of a civil 
+penalty in this action (“Penalty Offset”).  If the court in any Related Investor Action grants such a 
+Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting 
+the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the 
+Penalty Offset to the Securities and Exchange Commission.  Such a payment shall not be deemed 
+an additional civil penalty and shall not be deemed to change the amount of the civil penalty 
+imposed in this proceeding.  For purposes of this paragraph, a “Related Investor Action” means a 
+private damages action brought against Respondent by or on behalf of one or more investors based 
+on substantially the same facts as alleged in the Order instituted by the Commission in this 
+proceeding. 
+ 
+V. 
+It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section 
+523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by 
+Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other 
+amounts due by Respondent under this Order or any other judgment, order, consent order, decree 
+or settlement agreement entered in connection with this proceeding, is a debt for the violation by 
+Respondent of the federal securities laws or any regulation or order issued under such laws, as set 
+forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). 
+ 
+ 
+ By the Commission. 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 
+ 
+ 
+ 

raw/aaer/2016/AAER-3733.txt

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+UNITED STATES OF AMERICA 
+Before the 
+SECURITIES AND EXCHANGE COMMISSION 
+SECURITIES EXCHANGE ACT OF 1934  
+Release No. 76938 / January 20, 2016 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No. 3733 / January 20, 2016 
+ADMINISTRATIVE PROCEEDING  
+File No. 3-17060 
+In the Matter of 
+Ocwen Financial Corp. 
+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 Ocwen Financial Corp. (“Ocwen” or 
+“Respondent”). 
+II. 
+In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
+of Settlement (“Offer”) which the Commission has determined to accept. Solely for the purpose 
+of these proceedings and any other proceedings brought by or on behalf of the Commission, or to 
+which the Commission is a party, and without admitting or denying the findings herein, except as 
+to the Commission’s jurisdiction over them 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 of 1934, Making Findings, and 
+Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. 
+III. 
+On the basis of this Order and Respondent’s Offer, the Commission finds1 that: 
+                                                 
+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 involves Ocwen’s related party transactions and its valuation of 
+certain related company liabilities from 2012 to 2014. First, Ocwen disclosed that it had policies, 
+procedures and practices that, among other things, required that its then-Executive Chairman of 
+the Board (the “Executive Chairman”), who also served as the Chairman of the Board of two 
+related companies, Home Loan Servicing Solutions Ltd. (“HLSS”) and Altisource Portfolio 
+Solutions S.A. (“Altisource”), be recused from approving transactions with HLSS and 
+Altisource. In fact, there were no written policies or procedures regarding recusal and the 
+practice that existed was flawed, inconsistent, and ad hoc. Second, Ocwen’s erroneous valuations 
+of its financing liability on certain mortgage servicing rights sold to HLSS contributed to Ocwen 
+materially misstating its financial results for the last three quarters in 2013 and the first quarter of 
+2014. These misstatements resulted from an internal accounting controls failure that caused the 
+company to rely on a valuation methodology that did not conform to U.S. Generally Accepted 
+Accounting Principles (“GAAP”). 
+2. In its Form 10-K for the year 2012, Ocwen disclosed in the 1A “Risk Factors” 
+section that it had “adopted policies, procedures and practices to avoid potential conflicts 
+involving significant transactions with related parties such as Altisource, including [the 
+Executive Chairman’s] recusal from negotiations regarding, and credit committee and board 
+approvals of such transactions.” In the same section of its Form 10-K for the year 2013, Ocwen 
+similarly disclosed that it had “adopted policies, procedures and practices to avoid potential 
+conflicts with respect to [its] dealings with Altisource [and] HLSS [among other related entities], 
+including [its] Executive Chairman recusing himself from negotiations regarding, and approvals 
+of, transactions with these entities.” The Executive Chairman’s recusal was to be one of several 
+safeguards against potential conflicts due to his multiple roles at Ocwen and its related entities. 
+3. Ocwen had no written related party transactions policies or procedures. And, 
+although the Executive Chairman had a practice of recusing himself from negotiations and 
+certain approvals of related party transactions, that practice was inconsistent and ad hoc. Ocwen 
+therefore failed to devise and maintain its disclosed internal controls sufficient to ensure that the 
+Executive Chairman recused himself from all approvals involving potential conflicts of interest 
+in Ocwen’s related party transactions. 
+4. Due to these control failures, the Executive Chairman repeatedly approved 
+transactions between Ocwen and HLSS in both his Ocwen- and HLSS-related capacities. In 
+addition, as to Altisource, the Executive Chairman voted, as a member of the Ocwen Board of 
+Directors, to approve a $75 million bridge loan from Altisource to Ocwen. And, due to other 
+internal accounting control deficiencies, Ocwen had either no documentation or insufficient 
+documentation of approvals of five transactions between Ocwen and HLSS. 
+5. Separately, Ocwen materially misstated its net income for three quarters in 2013 
+and the first quarter of 2014 by relying on HLSS’s improper valuation of rights to mortgage 
+servicing rights (“Rights to MSRs”) that were acquired from Ocwen and still accounted for by 
+Ocwen as a financing liability. Although Ocwen reported that it accounted for the Rights to 
+MSRs at amortized cost and that the carrying value of the Rights to MSRs “approximate[d] fair 
+value,” the valuation for the Rights to MSRs assigned by HLSS was not a fair value estimate. 
+ 3 
+ 
+Ocwen’s Executive Chairman anticipated that the variance between the HLSS valuation and a 
+fair value estimate provided by a third party would be significant; however, he did not share his 
+views with anyone at Ocwen or with Ocwen’s external auditors. In addition, Ocwen’s 
+management and its Audit Committee failed to adequately review whether HLSS’s valuation 
+methodology, which Ocwen relied upon, complied with GAAP. 
+Respondent 
+6. Ocwen is a Florida corporation that, as of October 2015, has its principal place of 
+business in West Palm Beach, Florida. Ocwen’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. Between 2012 and 2014, Ocwen’s Executive Chairman owned approximately 13 
+percent of Ocwen’s common stock. 
+Other Relevant Entities 
+7. Altisource is a Luxembourg corporation with its principal executive offices in 
+Luxembourg. Altisource comprises certain business divisions divested from Ocwen, and it 
+became registered with the Commission pursuant to Section 12(b) of the Exchange Act in 2009. 
+It trades on the NASDAQ Global Market. The Executive Chairman of Ocwen became 
+Altisource’s Chairman at the time of its formation and owned approximately 26 percent of 
+Altisource’s common stock between 2012 and 2014. 
+8. HLSS is a Cayman Islands corporation with its principal executive offices in the 
+Cayman Islands. HLSS’s common stock became registered with the Commission pursuant to 
+Section 12(b) of the Exchange Act in February 2012 and, from that date until approximately 
+April 2015, traded on the NASDAQ Global Market. HLSS was founded by Ocwen’s Executive 
+Chairman in 2010 and conducted an initial public offering in February 2012. The Executive 
+Chairman of Ocwen also became HLSS’s Chairman in 2010 and owned 100 percent of HLSS’s 
+ordinary shares of common stock prior to the initial public offering, 5 percent after the offering, 
+and approximately 1 percent between 2013 and 2014. 
+Background 
+A. Ocwen’s Related Party Transactions 
+Ocwen’s Relationship with Altisource and HLSS 
+9. Ocwen is a servicer of mortgages that have been securitized and are owned by 
+residential mortgage-backed securities trusts. As such, Ocwen collects and remits principal and 
+interest payments received from homeowner borrowers and manages loans that are delinquent or 
+in foreclosure or bankruptcy. In addition, as one of its obligations in managing delinquent loans, 
+Ocwen advances funds to the trusts to cover payments missed by borrowers. 
+10. In 2009, Ocwen spun-off certain business lines to a newly-created entity, 
+Altisource, and entered into long-term agreements for Altisource to provide technology products 
+and services to Ocwen including, among other things, home valuations, property preservation 
+and inspection services, sales of foreclosed properties, mortgage charge-off collection services, 
+ 4 
+ 
+and insurance services. Ocwen’s Executive Chairman also became Chairman of Altisource, and 
+several Ocwen managers left Ocwen to become executives and members of the board of 
+directors at Altisource. 
+11. In 2010, Ocwen’s Executive Chairman sought to make Ocwen “capital-light” by 
+creating HLSS, a company that would be publicly traded and that would finance a substantial 
+part of Ocwen’s servicer advances. HLSS was to purchase Ocwen’s mortgage servicing rights 
+(“MSRs”), and thereby receive the future servicing fees owed to Ocwen in connection with those 
+MSRs and, as a result of that purchase, would be responsible for funding servicer advances. As a 
+part of this arrangement, HLSS would retain Ocwen as the subservicer for all mortgages 
+underlying the MSRs purchased by HLSS. Ocwen’s Executive Chairman also became HLSS’s 
+Chairman, and certain managers and members of the board of directors at Ocwen left Ocwen to 
+become executives and board members at HLSS. 
+12. Due to difficulties encountered with transferring title to the MSRs to HLSS, 
+Ocwen retained title and HLSS agreed to acquire the Rights to the MSRs through a financing. 
+Ocwen and HLSS executed a master purchase agreement and master subservicing agreement in 
+February 2012. On March 5, 2012, Ocwen completed an initial sale to HLSS of Rights to MSRs 
+on mortgages with an unpaid principal balance (“UPB”) of $15.2 billion. Under this 
+arrangement, Ocwen serviced the mortgages, collected the servicing fees from borrowers and 
+remitted the fees to HLSS. From the total servicing fees remitted, HLSS paid Ocwen a base fee 
+for its services and a performance fee when Ocwen met certain targets for advance levels. 
+Because of his role at HLSS, the Executive Chairman recused himself from negotiating and 
+voting on the approval of the master agreements and initial purchase. 
+Ocwen’s Control Breakdowns Relating to Related Party Transactions 
+13. Although several internal documents created by Ocwen personnel referred to a 
+related party transactions policy, there were no written policies or procedures governing when an 
+officer or director with a conflict of interest was required to be recused from negotiating or 
+approving a related party transaction. While the Executive Chairman routinely recused himself 
+from negotiations with Altisource and HLSS and recused himself from approvals of transactions 
+in certain instances, including the master purchase and master subservicing agreements and the 
+initial sale of Rights to MSRs to HLSS, Ocwen personnel never developed guidelines under 
+which such recusal was appropriate. This caused a number of control deficiencies. 
+14. First, the responsibility for determining whether recusal was appropriate was left 
+largely to the Executive Chairman, the person with the conflict of interest. While Ocwen’s in-
+house counsel occasionally provided advice on whether the Executive Chairman could 
+participate in a related party transaction, there was no meaningful oversight of the Executive 
+Chairman’s determination. 
+15. Second, Ocwen personnel lacked a clear understanding of when recusals were 
+required. Ocwen stated in its 2012 Form 10-K that it had “adopted policies, procedures and 
+practices to avoid potential conflicts” present in “significant” related party transactions. 
+However, Ocwen personnel had conflicting understandings of what types of transactions could 
+qualify as significant, and they never attempted to reconcile these conflicting understandings. 
+ 5 
+ 
+When Ocwen removed the term “significant” from its disclosure in its 2013 Form 10-K, some 
+Ocwen personnel continued to view the Executive Chairman’s recusal as required only in 
+transactions determined to be significant. Yet, there was no guidance or common understanding 
+for making such a determination. In addition, the Executive Chairman and a member of Ocwen 
+senior management both believed that the need to approve transactions in the Virgin Islands for 
+tax reasons may have been grounds for participating in the approval. Ocwen’s disclosures, 
+however, do not include this exception, and this belief was not given sufficient consideration 
+internally. 
+Ocwen’s Executive Chairman Approved a Transaction with Altisource 
+16. In December 2012, Ocwen entered into an agreement to borrow $75 million from 
+Altisource as an unsecured bridge loan to serve as part of the consideration paid by Ocwen in 
+connection with Ocwen’s acquisition of another mortgage servicer. The Executive Chairman 
+voted to approve Ocwen’s entry into the loan agreement. In his role as Chairman of Altisource, 
+the Executive Chairman recused himself from the decision to approve the loan. However, he 
+reviewed and approved the Altisource board presentation before it was circulated to the 
+Altisource Board of Directors for the vote. Ocwen disclosed the loan in a Form 8-K, dated 
+December 28, 2012, and in its annual report for 2012 filed on Form 10-K. 
+Ocwen’s Executive Chairman Approved Transactions with HLSS 
+17. After Ocwen and HLSS executed the master purchase and master subservicing 
+agreements and the initial sales of the Rights to MSRs, Ocwen made additional sales, known as 
+“Flow Transactions,” to HLSS in 2012 and 2013. Ocwen disclosed in its Form 10-K for 2012 
+that “[t]he [2012] HLSS [t]ransactions have improved Ocwen’s liquidity and cash flows . . . 
+[and] lowered Ocwen’s capital requirements since HLSS is acquiring not only the Rights to 
+MSRs but also the servicer advances related to the Rights to MSRs and assuming responsibility 
+for funding servicer advances in the future.” The disclosure added that Ocwen expected “the 
+reduction in equity required to run the servicing business” resulting from its sales to HLSS 
+would improve the return on equity of Ocwen’s servicing business over time. 
+18. While Ocwen and HLSS based the purchase price for the Rights to MSRs for each 
+Flow Transaction on an appraisal by a third party valuation firm, other terms varied. For 
+example, for each Flow Transaction, Ocwen and HLSS negotiated HLSS’s retained fees, which 
+were the servicing fees retained by HLSS from those collected and remitted to it by Ocwen after 
+payment of the base and performance fees owed back to Ocwen. The retained servicing fee for 
+each Flow Transaction was based on the agreed-upon advance target for Ocwen and other 
+assumptions that were jointly set by Ocwen and HLSS such as the prepayment rate on the 
+underlying loan balances, financing cost and advance borrowing rate. 
+19. The Flow Transactions with HLSS were approved at Ocwen by different methods. 
+The Flow Transactions in 2012 were approved by the unanimous written consent of Ocwen’s 
+Executive Committee, which was appointed by the Board and composed of the Executive 
+Chairman, another member of the Board of Directors, and Ocwen’s CEO. In 2013, Ocwen 
+personnel submitted proposals for approval of these transactions to the Ocwen Credit 
+Committee, which was responsible for the financial direction and oversight of Ocwen’s servicing 
+ 6 
+ 
+business operated by its wholly owned subsidiary in the Virgin Islands. Approval by the Credit 
+Committee was necessary for a Flow Transaction to be consummated. In addition to his other 
+roles, the Executive Chairman was also a member of HLSS’s Credit Committee, which 
+performed an analogous role to that of the Ocwen Credit Committee. 
+20. The routine process for Credit Committee review and approval of the Flow 
+Transactions was to circulate a memorandum that presented analysis of the proposed price of the 
+Rights to MSRs, the retained fees and the varying underlying assumptions. The memoranda 
+circulated typically included a signature page to indicate approval by each of the committee 
+members. The committee members either executed the signature pages or indicated their 
+approval of the transactions by email. 
+21. In 2012, Ocwen entered into five Flow Transactions with HLSS totaling 
+approximately $67.5 billion in UPB. The Executive Chairman approved two of these transactions 
+as a member of the Executive Committee in separate written consents. Contemporaneously, the 
+Executive Chairman approved all of these transactions in his capacity as a member of the HLSS 
+Credit Committee. 
+22. In 2013, Ocwen entered into four Flow Transactions with HLSS totaling 
+approximately $120 billion UPB. The Executive Chairman recused himself from the first 
+transaction but then approved the second one for both Ocwen and HLSS. Even when the 
+Executive Chairman recused himself from the Credit Committee decision, he still received the 
+Credit Committee memorandum because, according to him, “I’m interested in valuation [and] I 
+still thought I had the right to say, ‘No, this isn’t going to happen.’” 
+23. In 2014, the Executive Chairman approved another type of transaction between 
+Ocwen and HLSS concerning early buy-out loans, which are delinquent loans eligible for 
+purchase by the mortgage servicer. In this transaction, Ocwen sold HLSS early buy-out loans 
+worth approximately $672 million that Ocwen recently had purchased. In a February 2014 email 
+addressed to members of both Ocwen and HLSS senior management, the Executive Chairman 
+approved this purchase on the condition that it did not trigger losses. 
+Ocwen’s Failure to Document Approvals 
+24. As to the latter three of the five Flow Transactions between Ocwen and HLSS in 
+2012 and two of the four Flow Transactions in 2013, Ocwen was unable to locate final executed 
+Executive Committee resolutions, Credit Committee memoranda or approving emails. 
+Contemporaneous emails for the last of these transactions in October 2013, however, show a 
+request to schedule a phone call for both Credit Committees to discuss the analysis contained in 
+the memorandum and a subsequent modification of the retained servicing fee based on a change 
+to an underlying assumption. 
+25. Documentation of Ocwen’s Credit Committee approval process again broke down 
+in February 2014 in connection with the early buy-out loan sale agreement between Ocwen and 
+HLSS. Ocwen was unable to locate all Credit Committee approvals for this transaction. 
+ 7 
+ 
+B. Improper Valuation of Rights to MSRs 
+26. For each transfer of Rights to MSRs from Ocwen to HLSS, HLSS recorded a 
+Note Receivable – Rights to MSRs, and Ocwen recorded a corresponding note payable on its 
+books, entitled Financing Liability – MSRs Pledged. HLSS purported to carry the asset at fair 
+value. Ocwen’s filings stated that it recorded the liability at amortized cost and amortized the 
+liability over the estimated life of the underlying MSRs using the interest method. For purposes 
+of applying the interest method, Ocwen disclosed to investors that the balance of the liability was 
+reduced each quarter based on the change in the present fair value of the estimated future cash 
+flows. Because the calculation of amortization of the financing liability had a fair value 
+component to it, Ocwen’s 2013 Form 10-K Note 5 provided that “[t]he carrying value of the 
+Financing Liability – MSRs Pledged approximates fair value” and that “[t]he net present value of 
+these future cash flows represents the fair value of the Financing Liability – MSRs Pledged.” 
+Ocwen’s quarterly and annual filings with the Commission also stated that its financial 
+statements were prepared in accordance with GAAP. 
+27. Ocwen did not independently value the Rights to MSRs that it accounted for as a 
+financing liability. Rather, in consultation with its external auditors, Ocwen relied on HLSS to 
+value the Rights to MSRs and assigned them the value that was derived from HLSS’s valuation 
+methodology, which was later proven to be flawed. 
+28. FASB Financial Accounting Standards Codification Topic 820 (“ASC 820”) – 
+Fair Value Measurements and Disclosures defines fair value as the price that would be received 
+to sell an asset or paid to transfer a liability in an orderly transaction between market participants 
+at the measurement date. Because Rights to MSRs are not frequently bought or sold, there rarely 
+are observable market prices for them. Rights to MSRs are therefore considered to be a Level 3 
+asset in the fair value hierarchy, which are assets that do not have observable inputs for a fair value 
+measurement. While Level 3 assets are more difficult to value, the fair value measurement 
+objective remains the same, that is, an exit price from the perspective of a market participant that 
+holds the asset. 
+29. As stated in a previous settled order concerning HLSS, see In re HLSS, Admin. 
+Proc. File No. 3-16882 (October 5, 2015), HLSS retained a third party with expertise in valuing 
+MSRs to calculate the fair value of its Rights to MSRs. Each quarter, the third-party valuation 
+firm performed an analysis of the Rights to MSRs and provided HLSS with a valuation report. 
+The valuation reports included an estimate of the fair-value based on inputs that affected the fair 
+value of the MSRs, such as then-current prepayment rates, pre-tax discount rates, and costs to 
+service. This estimate was represented as a specific price that was reflected in basis points.2 
+Multiplying this specific price, which was the third-party valuation firm’s best-point estimate, by 
+the UPB for HLSS’s Rights to MSRs would provide a fair-value measurement for those Rights 
+to MSRs. In a prefatory note, the valuation reports stated that a sale of the Rights to MSRs in an 
+orderly market should not differ by more than 7.5, or in some instances 10, basis points from the 
+best-point estimate provided. 
+                                                 
+2  A basis point is one hundredth of one percent. 
+ 8 
+ 
+30. In addition to the fair value measurement provided in the valuation report, HLSS 
+independently determined the carrying value of its Rights to MSRs. As part of this 
+determination, HLSS calculated an “Inception BPS,” also reflected in basis points, by dividing 
+the UPB of the mortgages underlying the MSRs as of the date of their acquisition by HLSS’s 
+purchase price of the Rights to MSRs. Over time, the UPB of the mortgages generally decreased 
+as borrowers paid down their mortgages. At the end of each quarter, HLSS calculated the 
+carrying value for the Rights to MSRs by multiplying the Inception BPS by the amount of the 
+UPB as of the end of the quarter. This amortization was driven entirely by the decline in size of 
+the mortgages’ UPB and was not affected by any of the factors that would affect a fair value 
+measurement. 
+31. Because the value of the MSRs for which HLSS had obtained the rights 
+historically had been fairly stable, HLSS developed a valuation methodology that used the 
+carrying value of the Rights to MSRs as the presumptive fair value measurement. This 
+methodology was reviewed by HLSS’s and Ocwen’s external auditors. For each reporting date, 
+HLSS compared the carrying value of its Rights to MSRs (as calculated above) to the third-party 
+valuation report’s best-point estimate and would record an adjustment to the value of the Rights 
+to MSRs, which HLSS disclosed reflected fair value, only if there was a variation in price of at 
+least 5 percent. 
+32. To illustrate, the third-party valuation firm provided a report with a valuation date 
+of November 29, 2013 estimating the price of HLSS’s Rights to MSRs, which had underlying 
+mortgages with an UPB of approximately $159.56 billion, at 37.08 basis points. Multiplying the 
+UPB by the estimated price, the third party valued the Rights to these MSRs at approximately 
+$592 million. Under HLSS’s valuation methodology, HLSS would apply 5 percent bands around 
+the third-party valuation firm’s best-point estimate of 37.08 basis points, which would create a 
+range from 35.23 basis points (5 percent below) to 38.93 basis points (5 percent above), and 
+would report the carrying value of its Rights to MSRs as their fair value so long as the carrying 
+value was within the range of values created by the 5 percent bands. In other words, so long as 
+HLSS’s carrying value was within approximately $562 million (35.23 basis points multiplied by 
+the UPB) and approximately $621 million (38.93 basis points multiplied by the UPB), it would 
+report the carrying value as fair value. Based on Ocwen’s financial results for the fourth quarter 
+of 2013, this approximately $56 million range was equivalent to 10 percent of its total revenues 
+and 41 percent of its net income. 
+Ocwen Used HLSS’s Valuations 
+33. Ocwen amortized the Financing Liability using HLSS’s calculation. Under ASC 
+820, Ocwen was required to update its expectations of cash flows at each reporting period to 
+determine the current net present value of the cash flows. Ocwen did not independently 
+determine the current net present value of the cash flows. Rather, it automatically used for each 
+quarter the resulting estimates produced by HLSS’s improper valuation methodology. As a 
+result, Ocwen would adjust the net present value amounts only if the difference of carrying 
+amount was larger than 5 percent of the third-party valuation firm’s best-point estimate. 
+ 9 
+ 
+34. Ocwen’s quarterly and annual filings listed “Fair Value Measurements” as a 
+“Critical Accounting Policy.” The Fair Value Measurements section referenced the amortization 
+of MSRs and the accounting and valuation for the Financing Liability – MSRs Pledged. 
+Ocwen’s Internal Accounting Controls Deficiencies Relating to Valuation 
+35. While Ocwen relied upon HLSS’s valuation methodology and used HLSS’s 
+calculation to account for its financing liability associated with the Rights to MSRs, neither 
+Ocwen’s management nor its Audit Committee independently reviewed HLSS’s valuation 
+methodology for the Rights to MSRs. 
+36. Before HLSS implemented the valuation methodology, Ocwen’s Executive 
+Chairman (who also served as HLSS’s Chairman) perceived a problem with it. Because the 5 
+percent bands created a very large range in terms of dollars, the Executive Chairman anticipated 
+that there would be significant differences between the third party best-point estimate and 
+HLSS’s carrying value that were still within the 5 percent bands. 
+37. The Executive Chairman did not share these concerns with Ocwen’s Audit 
+Committee, his fellow Ocwen Directors, Ocwen management, or Ocwen’s external auditors. 
+38. The Audit Committee of Ocwen’s Board of Directors also failed to give sufficient 
+independent consideration to the automatic use of estimates derived from HLSS’s valuation 
+methodology. The Audit Committee’s charter, which was reviewed by the Board of Directors 
+and the Audit Committee in March 2012, provided that the Audit Committee shall: 
+(j) Review with management, the Company’s independent 
+auditors and the director of the Company’s internal auditing 
+department, the following: 
+(i) critical accounting policies and such other accounting 
+policies of the Company as are deemed appropriate for review by 
+the Committee prior to any interim or year‐end filings with the 
+SEC or other regulatory body, including any financial reporting 
+issues which could have a material impact on the Company’s 
+financial statements . . . . 
+39. While Ocwen’s Audit Committee routinely reviewed the financial information 
+that resulted from HLSS’s valuation methodology, it did not review the valuation methodology 
+itself with Ocwen’s external auditors and did not review with Ocwen management whether it 
+was appropriate to use the estimates derived from HLSS’s valuation methodology to value 
+Ocwen’s financing liability of the Rights to MSRs. As a result, the Audit Committee did not 
+consider whether HLSS’s valuation methodology was an appropriate fair value measurement 
+under GAAP, nor did it consider whether the valuation methodology could result in a variance 
+between the third party valuation firm’s best-point estimate and the carrying value that was 
+material to Ocwen’s reported results. 
+ 10 
+ 
+Ocwen Restated Its Financials 
+40. The best-point estimate in the valuation reports fluctuated from quarter to quarter; 
+however, under its valuation methodology, HLSS did not make any adjustment to the fair value 
+of its Rights to MSRs because the Inception BPS used to calculate carrying value did not differ 
+by 5 percent or more from the best-point estimate. Consequently, Ocwen did not make any 
+adjustments to the net present value of the liability. 
+41. HLSS revisited the use of its valuation methodology in 2014 and determined that 
+the carrying value of the Rights to MSRs was not a fair value measurement under GAAP. HLSS, 
+therefore, determined that it was required to restate the value of its Rights to MSRs to the best-
+point estimate of fair value provided in the valuation reports. 
+42. HLSS management then relayed this information to Ocwen’s management. 
+Ocwen’s management, after discussions with its external auditors, determined that it should also 
+use the third-party’s best-point estimate, which would have resulted in a material variance for 
+three quarters in 2013 and the first quarter 2014. 
+43. In August 2014, Ocwen restated its 2013 Form 10-K and its Form 10-Q for the 
+quarter ended March 31, 2014 as a result of this required adjustment and an unrelated data input 
+error.3 As per the chart below, Ocwen’s use of HLSS’s improper valuation resulted in a material 
+error to Ocwen’s reported results in quarterly and annual filings and in earnings releases filed on 
+Form 8-K. 
+Dollars in thousands 
+ 
+Net Income As  
+Restated ($) 
+Adjustment 
+Relating to 
+Accounting 
+Error ($) 
+Adjustment as  
+a % of  
+Restated Net  
+Income 
+1Q 14 60,486 (8,000) -13% 
+FY 2013 310,418 11,356 4% 
+4Q 13 135,275 27,582 20% 
+3Q 13 60,572 (6,831) -11% 
+2Q 13 65,662 (13,352) -20% 
+1Q 13 48,909 3,957 8%  
+C. Violations 
+44. As a result of the conduct described above, Ocwen violated Section 13(a) of the 
+Exchange Act, Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, which require issuers to file 
+true, accurate, and complete annual, quarterly and current reports with the Commission. 
+                                                 
+3  This data input error related to a subset of the Rights to MSRs as of the fourth quarter of 2013 and the first 
+quarter of 2014. The impact of the data error was $5.9 million and $9.3 million as of December 31 , 2013 and March 
+31, 2014, respectively. 
+ 11 
+ 
+45. As a result of the conduct described above, Ocwen violated Section 13(b)(2)(A) 
+of the Exchange Act, which requires public companies to “make and keep books, records, and 
+accounts, which, in reasonable detail, accurately and fairly reflect the transactions and 
+dispositions of the assets of the issuer.” 
+46. As a result of the conduct described above, Ocwen violated Section 13(b)(2)(B) 
+of the Exchange Act, which requires public companies to “devise and maintain a system of 
+internal accounting controls sufficient to provide reasonable assurances that . . . (ii) transactions 
+are recorded as necessary (I) to permit preparation of financial statements in conformity with 
+generally accepted accounting principles or any other criteria applicable to such statements, and 
+(II) to maintain accountability for assets.” 
+IV. 
+In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
+agreed to in Respondent’s Offer. 
+Accordingly, pursuant to Section 21C of the Exchange Act of 1934, it is hereby 
+ORDERED that: 
+A. Respondent Ocwen cease and desist from committing or causing any violations 
+and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act 
+and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. 
+B. Respondent shall, within 10 days of the entry of this Order, pay a civil money 
+penalty in the amount of $2,000,000 to the Securities and Exchange Commission for transfer to 
+the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If 
+timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C § 3717. 
+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 
+ 12 
+ 
+Payments by check or money order must be accompanied by a cover letter 
+identifying Ocwen as a Respondent in these proceedings, and the file number of 
+these proceedings; a copy of the cover letter and check or money order must be 
+sent to Michael J. Osnato, Chief, Complex Financial Instruments Unit, Division 
+of Enforcement, Securities and Exchange Commission, Brookfield Place, 200 
+Vesey Street, Suite 400, New York, NY, 10281. 
+ 
+ By the Commission. 
+Brent J. Fields  
+Secretary 

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+              Andrew M. Miller
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+                U.S. SECURITIES AND EXCHANGE COMMISSION 
+         Litigation Release No. 23454 / January 27, 2016 
+         Accounting and Auditing Enforcement Release No. 3734 / January 27, 2016 
+          Securities and Exchange Commission v. Andrew M. Miller , Civil Action No. 3:15-cv-1461-YGR (LB) (N.D. Cal.) 
+
+         headline  -->
+         
+
+         The Securities and Exchange Commission announced today that on January 26, 2016, the Honorable Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California entered a final judgment against Andrew Miller, the former CEO of Silicon Valley-based technology firm Polycom Inc. 
+
+         Without admitting or denying the allegations in the complaint, Miller consented to the entry of the final judgment that: 
+
+            Permanently enjoins him from violating Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 10(b), 13(b)(5) and 14(a) of the Securities and Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5, 13a-14, 13b2-1, 14a-3 and 14a-9 thereunder, and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act, and Rules 12b-20 and 13a-1 thereunder;   
+
+             Bars Miller from acting as an officer or director of a public company for five years; and   
+
+             Orders Miller to pay $450,000 in disgorgement, prejudgment interest and a penalty. 
+            The court's entry of the judgment against Miller ends the litigation against him. 
+
+         The Commission's complaint, filed on March 31, 2015, alleged that Miller used $190,000 in corporate funds for personal perks that were not disclosed to investors and created false expense reports to pay for meals, entertainment, gifts, and engaged in other deceptions, to obtain undisclosed payments for personal expenses and for travel with his friends and girlfriend to resorts.  The Commission separately charged Polycom in an administrative order finding that the company had inadequate internal controls and failed to report Miller's perks to investors.  Polycom agreed to pay $750,000 to settle the SEC's charges, without admitting or denying the SEC's findings as to the company. 
+
+         For additional information, see Press Release  2015-53  (March 31, 2015) and Litigation Release No.  23225  (March 31, 2015). 
+
+         
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+         
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+         SEC Complaint  -->
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raw/aaer/2016/AAER-3735.txt

@@ -0,0 +1,172 @@
+ 
+ 
+UNITED STATES OF AMERICA 
+ Before the 
+SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 76978 / January 27, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3735 / January 27, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17069 
+ 
+ 
+ 
+ 
+In the Matter of 
+ 
+JUSTIN MOONGYU 
+LEE, ESQ., CPA   
+ 
+Respondent. 
+ 
+ 
+ 
+ 
+ 
+ 
+ORDER INSTITUTING PUBLIC 
+ADMINISTRATIVE PROCEEDINGS AND 
+IMPOSING TEMPORARY SUSPENSION 
+PURSUANT TO RULE 102(e)(3)(i) OF 
+THE COMMISSION’S RULES OF 
+PRACTICE 
+ 
+   
+I. 
+     
+ The Securities and Exchange Commission (“Commission”) deems it appropriate and in 
+the public interest that public administrative proceedings be, and hereby are, instituted against 
+Justin Moongyu Lee  (“Respondent” or “J. Lee”) pursuant to Rule 102(e)(3)(i)1 of the 
+Commission’s Rules of Practice (17 C.F.R. § 200.102(e)(3)(i)).   
+ 
+ 
+                                                           
+1 Rule 102(e)(3)(i) provides, in relevant part, that: 
+ 
+The Commission, with due regard to the public interest and without preliminary 
+hearing, may, by order, temporarily suspend from appearing or practicing before 
+it any atto rney, [or] accountant . . . who has been by name:  (A) Permanently 
+enjoined by any court of competent jurisdiction, by reason of his or her 
+misconduct in an action brought by  the Commission, from violating  . . .  any 
+provision of the Federal securities laws or of the rules and regulations thereunder. 
+ 
+2 
+ 
+II. 
+ 
+ The Commission finds that:  
+ 
+1. J. Lee, at all relevant times, was an attorney who was admitted to practice in 
+California.  On July 1, 2014, J. Lee was suspended for failure to pay bar membership fees while 
+disciplinary charges relating to the fraud alleged in the Commission’s injunctive action described 
+below were pending against him.   
+ 
+2. At all relevant times, J. Lee held a certified public accountant certificate in the 
+State of Missouri.  He held himself out to investors as a certified public accountant.  
+3. On September 3, 2014, the Commission filed a civil injunctive action against J. 
+Lee, his wife Rebecca Taewon Lee (“R. Lee”), Thomas Edward Kent (“Kent”), and the 
+following entities: American Immigrant Investment Fund I, LLC, (“AIIF”), Biofuel Venture IV, 
+LLC, (“Biofuel IV”), Biofuel Venture V, LLC (“Biofuel V”), Nexland, Inc., dba Nexland 
+Investment Group (“Nexland”), and Nexsun Ethanol, LLC (“Nexsun”) (collectively, the “Entity 
+Defendants).  The Commission alleged that J. Lee and the others perpetrated a multimillion 
+dollar investment scheme that defrauded foreign investors, who were seeking to obtain United 
+States residency and, ultimately, citizenship, through the EB-5 visa program.  The Complaint 
+alleges that J. Lee violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 
+(“Securities Act”) and Section 10(b)  of the Securities Exchange Act of 1934 (“Exchange Act”), 
+and Rule 10b-5 thereunder. 
+ 
+4. On October 29, 2015, the United States District Court for the Central District of 
+California entered a final judgment against J. Lee and the Entity Defendants that he controlled, 
+after granting the Commission’s motion for entry of final judgment by default.  In addition to 
+enjoining J. Lee and the Entity Defendants from future violations of Section 17(a) of the 
+Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, the Court 
+ordered that J. Lee and the Entity Defendants are jointly and severally liable for disgorgement of 
+$7,210,000, plus interest of $1,052,403.73, for a total of $8,262,403.73, and further ordered J. 
+Lee to pay a $150,000 civil penalty.   
+ 
+5.  In granting the Commission’s motion for entry of a final judgment by default, the 
+Court found the facts pled in the Complaint were sufficient to establish violation of the antifraud 
+provisions by J. Lee, including that:  
+ 
+a. J. Lee founded, and was the CEO, of each of the Entity Defendants.  In 
+addition to his role as CEO, he was the president, secretary, managing member, and/or the 
+chairman of the board of directors of several of the Entity Defendants.  He was also the 
+signatory on all bank accounts for each of these entities.  Further, J. Lee was the founder, CEO, 
+and sole owner of a related entity, Kansas Biofuel Regional Center, LLC (“Kansas Biofuel”). 
+b. The fraudulent scheme began in 2006, when J. Lee and Kent applied to 
+the United States Citizenship and Immigration Service (“USCIS”) on behalf of Kansas Biofuel 
+for designation as a regional center.  Among other representations, J. Lee and Kent represented 
+to USCIS that, through Nexsun, they were going to construct and operate a new ethanol plant 
+3 
+ 
+in Kansas that would create thousands of jobs and substantial economic benefit.  Once USCIS 
+designated Kansas Biofuel as a regional center in 2007, J. Lee and Kent created various 
+companies, including AIIF, Biofuel IV, and Biofuel V, through which to raise monies from 
+immigrant investors.  From March 2009 to April 2011, defendants raised $11,455,000 from 
+twenty-four investors through three offerings of shares in AIIF, Biofuel IV, and Biofuel V, to 
+purportedly construct an ethanol plant in Kansas. 
+c. The defendants, including J. Lee, misrepresented that the $11.5 million in 
+investor monies raised was being used to construct and operate an ethanol plant in Kansas, that 
+these investments qualified the investors to obtain U.S. residency citizenship, and that people 
+had been employed for this venture.  Contrary to these representations, the ethanol plant was 
+never built.  Instead, J. Lee and R. Lee misappropriated and misused most of the $11.5 million.  
+In particular, they spent almost $3.9 million to finance an unrelated project in the Philippines, 
+and another $2.38 million to pay off investors in other offerings.  These expenditures were 
+neither permissible under the EB-5 program nor disclosed to investors.  
+d. To conceal their misuse of funds and failure to construct the ethanol plant, 
+J. Lee and R. Lee caused employees to be hired by Nexsun, but paid them for performing tasks 
+unrelated to construction of the ethanol plant.  Then, as required by USCIS, defendants 
+submitted a Form I-9 to USCIS identifying each employee that they hired, which purportedly 
+evidenced the required creation of jobs.  J. Lee signed the false documents submitted to USCIS.  
+ 
+e. The facts alleged in the Complaint support a claim that J. Lee and the 
+Entity Defendants made the misrepresentations and omissions, which were material, with the 
+requisite scienter.  J. Lee was the “architect” of the entire fraudulent scheme.  He headed and 
+controlled each of the Entity Defendants.  He signed the initial application to the USCIS for 
+designation as a regional center in 2006 as President and CEO of Kansas Biofuel.  J. Lee also 
+approved offering materials to each investor, which represented that their money would be 
+invested in Nexsun to develop and operate an ethanol plant.  Further, J. Lee approved of all 
+information regarding the purported Nexsun ethanol project that was disseminated at investor 
+seminars from 2008 to 2010.  By 2009, preliminary construction of the ethanol plant ceased and 
+construction of the ethanol plant was no longer feasible.  Nevertheless, J. Lee continued to make 
+representations to investors and the USCIS that construction of the plant was ongoing. 
+ 
+III. 
+ 
+Based upon the foregoing, the Commission finds that a court of competent jurisdiction 
+has permanently enjoined J. Lee from violating the Federal securities laws within the meaning of 
+Rule 102(e)(3)(i)(A) of the Commission’s Rules of Practice.  In view of these findings, the 
+Commission deems it appropriate and in the public interest that J. Lee be temporarily suspended 
+from appearing or practicing before the Commission as an attorney or an accountant.   
+ IT IS HEREBY ORDERED that J. Lee be, and hereby is, temporarily suspended from 
+appearing or practicing before the Commission as an attorney or an accountant.  This Order will 
+be effective upon service on the Respondent.  
+IT IS FURTHER ORDERED that J. Lee may, within thirty days after service of this 
+Order, file a petition with the Commission to lift the temporary suspension.  If the Commission 
+4 
+ 
+receives no petition within thirty days after service of the Order, the suspension will become 
+permanent pursuant to Rule 102(e)(3)(ii).  
+ If a petition is received within thirty days after service of this Order, the Commission 
+will, within thirty days after the filing of the petition, either lift the temporary suspension, or set 
+the matter down for hearing at a time and place to be designated by the Commission, or both.  If 
+a hearing is ordered, following the hearing, the Commission may lift the suspension, censure the 
+petitioner, or disqualify the petitioner from appearing or practicing before the Commission for a 
+period of time, or permanently, pursuant to Rule 102(e)(3)(iii). 
+This Order shall be served upon J. Lee personally or by certified mail at his last known 
+address or, if that address is in a foreign country, by any other method reasonably calculated to 
+give notice and is not prohibited by the law of the foreign country where J. Lee may be found.  If 
+J. Lee i s located in  the Republic of Korea, he may be served  in accordance with the Hague 
+Convention on the  Service Abroad of Judi cial or Extrajudicial Documents in Civil or 
+Commercial Matters.   
+ 
+By the Commission. 
+ 
+       Brent J. Fields 
+       Secretary 
+ 
+ 

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@@ -0,0 +1,350 @@
+1 
+ 
+UNITED STATES OF AMERICA 
+Before the 
+SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77005 / February 1, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3736 / February 1, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17080 
+ 
+ 
+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 that 
+cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the 
+Securities Exchange Act of 1934 (the “Exchange Act”) against 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 (the “Order”), 
+as set forth below. 
+ 
+III. 
+ On the basis of this Order and Respondent’s Offer, the Commission finds1 that: 
+                                                           
+1  The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any 
+other person or entity in this or any other proceeding.  
+ 
+2 
+ 
+Summary 
+1. This matter concerns violations of the books and records and internal controls 
+provisions of the Foreign Corrupt Practices Act of 1977 (“FCPA”) by SAP SE (“SAP”), a 
+European Union corporation headquartered in Waldorf, Germany.  The violations occurred due 
+to deficient internal controls, which allowed SAP’s former Vice-President of Global and 
+Strategic Accounts, Vicente E. Garcia, to discount the software price to a former SAP local 
+partner at a level sufficient to permit Garcia and the local partner to pay $145,000 in bribes to 
+one senior Panamanian government official, and offer bribes to two others.  Through these 
+bribes, Garcia secured government sales contracts of approximately $3.7 million for SAP, and 
+also self-profited through kickbacks.  By excessively discounting the SAP software, Garcia 
+created a slush fund that the partner used to pay the bribes and kickbacks.  Garcia concealed his 
+scheme from others at SAP, circumvented SAP’s internal controls, and justified the excessive 
+discounts by falsifying SAP’s internal approval forms. 
+ 
+2. The deep discounts that Garcia used to create the slush fund were falsely recorded 
+as legitimate discounts on the books of SAP’s Mexican subsidiary, which were subsequently 
+consolidated into SAP’s financial statements.  In addition, SAP failed to devise and maintain an 
+adequate system of internal accounting controls sufficient to provide reasonable assurances that 
+these improper payments to government officials did not occur.    
+Respondent 
+3. SAP SE (“SAP”) is a European Union corporation headquartered in Waldorf, 
+Germany.  SAP’s American Depository 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.    
+Related Individual and Entities 
+4. Vicente E. Garcia is a U.S. citizen residing in Miami, Florida.  Garcia was SAP’s 
+Vice-President of Global and Strategic Accounts, responsible for sales in Latin America for SAP 
+from February 2008 until April 2014, when SAP terminated Garcia for his misconduct described 
+herein.   
+ 
+5. SAP International, Inc. (“SAPI”), a Miami, Florida-based wholly-owned 
+subsidiary of SAP, is engaged in selling software in the Latin American and Caribbean markets.  
+SAPI does not enter into direct or indirect software or software-related services deals with end 
+customers.  Instead, SAPI employs some of the members of the Latin America and Caribbean 
+(“LAC”) regional leadership team and provides some back office operational support for some of 
+the LAC regional subsidiaries.  Garcia was on the payroll of SAPI. 
+ 
+6. SAP Mexico S.A. de C.V. (“SAP Mexico”) is a Mexico City, Mexico-based 
+wholly-owned subsidiary of SAP engaged in selling software in the Mexican and Central 
+American markets.  SAP Mexico is authorized by SAP to distribute, sell, license, and sublicense 
+software directly and indirectly to end customers.   Garcia negotiated the Panamanian contracts 
+on behalf of SAP Mexico.  SAP Mexico’s financial statements are consolidated and reported in 
+SAP’s financial statements. 
+3 
+ 
+ 
+Facts 
+A. Background 
+ 
+7. SAP, through its 272 subsidiaries, sells software licenses and related services to 
+263,000 customers in 188 countries.  SAP’s global business is directed and operated from its 
+headquarters in Waldorf, Germany and executed through its numerous subsidiaries.  SAP’s 
+business is conducted through a network of more than 11,500 partners worldwide that provide an 
+additional workforce of 380,000 individuals skilled in SAP software solutions and technology.  
+SAP’s sales using a local partner can be either (i) a direct sale to a customer with a sales 
+commission paid to a partner that provides assistance, (ii) an indirect sale through a partner that 
+purchases the software license and resells it to a customer at an independently determined 
+increased price, or (iii) a direct sale to the partner, which acts as a distributor and independently 
+resells the software licenses to customers in the future. 
+ 
+8. From 2008 to April 2014, Garcia served as SAP’s Vice-President of Global and 
+Strategic Accounts and was responsible for sales in Latin America for SAP.  Although Garcia 
+was technically employed by SAPI, SAP presented him to customers as an SAP employee and 
+his supervisors included employees of SAPI (from January 16, 2010 to April 10, 2014), SAP’s 
+Brazilian subsidiary (from February 25, 2008 to January 15, 2010), and indirectly SAP 
+(throughout the relevant time period).  
+ 
+9. In June 2009, SAP conducted an internal investigation and found that Garcia 
+violated its internal Code of Business Conduct when he invited an executive of Petroleos 
+Mexicanos (“PEMEX”), the Mexican national oil company, to an SAP marketing event at the 
+Monaco Grand Prix.  SAP did not find any attempt to improperly influence any government 
+official in connection with the 2008 PEMEX sale.  As a result of the internal investigation, SAP 
+revised its policies prohibiting government officials or employees from attending any 
+“hospitality” event, which it defined as any event where business constitutes less than 80% of the 
+event. 
+ 
+B. Garcia Bribed Government Officials in Panama to Obtain Business for SAP 
+ 
+10. Garcia continued working for SAP, and from at least June 2009 to November 
+2013, he along with others outside of SAP, planned and executed a bribery scheme in Panama, as 
+described below. 
+ 
+11. In June 2009, Garcia’s business associate, a Panamanian lobbyist (the 
+“Lobbyist”), informed Garcia about potential software sales opportunities with the government 
+of Panama and that he had an existing relationship with the newly elected government, including 
+a high ranking Government Official A, who was tasked with improving technology solutions 
+across multiple government agencies in Panama and had significant influence over Panama’s 
+software purchasing decisions.  Around the same time, SAP independently began investigating 
+possible software sales to the Panamanian government.  Initially the overall SAP endeavor was 
+led by local SAP sales employees in Mexico and Panama.  Garcia, however, took over the 
+4 
+ 
+business opportunity by recommending that SAP designate the Panama government as part of 
+the Premier Customer Network – a group of large, strategically important, regional customers – 
+that Garcia headed. 
+ 
+12. Garcia and others outside of SAP were informed by the Lobbyist that in order to 
+obtain contracts from the government of Panama, they needed to bribe three Panamanian 
+government officials that had significant influence in the Panamanian government’s award of 
+contracts to purchase software. 
+ 
+13. In anticipation of the sales to the government of Panama, Garcia and others 
+outside of SAP began planning the details of the bribery scheme.  On June 9 and 10, 2010, 
+Garcia discussed with others, including via personal e-mail, their plans to pay bribes to 
+Government Official A (2% of the value of the contract) and Government Official B (10%), and 
+receive kickbacks for themselves (2%).  Also, on October 26, 2010, e-mails were exchanged 
+with two attached spreadsheets referencing planned payments to Government Officials A and C 
+of approximately $100,000 and $300,000, respectively. 
+ 
+14. One of the four contracts was a software license sale to the Panamanian social 
+security agency, which was initially proposed to be a direct sale with the assistance of local 
+partners.  In order to facilitate the bribery scheme, the existing partners were replaced with a new 
+local Panamanian partner.  This last-minute change, and other red flags, triggered an SAP 
+compliance review which resulted in SAP rejecting Garcia’s request to pay a commission to the 
+local partner.  Therefore, Garcia and others began looking for other ways to advance the bribery 
+scheme.  Finally, in the fall of 2010, Garcia finalized an indirect sale of the software license to 
+the agency through the local partner, who, with Garcia’s assistance, ultimately sought and 
+obtained an 82% discount on SAP’s sale price to the local partner.  Garcia caused various 
+approval forms to be submitted that misstated the reasons for the large discount.  Garcia stated 
+that the discounts were necessary to compete with other software companies in establishing a 
+relationship with the government of Panama when, in fact, the discounts were necessary to fund 
+and pay bribes to government officials.  Garcia and others planned to sell SAP software to the 
+local partner at an 82% discount, who in turn would sell the software at significantly higher 
+prices to the Panamanian government and use part of the profits from the sale to pay bribes. 
+ 
+15. Garcia, as a senior vice-president of SAP responsible for sales in Latin America, 
+used his knowledge of the availability of discounts to push through large discounts in order to 
+create a slush fund from which the local partner was able to pay the bribes.  SAP routinely 
+provides large discounts to local partners for legitimate reasons that Garcia used to justify the 
+illegitimate discounts.  Once Garcia obtained approval of the discounts based on his falsified 
+justification forms, the bribes were then paid from the local partner.    
+ 
+16. SAP agreed to sell the software licenses for the Panamanian social security 
+agency to the local partner for approximately $2.1 million, an 82% discount.  In November 2010, 
+the local partner successfully bid $14.5 million for a contract, which included SAP software.  On 
+January 31, 2011, the Panamanian government awarded the contract to the local partner.  Garcia, 
+along with others, planned to pay bribes to Panamanian government officials from the proceeds 
+of the software sale to the government of Panama.   
+5 
+ 
+ 
+17. Thereafter, between June 2012 and December 2013, the Panamanian government 
+awarded three additional contracts that included SAP software products valued at approximately 
+$13.5 million, which were also sold at deep discounts by SAP to its local partner.  For these 
+contracts also, Garcia and others outside of SAP agreed to pay bribes to Panamanian officials 
+from the proceeds of the software sales.   
+ 
+18. As a result of Garcia’s conduct in the bribery scheme, SAP, with its local partner, 
+was able to sell software to the Panamanian government through four contracts from 2010 to 
+2013.  These contracts generated revenues of approximately $3.7 million to SAP.   
+ 
+19. The deep discounts that Garcia used to create the slush fund were falsely recorded 
+as legitimate discounts on the books of SAP Mexico, which were subsequently consolidated into 
+SAP’s financial statements.   
+SAP’s Insufficient Internal Controls 
+20. SAP lacked adequate internal controls to ensure that discounts to local partners 
+were not improperly used.  SAP’s system required employees to electronically submit requests 
+within SAP to obtain approval of discounts to local partners.  SAP employees, however, had 
+wide latitude in seeking and approving discounts to local partners, and employees’ explanations 
+for the discounts were accepted without verification.  There were also no requirements for 
+heightened anti-corruption scrutiny for large discounts.  Garcia was therefore able to evade the 
+basic approval procedures by taking advantage of his position and his knowledge of how 
+discounts were approved.  Furthermore, the nature of Garcia’s reporting structure made it easy 
+for him to implement the bribery scheme.  Although Garcia was located in Miami and employed 
+by SAPI, he variously reported to supervisors employed by other regional subsidiaries and used 
+employees from other subsidiaries such as SAP Mexico to execute the sales to the Panamanian 
+government.  This indirect reporting structure at SAP created gaps in supervising Garcia that 
+provided him the opportunity to use the large discounts for creating a slush fund for bribes.  
+Because of the deficient controls, Garcia was able to provide the partner with deep enough 
+discounts to enable him to implement the bribery scheme, which continued unabated for over 
+four years.   
+SAP’s Cooperation and Remediation 
+21. When SAP learned of the conduct as a result of the SEC’s inquiry, SAP 
+conducted a thorough internal investigation and extensively cooperated with the SEC’s 
+investigation by, among other things:  (i) conducting an internal investigation; (ii) voluntarily 
+producing approximately 500,000 pages of documents and other information quickly, identifying 
+significant documents and translating documents from Spanish; (iii) conducting witness 
+interviews, sharing Power-Point presentations and timelines; (iv) facilitating an interview of 
+Garcia at work at SAPI offices in Miami without alerting him to the investigation into his 
+conduct; and (v) initiating a third party audit of the local partner.  
+  
+22. After being alerted to Garcia’s misconduct, SAP terminated Garcia and undertook 
+remediation efforts to uncover any other possible misconduct and to improve its FCPA 
+compliance.  Specifically, SAP audited all recent public sector Latin American transactions, 
+6 
+ 
+regardless of Garcia’s involvement, to analyze partner profit margin data especially in 
+comparison to discounts so that any trends could be spotted and high profit margin transactions 
+could be identified for further investigation and audit.  SAP also implemented new policies and 
+procedures to detect and prevent similar issues from recurring in the future.  For example, SAP 
+elevated the status of its Chief Compliance Officer (“CCO”) by having that person now report 
+directly to the CFO, who is a member of the Executive Board, and gave the CCO authority to 
+independently terminate employees and partner contracts.  SAP conducted, and continues to 
+conduct, regular anti-corruption training, as well as anti-corruption audits through its internal 
+audit function. 
+ 
+23. In determining to accept the Offer, the Commission considered remedial acts 
+undertaken by Respondent and cooperation afforded the Commission staff.   
+Legal Standards and Violations 
+24. Section 13(b)(2)(A) of the Exchange Act requires every issuer with a class of 
+securities registered pursuant to Section 12 of the Exchange Act “to make and keep books, 
+records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions 
+and dispositions of the assets of the issuer.” 
+ 
+25. Section 13(b)(2)(B) of the Exchange Act requires every issuer with a class of 
+securities registered pursuant to Section 12 of the Exchange Act to devise and maintain a system 
+of internal accounting controls sufficient to provide reasonable assurances that, among other 
+things, transactions are executed in accordance with management’s general or specific 
+authorization; transactions are recorded as necessary to permit preparation of financial 
+statements in conformity with generally accepted accounting principles or any other applicable 
+criteria; transactions are recorded as necessary to maintain accountability for assets; and access 
+to assets is permitted only in accordance with management’s general or specific authorization. 
+ 
+26. As a result of the conduct described above, the discounts used to fund the bribe 
+payments were misrecorded in SAP Mexico’s books and records as legitimate discounts to a 
+local partner.  SAP Mexico’s books and records were consolidated into SAP’s books and 
+records.  Based on the foregoing, SAP violated Section 13(b)(2)(A) of the Exchange Act. 
+ 
+27. SAP also violated Section 13(b)(2)(B) of the Exchange Act by failing to devise 
+and maintain an adequate system of internal accounting controls relating to approving and 
+granting discounts to local partners.  As described herein, SAP lacked effective internal controls 
+sufficient to provide reasonable assurances that discounts provided to local partners were not 
+being used to pay bribes. 
+Findings 
+28. Based on the foregoing, the Commission finds that SAP violated Sections 
+13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. 
+ 
+ 
+ 
+7 
+ 
+IV. 
+ 
+In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
+agreed to in Respondent SAP’s Offer. 
+ 
+Accordingly, it is hereby ORDERED, effective immediately, that: 
+ 
+A.  Pursuant to Section 21C of the Exchange Act, Respondent SAP cease and desist 
+from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and 
+13(b)(2)(B) of the Exchange Act. 
+ 
+B.  Respondent shall pay disgorgement of $3,700,000, representing ill-gotten gains 
+received in connection with the bribery scheme, and prejudgment interest of $188,896 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 within ten (10) 
+days of the date of this Order.  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 SAP 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 Alka N. Patel, Assistant Regional 
+Director, Division of Enforcement, U.S. Securities and Exchange Commission, 444 South 
+Flower Street, Suite 900, Los Angeles, California 90071. 
+ 
+C. 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 
+8 
+ 
+information or materials to the Commission, or in a related proceeding, the Division may, at its 
+sole discretion and with prior notice to the Respondent, petition the Commission to reopen this 
+matter and seek an order directing that the Respondent pay a civil money penalty.  Respondent 
+may contest by way of defense in any resulting administrative proceeding whether it knowingly 
+provided materially false or misleading information, but may not:  (1) contest the findings in the 
+Order; or (2) assert any defense to liability or remedy, including, but not limited to, any statute of 
+limitations defense. 
+ 
+ By the Commission.  
+ 
+ 
+ 
+ 
+       Brent J. Fields  
+       Secretary 

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@@ -0,0 +1,419 @@
+ 
+UNITED STATES OF AMERICA 
+Before the 
+SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77057 / February 4, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3738 / February 4, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17100 
+ 
+ 
+In the Matter of 
+ 
+Ignacio Cueto Plaza 
+ 
+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 Ignacio Cueto Plaza (“Cueto” 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.     In 2006 and 2007, Ignacio Cueto Plaza (“Cueto”), the CEO of LAN Airlines S.A. 
+(“LAN”), authorized $1.15 million in improper payments to a third party consultant in Argentina 
+in connection with LAN’s attempts to settle disputes on wages and other work conditions 
+between LAN Argentina S.A. (“LAN Argentina”), a subsidiary of LAN, and its employees.  At 
+the time, Cueto understood that it was possible the consultant would pass some portion of the 
+$1.15 million to union officials in Argentina.  The payments were made pursuant to an unsigned 
+consulting agreement that purported to provide services that Cueto understood would not occur.  
+Cueto authorized subordinates to make the payments that were improperly booked in the 
+Company’s books and records, which circumvented LAN’s internal accounting controls.   
+Respondent 
+ 
+2. Ignacio Cueto Plaza, age 51, is a Chilean citizen and, since 2012, has been CEO of 
+LAN.  From 1995 to 1998, Cueto served as President of LAN Cargo, a LAN subsidiary located in 
+Miami, Florida.  He served on the Board of Directors of LAN from 1995 to 1997.  From 1999 to 
+2005, Cueto was CEO of LAN’s passenger airline business.  In 2005, Cueto became President and 
+COO of LAN Airlines S.A.  He remained in that position until June of 2012, when LAN merged 
+with Brazilian Airline TAM, S.A. (“TAM”) and became LATAM Airlines Group S.A. 
+(“LATAM”).2  Cueto remains CEO of LAN, which is now part of LATAM. 
+Relevant Entities 
+ 
+3. LAN Airlines S.A. (“LAN”) was a publicly traded airline company headquartered 
+in Santiago, Chile, that provided passenger and cargo airline services throughout Latin America.  
+LAN merged with TAM, S.A. in 2012.  Throughout the relevant period, LAN’s common stock 
+was registered in the United States pursuant to Section 12(b) of the Exchange Act and LAN filed 
+annual and quarterly reports as required under Section 13(a) of the Exchange Act and Rules 
+thereunder.  Prior to the merger with TAM, LAN’s common stock traded on the NYSE under the 
+symbol “LFL.”    
+4. LATAM Airlines Group is a Chilean based holding company.  LAN became 
+LATAM after the merger of LAN and its consolidated subsidiaries/or affiliates and TAM, S.A. and 
+its consolidated subsidiaries on June 22, 2012.  Following the merger, LATAM’s holdings 
+                                                 
+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  The LAN brand, which was launched in 2004 and includes subsidiaries in Peru, Argentina, Colu mbia and 
+Ecuador continues to exist as part of LATAM. 
+ 
+ 3 
+included LAN and its subsidiaries/or affiliates in Peru, Argentina, Colombia and Ecuador, TAM 
+and its subsidiaries, and LAN Cargo and its affiliates.  LATAM’s common stock is registered 
+pursuant to Section 12(b) of the Exchange Act and LATAM files annual and quarterly reports as 
+required under Section 13(a) of the Exchange Act and Rules thereunder.  LATAM’s common 
+stock trades on the NYSE under the symbol “LFL.” 
+5. LAN Argentina S.A. (“LAN Argentina”), formerly known as AERO 2000, was a 
+subsidiary of LAN during the relevant period.  LAN Argentina began operations in 2005, and 
+operated domestic and international flights throughout Latin America.  It continues to do business 
+as part of LATAM.  LAN Argentina’s financial statements were consolidated into the financial 
+statements of LAN and later LATAM. 
+6. Atlantic Aviation Investments LLC (“AAI”) was an indirect subsidiary of LAN 
+incorporated in Delaware.  LAN used AAI to conceal the sham payments to a company controlled 
+by its consultant in Argentina.  AAI’s financial statements were consolidated into the financial 
+statements of LAN and later LATAM.     
+LAN’s Entry into Argentina 
+ 
+7. For several years prior to 2004, LAN, a Chilean airline, explored expansion into 
+Argentina.  LAN put its Vice President of Business Development at LAN Cargo, a LAN 
+subsidiary, in charge of the expansion efforts.  The Vice President of Business Development was 
+based in Miami, Florida, and, reported directly to Cueto. 
+8. In late 2004, the Vice President of Business Development received a call from a 
+lawyer and purported business consultant in Argentina offering to help LAN with its expansion 
+efforts.  The two men later met in Buenos Aires and discussed the obstacles that LAN might face 
+in trying to enter the Argentine airline market.  Following the meeting, they kept in touch.   
+9. In early 2005, officials from the Argentine Transportation Secretary’s Office 
+contacted LAN to ask whether it would be interested in purchasing Lineas Aereas Federales S.A. 
+(“LAFSA”), a state owned airline, as a means to enter Argentina.  LAN declined the offer to 
+purchase LAFSA but continued discussions with government officials to enter into the market.  
+Eventually the officials informed LAN that LAFSA would cease operations and LAN would enter 
+the Argentine market through the purchase of 49% of the shares of AERO 2000, a non-operating 
+Argentinean airline that possessed an airline operation certificate and owned various flight routes.  
+As part of the deal, LAN agreed to hire workers from LAFSA and another Argentine airline, 
+Southern Winds, to operate AERO 2000.   
+10. In March 2005, Cueto and the Vice President of Business Development met with 
+the President of Argentina and the Transportation Secretary, as well as other officials from the 
+Ministry of Federal Planning, Public Investment and Services, and Transportation to finalize the 
+terms of the deal.  LAN completed its purchase of AERO 2000 on or about April 2005, and AERO 
+2000 began operations in June 2005.  In December 2005, AERO 2000’s name was changed to 
+LAN Argentina S.A.  The LAN employees primarily involved in these negotiations were the Vice 
+ 
+ 4 
+President of Business Development and the General Manager of LAN Argentina, who later 
+became Chief Operating Officer of LAN.  Both employees reported directly to Cueto.  
+LAN Faces Major Issues Upon Entering the Argentine Market 
+11. Upon entering the Argentine passenger airline market LAN immediately faced 
+several major issues impacting its viability and began losing money.  First, it needed to meet 
+demands from labor unions representing the employees acquired from LAFSA and Southern 
+Winds.  Second, LAN needed majority ownership of its Argentine subsidiary, and therefore had to 
+persuade the Argentine government to change its existing law on foreign ownership of domestic 
+airlines and to increase caps on airfares.  Third, LAN needed regulatory authorization to operate 
+various flight routes, both domestically and internationally, in Argentina.  Since the Argentine 
+passenger airline market was heavily regulated by the government, particularly officials within the 
+Department of Transportation who had close ties to the unions, LAN sought help from the 
+government officials with each of these issues.         
+12. In early 2006, the consultant again contacted the Vice President of Business 
+Development and offered to assist LAN in Argentina.  By this time, the consultant was a 
+government official in the Ministry of Federal Planning, Public Investment and Services, 
+Department of Transportation.  On January 31, 2005, the Secretary of Transportation appointed the 
+consultant as a Cabinet Advisor “ad-honorem.”3          
+13. LAN executives, including Cueto, knew that for LAN Argentina to become 
+profitable it would need an infusion of cash.  LAN asked Argentine government officials to 
+liberalize the laws on foreign ownership so that LAN could own a majority share of LAN 
+Argentina and sought government authorization to raise regulated airfares.  On or about August 8, 
+2006, the President of Argentina signed a Decree that enabled LAN to become a majority owner of 
+LAN Argentina and allowed LAN to raise airfares by 20%.  LAN Argentina was also awarded 
+critical additional flight routes by the Transportation Secretary.       
+            LAN Encounters Problems with the Unions in Argentina 
+14.  As part of the deal that LAN reached with the Argentine government in March 
+2005, LAN was required to hire between six and eight hundred employees from the defunct 
+LAFSA and Southern Winds airlines.  LAN was bound by the existing bargaining agreements 
+between LAFSA, Southern Winds and the labor unions.      
+15. There were five unions representing airline employees in Argentina.  They included 
+the grounds crew union, the Asociación del Personal Aeronáutico (APA), the pilots’ union, the 
+Asociación de Pilotos de Lineas Aereas (APLA), the mechanics’ union, Asociacion del Personal 
+Técnico Aeronáutico (APTA), the flight attendants’ union, Asociación de Tripulantes de Cabina de 
+Pasajeros de Empresas Aerocomerciales (ATCPEA), and the supervisors’ union, Unión del 
+Personal Superior y Profesional de Empresas Aerocomerciales (UPSA).   
+                                                 
+3  The consultant resigned from the position on or about July 2, 2009. 
+ 
+ 5 
+16. All of the unions were powerful and unafraid to make demands on LAN.  They 
+sought wage increases and additional benefits, and used the terms of their respective Collective 
+Bargaining Agreements (“CBAs”) as leverage.  These labor agreements contained provisions that 
+LAN believed were unfavorable, such as restrictions on the hours employees could work and their 
+work locations.     
+17. The mechanics’ union, the flight attendants’ union and the supervisors’ union each 
+had a single-function rule contained in their CBAs.  The single-function rule was a provision that 
+limited workers from performing more than one work function at a time for LAN.  The single-
+function rule was loosely interpreted and for the most part not enforced by the unions.  Had it been 
+enforced, the single-function rule would have required LAN to double its work force and would 
+have seriously imperiled LAN’s ability to continue its operations in Argentina. 
+ 
+18. Around 2006 the unions began campaigning for wage increases.  The unions  
+threatened to enforce the single-function rule unless LAN Argentina agreed to a substantial wage 
+increase.  LAN’s management, including Cueto, attempted to negotiate on the wage issues but 
+made no progress and things worsened over time.  Eventually there were work stoppages and 
+slowdowns on the part of the workforce, including strikes involving the pilots’ and the mechanics’ 
+unions. 
+ 
+Cueto Approves Improper Payments   
+ 19. Beginning in the summer of 2006, the consultant supplied LAN executives with 
+information on how to deal with specific union members and the unions in general.  Eventually, 
+the consultant offered to negotiate directly with the unions on LAN’s behalf, making it clear that 
+he would expect compensation for such negotiations, and that payments would be made to third 
+parties who had influence over the unions.  After his staff informed Cueto that the consultant was 
+well connected with the unions and could effectively negotiate an agreement with union officials, 
+Cueto approved the retention of the consultant. 
+ 20. During the summer of 2006, Cueto approved payments totaling $1,150,000 to the 
+consultant in connection with LAN’s attempts to settle disputes on wages and other work 
+conditions with the unions.  At the time, Cueto understood that it was possible the consultant 
+would pass some portion of the $1.15 million to union officials in Argentina.  Cueto approved the 
+payments to get the unions to abandon their threats to enforce the single-function rule and to get 
+them to accept a wage increase lower than the amount asked for in negotiations.  LAN and the 
+consultant agreed that LAN would make the payment to a company controlled by the consultant in 
+Argentina.  In 2006, LAN did not have a policy requiring that due diligence be performed on 
+consultants, and neither Cueto nor LAN conducted any due diligence on the consultant or any of 
+his related entities.       
+ 21. Around August 2006, Cueto’s staff informed him that the consultant had reached an 
+oral agreement to settle the wage dispute with the mechanics’ union on LAN’s behalf.  Although 
+the existing Collective Bargaining Agreement with the mechanics’ union would remain 
+unchanged, Cueto understood that the union would orally agree not to seek enforcement of the 
+single-function rule for a period of four years in exchange for a wage increase of approximately 
+ 
+ 6 
+15% of salary.  The wage increase of approximately 15% was lower than the amount originally 
+sought by the mechanics’ union. 
+ 22. Around August 2006, the flight attendants’ and supervisors’ unions both agreed to 
+accept wage increases of approximately 15% and 10% respectively of salaries.  The amounts were 
+lower than the amounts originally sought by each union. 
+Sham Contract with Consultant’s Company 
+ 23. On October 2, 2006, the consultant sent the Vice President of Business 
+Development an e-mail attaching a draft consulting contract between LAN and the consultant’s 
+company for his “consideration.”  The consultant copied the e-mail and draft contract to a chief 
+advisor to the Transportation Secretary who oversaw airline and union issues.  The following day, 
+the Vice President of Business Development forwarded the draft contract to Cueto for his review.  
+The contract described the $1,150,000 to be paid to the consultant’s company in three installments, 
+and falsely stated that the consultant would undertake a study of existing air routes in Argentina 
+and the regional market as a basis for the payment.  The draft contract was never signed by the 
+parties.  Cueto knew that the consultant would not perform a study.  Cueto did not inform anyone 
+at LAN that the contract falsely stated the purpose of the payments to the consultant. 
+ 24. To further disguise the sham arrangement, an unrelated LAN subsidiary, AAI 
+incorporated in Delaware, was used to make the improper payments to the consultant’s company.  
+Around October 20, 2006, the consultant’s company sent a backdated invoice for $300,000 to AAI, 
+the LAN subsidiary that was designated by LAN to make the improper payments to the 
+consultant’s company.  The invoice indicated that the amount due was for “consulting services 
+provided by and payable…under contract signed by both parties.”  It also contained wire transfer 
+instructions to a brokerage account in Virginia owned by the consultant and his wife.  On October 
+20, 2006, LAN wired the $300,000 to the brokerage account.  Additional invoices for $300,000 on 
+November 21, 2006 and $550,000 on January 17, 2007 were sent to AAI and paid to the same 
+brokerage account.  All of the improperly booked payments to the consultant’s company were 
+intentionally mis-recorded as payments to “other debtors” on AAI’s books and records. 
+ 25. In November 2007, the Vice President of Business Development received an 
+invoice from the consultant for $58,000 payable to an account in Spain in the name of another 
+company, which was owned by the consultant’s son and wife and was headquartered in Costa 
+Rica.  The invoice was also directed for payment by LAN’s AAI subsidiary.  This payment was in 
+addition to the $1.15 million already authorized by Cueto and paid to the consultant.  Cueto 
+received a copy of the invoice via e-mail from the Vice President of Business Development.  Like 
+the consultant’s draft contract, the invoice indicated that it was for payment for a study of existing 
+air routes in Argentina and the regional market, which Cueto knew was inaccurate.  In November 
+2007, LAN paid the invoice. 
+ 26. Cueto approved the consultant’s compensation and instructed the CFO of LAN to 
+pay the consultant’s invoices.  The invoices contained false references to consulting services that 
+were never rendered by the consultant.  At the time he approved the payments to the consultant, 
+Cueto knew that the unsigned consulting contract with the consultant’s company was a sham 
+ 
+ 7 
+contract.  Cueto did not inform the CFO or LAN’s legal department that $1,150,000 in payments 
+was being made to the consultant’s company pursuant to a fake contract for improper purposes.  
+Further, while copied on an email attaching the $58,000 invoice for payment to the company 
+owned by consultant’s son and wife, Cueto took no action to stop the payment, which he knew 
+contained false references to services never rendered. 
+   Cueto Caused LAN’s Inaccurate Books and Records 
+ 
+27. Cueto authorized improper payments that were not accurately and fairly reflected 
+on LAN’s books and records.  Cueto directed subordinates to make the improper payments.  The 
+improper payments authorized by Cueto were improperly described in the books and records as 
+“other debtors” costs in a LAN subsidiary that had no role in LAN’s argentine business.   
+ 
+Cueto Caused LAN’s Internal Accounting Control Failure 
+ 
+28. As President and Chief Operating Officer of LAN, Cueto, along with others, was 
+responsible for devising and maintaining compliance with internal accounting controls at LAN.  
+Cueto did not follow the company’s existing internal accounting controls when he authorized the 
+payment of $1,150,000 to the consultant’s company and failed to prevent the payment of $58,000 
+to another company owned by consultant’s son and wife.  Cueto received and approved the sham 
+contract for the consultant’s company to provide consulting services to LAN, knowing that such 
+services would never be provided.  Cueto also authorized payment of invoices from the 
+consultant’s company that contained a description of services listed on the invoices that was false.      
+ 
+Legal Standards and Violations 
+29. Under Section 21C(a) of the Exchange Act, the Commission may impose a cease-
+and-desist order upon any person who is violating, has violated, or is about to violate any provision 
+of the Exchange Act or any rule or regulation thereunder, and upon any other person that is, was, 
+or would be a cause of the violation, due to an act of omission the person knew or should have 
+known would contribute to such violation. 
+30. As a result of the conduct described above, Cueto caused violations of Section 
+13(b)(2)(A) of the Exchange Act by LAN, which requires issuers to make and keep books, records, 
+and accounts which, in reasonable detail, accurately and fairly reflect their transactions and 
+dispositions of the assets of the issuer.  
+ 
+ 31. In addition, as a result of the conduct described above, Cueto caused violations of 
+Section 13(b)(2)(B) of the Exchange Act by LAN, 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 
+ 
+ 8 
+is compared with the existing assets at reasonable intervals and appropriate action is taken with 
+respect to any differences.  Cueto also violated Section 13(b)(5) of the Exchange Act, which states 
+that no person shall knowingly circumvent or knowingly fail to implement a system of internal 
+accounting controls or knowingly falsify any book, record or account.  Cueto also violated Rule 
+13b2-1, which states that no person shall, directly or indirectly, falsify or cause to be falsified, any 
+book, record, or account subject to section 13(b)(2)(A) of the Exchange Act. 
+  
+Remedial Actions and Undertakings 
+ 
+ 32. As the CEO of LAN, which is now a division of LATAM, Cueto is subject to 
+LATAM’s enhanced compliance structure and internal accounting controls.  Cueto is required to 
+certify compliance with LATAM’s new Code of Conduct that was adopted in 2013, as well as 
+other internal corporate policies, including an Anti-Corruption Guide, a Gifts, Travel, Hospitality 
+and Entertainment Policy, an Escalation Policy, and Procurement and Payment policies.   
+ 
+ 33. Respondent has attended the Corporate Governance Training provided by the 
+LATAM Chief Compliance Officer  and has provided a certification confirming acknowledgement 
+of the Code of Conduct, the relevant applicable regulations, as well as the Company policies.  
+Respondent has also executed an amendment to his employment agreement whereby Respondent 
+acknowledges having been informed regarding the LATAM Manual for the Prevention of 
+Corruption, among other matters, and his responsibilities to perform his duties with the highest 
+ethical standards, in compliance with all Company Policies and Procedures.  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. 
+ 
+ 34. Respondent also undertakes to attend all anti-corruption training sessions required 
+for senior executives at LAN.  These sessions will include, but are not limited to, both live and 
+online anti-corruption trainings to be completed on at least an annual basis and according to LAN’s 
+Compliance Department’s training schedule.  These sessions will include, in addition to anti-
+corruption laws and regulations, such as the FCPA, training on anti-trust laws, the Company’s 
+Code of Conduct and all other applicable policies that each LAN employee must follow.  After the 
+conclusion of each session Cueto will sign the appropriate documentation that acknowledges his 
+attendance and understanding of the topics presented.  Should LAN modify the schedule of such 
+ 
+ 9 
+training sessions for any reason, Cueto will, so long as he is a senior executive of LAN, attend a 
+comparable anti-corruption session on an annual basis and complete appropriate documentation 
+attesting to his attendance and the session’s contents.  The Respondent agrees to serve by hand 
+delivery or by next-day mail all written notices and correspondence required by or related to this 
+Agreement to Kara Novaco Brockmeyer, FCPA Unit Chief, Division of Enforcement, U.S. 
+Securities and Exchange Commission, 100 F Street, N.E., Mail Stop 5631, Washington, D.C. 
+20549, unless otherwise directed in writing by the staff of the Division. 
+ 
+ 35. 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 Ignacio Cueto Plaza’s Offer. 
+ 
+ Accordingly, it is hereby ORDERED that: 
+ 
+ A. Pursuant to Section 21C of the Exchange Act, Respondent Ignacio Cueto Plaza 
+cease and desist from committing or causing any violations and any future violations of Sections 
+13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A), 
+78m(b)(2)(B) and 78m(b)(5)] 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 $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) 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 
+Ignacio Cueto Plaza 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 

raw/aaer/2016/AAER-3739.txt

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+ 
+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77058 / February 4, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3739 / February 4, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17101 
+ 
+ 
+In the Matter of 
+ 
+SciClone Pharmaceuticals, 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 and in the 
+public interest that public administrative and cease-and-desist proceedings be, and hereby are, 
+instituted pursuant to 21C of the Securities Exchange Act of 1934 (“Exchange Act”) against 
+SciClone Pharmaceuticals, Inc. (“SciClone” or “Respondent”). 
+ 
+II. 
+ 
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
+of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 
+purpose of these proceedings and any other proceedings brought by or on behalf of the 
+Commission, or to which the Commission is a party, and without admitting or denying the findings 
+herein, except as to the Commission’s jurisdiction over it and the subject matter of these 
+proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-
+and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making 
+Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 2 
+III. 
+ 
+ On the basis of this Order and Respondent’s Offer, the Commission finds1 that: 
+ 
+Summary 
+  
+1. These proceedings arise out of violations of the anti-bribery, books and records and 
+internal accounting controls provisions of Foreign Corrupt Practices Act of 1977 (the “FCPA”) [15 
+U.S.C. § 78dd] by SciClone concerning its pharmaceutical operations in China. 
+ 
+2. From at least 2007 to 2012, employees of SciClone subsidiaries, who acted as agents 
+of SciClone in conducting business in China, gave money, gifts and other things of value to foreign 
+officials, including healthcare professionals (“HCPs”) who were employed by state-owned hospitals 
+in China, in order to obtain sales of SciClone pharmaceutical products.  Various means were 
+employed, and these schemes were known to and condoned by various managers within 
+SciClone’s China-based corporate structure.  The related transactions were falsely recorded in 
+SciClone’s books and records as legitimate business expenses, such as sponsorships, travel and 
+entertainment, conferences, honoraria, and promotion expenses.  During this period, SciClone also 
+failed to devise and maintain a sufficient system of internal accounting controls and lacked an 
+effective anti-corruption compliance program. 
+ 
+Respondent 
+ 
+ 3. SciClone Pharmaceuticals, Inc. (“SciClone”) is a pharmaceutical company 
+organized under the laws of Delaware, with headquarters in Foster City, California.  SciClone 
+issued and maintains a class of publicly traded securities registered pursuant to Section 12(b) of the 
+Securities Exchange Act of 1934, which are traded on the NASDAQ.  SciClone’s products are 
+primarily marketed and sold in China.   
+ 
+Other Relevant Entities 
+ 
+4. SciClone Pharmaceuticals International Ltd. (“SPIL”) is a wholly-owned 
+subsidiary of SciClone that is incorporated in the Cayman Islands with an affiliate in Hong Kong.  
+SciClone operates internationally primarily through subsidiaries, including SPIL and SPIL’s 
+wholly-owned subsidiaries that sell and promote SciClone’s products in China.  SciClone directs 
+the relevant operations of SPIL and its subsidiaries and oversees SPIL’s operations through various 
+means including through the appointment of directors and officers of SPIL, review and approval of 
+its annual budget, business and financial goals, and oversight of its legal, audit, and compliance  
+functions.  SciClone also reviews and approves annual marketing and promotion budgets of SPIL 
+and its subsidiaries.  During relevant periods, some SciClone officers also served as officers and/or 
+directors of SPIL, traveled frequently to China to participate in the management of SPIL, and were 
+                                                 
+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 
+responsible for negotiating its contracts with its Chinese distributors.  SPIL’s books and records are 
+consolidated by SciClone and reported in its financial statements. 
+ 
+Facts 
+ 
+5. Although SciClone has local distributor relationships in China, its sales and 
+marketing activities there are conducted through SPIL.  Sales representatives in China regularly 
+reported to senior management of SPIL on their efforts to increase sales.  In these reports, sales 
+representatives openly referred to instances in which they provided weekend trips, vacations, 
+gifts, expensive meals, foreign language classes, and entertainment to HCPs in order to obtain an 
+increase in prescriptions from those HCPs.  As described by one sales manager, this was “luring 
+them with the promise of profit.” 
+ 
+  6. Some sales representatives referred to those HCPs with the greatest impact on 
+their sales volume as VIP clients, and provided details on their volume of prescriptions when 
+reporting to SPIL.  This practice was known and encouraged by certain former SPIL managers at 
+the time SPIL and SciClone had overlapping officers and/or directors.  These reports included 
+such things as: 
+ 
+ In August 2005, numerous surgical VIP clients including several hospital presidents 
+attended the annual Qingdao Beer Festival consisting of golf in the morning and 
+beer-drinking in the evening.  In later years, SPIL continued to sponsor VIPs to the 
+annual festival.   
+ 
+ In February 2007, VIP clients were provided with vacations to Anji, China. 
+ 
+ In November 2007, a sales representative recounted the experience of recruiting a 
+VIP client by paying for family vacations and regular family dinners through an 
+employee expense account.  The sales representative attributed a nearly four-fold 
+sales increase to that VIP as a result.   
+ 
+7. In 2007, SciClone submitted a license application to the State Food and Drug 
+Administration for a new medical device product and had a renewal pending for its largest product.  
+SciClone hired a well-connected regulatory affairs specialist (“Specialist”) to facilitate that 
+licensing.  
+ 
+8. The Specialist arranged trips for two foreign officials to attend an academic 
+conference in Greece at SciClone’s expense.  The conference was solely related to the new medical 
+device.  One of the foreign officials had oversight over new product approvals, and the other 
+foreign official had oversight over renewals for existing licensed products.  At the time the trip was 
+arranged, both SciClone’s renewal application and its application for a new license were pending.     
+ 
+9. As the foreign officials were unable to obtain travel visas in time to attend the 
+conference in Greece, the Specialist instead provided them at least $8,600 in lavish gifts.  The 
+ 4 
+Specialist submitted two expense reimbursements for the gifts, the first of which was approved by 
+the senior vice president of SPIL.     
+ 
+10. After learning of the gifts, SciClone terminated the Specialist and conducted an 
+internal investigation related to the Specialist’s conduct and practices in China.  The review did not 
+look more broadly at sales and marketing practices in China.  No further action or remedial 
+measures were taken by SciClone or SPIL after the conclusion of the internal investigation in 2008.   
+ 
+11. Local Chinese travel companies were routinely hired to provide services (such as 
+arranging transportation, accommodations, and meals for HCPs) in connection with what were 
+ostensibly legitimate conferences, seminars, and other events.  In addition to a lack of due 
+diligence for these third party vendors, prior to 2012, there was a lack of controls over the events 
+to ensure they had an appropriate business purpose and that the events actually occurred.  Many 
+events did not include a legitimate educational purpose or the educational activities were 
+minimal in comparison to the sightseeing or recreational activities.  For example: 
+   
+ Between at least 2008 and 2010, SciClone sponsored dozens of Chinese HCPs to 
+attend liver and oncology conferences in the United States.  While a portion of the 
+travel was devoted to educational purposes, it also consisted of significant 
+sightseeing that involved, for example, travel to Las Vegas and Los Angeles with 
+tours of the Grand Canyon or Disneyland. 
+ 
+ In April 2010, SPIL sponsored Chinese HCPs to attend a seminar in Japan 
+regarding Zadaxin, its principle product.  While a portion of the meeting appeared 
+to involve half a day of educational activities, the remaining six days involved 
+sightseeing and tourist locations such as Mt. Fuji.   
+ 
+ In March 2010, SPIL held its annual sales meeting in China on the island of 
+Hainan, a resort destination.  The sales meeting was attended by the sales 
+representatives and senior management from SPIL.  The weekend before the sales 
+meeting, SPIL hosted VIP clients to a weekend stay on Hainan.  There was no 
+educational component to the VIP clients’ stay. 
+ 
+12. As part of its remedial efforts, SciClone conducted a detailed, comprehensive 
+internal review of promotion expenses of employees from 2011 to early 2013.  This review 
+found high exception rates indicating violations of corporate policy that ranged from fake fapiao, 
+inconsistent amounts or dates with fapiao, excessive gift or meal amounts, unverified events, 
+doctored honoraria agreements, and duplicative meetings.  A portion of the funds generated 
+through the reimbursements were used as part of the sales practices described above that 
+continued through at least 2012. 
+ 
+ 
+ 
+ 
+ 
+ 5 
+Legal Standards and Violations 
+13. Under Section 21C(a) of the Exchange Act, the Commission may impose a cease-
+and-desist order upon any person who is violating, has violated, or is about to violate any 
+provision of the Exchange Act or any 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 
+ 
+14. Under Section 30A(g) of the Exchange Act it shall also be unlawful for any issuer 
+organized under the laws of the United States, or a State, territory, possession, or commonwealth 
+of the United States or a political subdivision thereof and which has a class of securities registered 
+pursuant to section 78l of this title or which is required to file reports under section 78o(d)) of this 
+title, or for any United States person that is an officer, director, employee, or agent of such issuer 
+or a stockholder thereof acting on behalf of such issuer, to corruptly do any act outside the United 
+States in furtherance of an offer, payment, promise to pay, or authorization of the payment of any 
+money, or offer, gift, promise to give, or authorization of the giving of anything of value to any of 
+the persons or entities set forth in paragraphs (1), (2), and (3) of this subsection (a) of this section 
+for the purposes set forth therein, irrespective of whether such issuer or such officer, director, 
+employee, agent, or stockholder makes use of the mails or any means or instrumentality of 
+interstate commerce in furtherance of such offer, gift, payment, promise, or authorization.  [15 
+U.S.C. § 78dd-1]. 
+ 
+15. 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)]. 
+ 
+16. 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)]. 
+ 
+17. As described above, SciClone through SPIL violated Section 30A(g) by providing 
+things of value to foreign officials, including healthcare professionals (“HCPs”) who were 
+employed by state-owned hospitals in China, in order to obtain sales of SciClone pharmaceutical 
+products.  SciClone violated 13(b)(2)(A) of the Exchange Act by improperly recording the 
+payments to health care providers as sales, marketing, and promotion expenses.  The false entries 
+were initially recorded by SPIL which were then consolidated and reported by SciClone in its 
+consolidated financial statements.  SciClone violated Section 13(b)(2)(B) by failing to devise and 
+ 6 
+maintain a sufficient system of internal accounting controls to detect and prevent the making of 
+improper payments to foreign officials.  
+ 
+SciClone’s Remedial Efforts 
+18. SciClone has taken steps to improve its internal accounting controls and to create 
+a dedicated compliance function.  These include the following:   (1) hiring a compliance officer 
+for its China operations; (2) undertaking an extensive review of the policies and procedures 
+surrounding employee travel and entertainment reimbursements; (3) substantially reducing the 
+number of suppliers providing third-party travel and event planning services; (4) improving its 
+policies and procedures around third-party due diligence and payments; (5) incorporating anti-
+corruption provisions in its third-party contracts; (6) providing anti-corruption training to its 
+third-party travel and event planning vendors; (7) disciplining employees (and their managers) 
+who violate SciClone’s policies; and (8) creating an internal audit department and compliance 
+department. 
+Undertakings 
+ 
+ 19. Respondent has undertaken to: 
+ 
+1. Report to the Commission staff periodically, at no less than nine-month 
+intervals during a three-year term, the status of its remediation and 
+implementation of compliance measures.  During this three-year period, 
+should Respondent discover credible evidence, not already reported to 
+the Commission staff, that questionable or corrupt payments or 
+questionable or corrupt transfers of value may have been offered, 
+promised, paid, or authorized by Respondent, or any entity or person 
+acting on behalf of Respondent, or that related false books and records 
+have been maintained, Respondent shall promptly report such conduct to 
+the Commission staff.  During this three-year period, Respondent shall:  
+(1) conduct an initial review and submit an initial report, and (2) conduct 
+and prepare at least three follow-up reviews and reports, as described 
+below: 
+ 
+a. Respondent shall submit to the Commission staff a written report 
+within 180 calendar days of the entry of this Order setting forth a 
+complete description of its Foreign Corrupt Practices Act 
+(“FCPA”) and anti-corruption related remediation efforts to date, 
+its proposals reasonably designed to improve the policies and 
+procedures of Respondent for ensuring compliance with the FCPA 
+and other applicable anticorruption laws, and the parameters of the 
+subsequent reviews (the “Initial Report”).  The Initial Report shall 
+be transmitted to Charles Cain, Deputy Unit Chief, FCPA Unit, 
+Division of Enforcement, United States Securities and Exchange 
+Commission, 100 F St NE, Washington, DC 20549.  Respondent 
+ 7 
+may extend the time period for issuance of the Initial Report with 
+prior written approval of the Commission staff.   
+b. Respondent shall undertake at least three follow-up reviews, 
+incorporating any comments provided by the Commission staff on 
+the previous report, to further monitor and assess whether the 
+policies and procedures of Respondent are reasonably designed to 
+detect and prevent violations of the FCPA and other applicable 
+anti-corruption laws (the “Follow-up Reports”). 
+c. The first Follow-up Report shall be completed by no later than 270 
+days after the Initial Report.  The second Follow-up Report shall 
+be completed by no later than 540 days after the completion of the 
+Initial Report.  The third Follow-up Report shall be completed by 
+no later than 810 days after the completion of the Initial Report.  
+Respondent may extend the time period for issuance of the Follow-
+up Reports with prior written approval of the Commission staff. 
+d. The periodic reviews and reports submitted by Respondent will 
+likely include proprietary, financial, confidential, and competitive 
+business information.  Public disclosure of the reports could 
+discourage cooperation, impede pending or potential government 
+investigations and thus undermine the objectives of the reporting 
+requirement. For these reasons, among others, the reports and the 
+contents thereof are intended to remain and shall remain non-
+public, except (a) pursuant to court order, (b) as agreed by the 
+parties in writing, (c) to the extent that the Commission staff 
+determines in its sole discretion that disclosure would be in 
+furtherance of the Commission’s discharge of its duties and 
+responsibilities, or (d) is otherwise required by law. 
+2. Certify, in writing, compliance with the undertaking(s) set forth above.  
+The certification shall identify the undertaking(s), provide written 
+evidence of compliance in the form of a narrative, and be supported by 
+exhibits sufficient to demonstrate compliance.  The Commission staff 
+may make reasonable requests for further evidence of compliance, and 
+Respondent agrees to provide such evidence.  The certification and 
+supporting material shall be submitted to Charles Cain, 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 SciClone’s Offer. 
+ 
+ 8 
+ Accordingly, pursuant to 21C of the Exchange Act, it is hereby ORDERED that: 
+ 
+ A. Respondent SciClone 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 14 days of the entry of this Order, pay disgorgement, of 
+$9,426,000 and prejudgment interest of $900,000 to the Securities and Exchange Commission.  If 
+timely payment of disgorgement or prejudgment interest is not made, additional interest shall 
+accrue pursuant to SEC Rule of Practice 600.  Respondent shall, within 14 days of the entry of this 
+Order, pay a civil money penalty in the amount of $2,500,000 to the Securities and Exchange 
+Commission to transfer to the general fund of the United States Treasury, subject to Exchange Act 
+Section 21F(g)(3).  If timely payment of 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 
+SciClone as a Respondent in these proceedings, and the file number of these proceedings; a copy 
+of the cover letter and check or money order must be sent to Charles Cain, Deputy Unit Chief, 
+FCPA Unit, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, 
+Washington, DC 20549. 
+ 
+ C. Respondent shall comply with the undertakings enumerated in Section III above. 
+ 
+ 
+ By the Commission. 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 

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+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES ACT OF 1933 
+Release No. 10036 / February 5, 2016 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No.  77073 / February 5, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3740 / February 5, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17104 
+ 
+ 
+In the Matter of 
+ 
+BioElectronics Corp., 
+IBEX, LLC,  
+St. John’s, LLC, 
+Andrew J. Whelan 
+Kelly A. Whelan, CPA, and 
+            Robert P. Bedwell, CPA, 
+ 
+Respondents. 
+ 
+ORDER INSTITUTING 
+ADMINISTRATIVE AND CEASE-
+AND-DESIST PROCEEDINGS 
+PURSUANT TO SECTION 8A OF THE 
+SECURITIES ACT OF 1933, 
+SECTIONS 15(b), 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 
+and in the public interest that public administrative and cease-and-desist proceedings be, 
+and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 (“Securities 
+Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”) against 
+BioElectronics Corp., IBEX, LLC, St. John’s, LLC, Andrew J. Whelan and Kelly A. 
+Whelan, CPA.  The Commission further deems it appropriate and in the public interest that 
+administrative and cease and cease-and-desist proceedings be, and hereby are, instituted 
+pursuant to Section 15(b) of the Exchange Act against Andrew J. Whelan and Kelly A. 
+Whelan, CPA.  The Commission also deems it appropriate that public administrative and 
+cease-and-desist proceedings be, and hereby are, instituted against Robert P. Bedwell, CPA 
+pursuant to Sections 4C1 of the Exchange Act and Rule 102(e) of the Commission’s Rules 
+of Practice.  
+                                                 
+1  Section 4C provides, in relevant part, that:  
+ 
+ 2 
+II. 
+ 
+After an investigation, the Division of Enforcement alleges that: 
+ 
+1. This matter involves inaccurate public disclosure and the unlawful 
+distribution of securities by BioElectronics Corp. (“BIEL”) and related persons and entities.  
+On March 31, 2010, BIEL filed with the Commission a Form 10-K for the period ending 
+December 31, 2009, falsely recognizing revenue from two “bill and hold” transactions.  
+These transactions overstated BIEL’s revenue by $366,000, or 47%.  Additionally, from at 
+least August 2009 until at least November 2014 (“the relevant period”), BIEL and 
+respondents IBEX, LLC, St. John’s, LLC, Andrew J. Whelan and Kelly A. Whelan 
+engaged in an illegal distribution of purportedly unrestricted securities involving the sale of 
+hundreds of millions of BIEL shares.  Affiliates, IBEX, LLC and St. John’s, LLC, sold 
+purportedly unrestricted shares in unregistered transactions at a discount to then-current 
+market prices.  Andrew J. Whelan, President, CEO and the principal financial officer of 
+BIEL, and Kelly A. Whelan, his daughter and the President of IBEX, LLC, orchestrated the 
+illegal distribution.  Approximately half of the proceeds of these sales were then “loaned” 
+to BIEL and the other half was retained by the entities.  The offerings were not registered 
+with the Commission.  Robert P. Bedwell’s failures to detect BIEL’s improper accounting, 
+as the auditor responsible for auditing the financial statements included in BIEL’s Form 10-
+K, constitutes improper professional conduct.  
+ 
+RESPONDENTS 
+  
+ 2. Respondent BioElectronics Corp. is a Maryland corporation with a sole 
+location employing approximately twelve people in Frederick, Maryland.  The company is 
+engaged in the business of making inexpensive, drug-free, anti-inflammatory medical 
+devices and patches which use electromagnetic energy.  In 2007, BioElectronics entered 
+into a settlement with the State of Maryland related to selling unregistered shares, agreeing 
+to a permanent cease and desist order and the payment of a $2,500 penalty.  It has a class of 
+equity securities, previously registered with the Commission pursuant to Exchange Act 
+Section 12(g),2 with approximately 4 billion shares issued as of November 2013.  On April 
+18, 2011, BIEL voluntarily withdrew its registration.  BIEL shares currently trade on OTC 
+Link, operated by OTC Markets Group, Inc.  During the relevant period, BIEL shares were 
+                                                                                                                                                 
+ 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 BioElectronics’ Section 12 reporting obligation arose as a result of its filing a Form 8A-12g on 
+February 12, 2006 in conjunction with a registration statement on Form SB-2.  The Form 8A-12g 
+went effective by operation of law under Section 12(g) 60 days after filing, even though the Form 
+SB-2 was subsequently withdrawn. 
+ 3 
+a penny stock as that term is defined in Section 3(a)(51) of the Exchange Act and Rule 3a-
+51-1 thereunder.  15 U.S.C. § 78c(a)(51) and 17 C.F.R. § 240.3a-51-1.  
+ 
+ 3. Respondent IBEX, LLC (“IBEX”) is a Virginia Limited Liability Company 
+formed in 2005.  It has an office in Ashburn, Virginia and is managed by Kelly A. Whelan, 
+who is its sole employee and who has sole ownership of IBEX.  IBEX made millions of 
+dollars in loans to BIEL.  During the relevant period, IBEX participated in offerings of 
+BIEL stock.   
+ 
+ 4. Respondent St. John’s, LLC (“St. John’s”) is a Virginia limited liability 
+company formed in 2010.  It has never had a class of securities registered with the 
+Commission.  Patricia A. Whelan, wife of Andrew J. Whelan, owns 99% of St. John’s, and 
+Kelly A. Whelan, daughter of Patricia A. Whelan and Andrew J. Whelan, owns 1%.  St. 
+John’s has provided funding for BIEL.  Andrew J. Whelan’s salary at BIEL has been paid 
+to St. John’s.  During the relevant period, St. John’s participated in offerings of BIEL stock. 
+ 
+ 5.  Respondent Andrew J. Whelan (“Whelan”), age 74, is a resident of 
+Frederick, Maryland.  Whelan is now, and for all relevant periods has been, BIEL’s 
+President, CEO, principal financial officer and member of the board of directors.  He is also 
+BIEL’s founder.  During the relevant period, Whelan participated in offerings of BIEL 
+stock. 
+ 
+ 6.  Respondent Kelly A. Whelan, CPA (“Kelly Whelan”), age 48, is a resident 
+of Ashburn, Virginia.  Kelly Whelan is the daughter of Whelan.  She is licensed as a CPA 
+in the state of Maryland.  During the relevant period, Kelly Whelan participated in 
+offerings of BIEL stock.   
+ 
+ 7. Respondent Robert P. Bedwell, CPA (“Bedwell”), age 57, is a resident of 
+Coral Springs, Florida.  Bedwell is currently a partner at an accounting firm in Florida.  He 
+was the audit engagement partner for BIEL’s 2009 10-K.    
+   
+OTHER RELEVANT ENTITIES 
+ 
+ 8. eMarkets Group, LLC (“eMarkets”) is a Nevada registered limited liability 
+company owned by Whelan’s sister, who is its sole employee and shareholder.  It has 
+never had a class of securities registered with the Commission.  It acts as a distributor of 
+BIEL’s veterinary products and is a related entity.   
+ 
+9. YesDTC Holdings, Inc. (“YesDTC”) is a Nevada corporation 
+headquartered in San Francisco, California.  YesDTC purports to specialize in direct-to-
+consumer marketing (e.g., infomercials, advertisements).  YesDTC was a reporting 
+company with the Commission pursuant to Section 12(g) of the Exchange Act.  YesDTC 
+ceased all business operations on February 23, 2012.  On December 15, 2014, YesDTC’s 
+securities registration with the Commission was revoked under Section 12(j) of the 
+Exchange Act. 
+ 
+ 
+ 4 
+FACTS 
+ 
+The Distribution of Unrestricted Shares in Unregistered Transactions 
+ 
+10. From at least August 2009 to at least November 2014, BioElectronics, 
+through IBEX and St. John’s, and the efforts of Whelan and Kelly Whelan, distributed 
+hundreds of millions of unrestricted shares in a series of unregistered transactions (“the 
+offerings”).  BIEL received proceeds of several million dollars from the offerings.   
+ 
+11. During the relevant period, respondents BIEL, IBEX, St. John’s, Whelan 
+and Kelly Whelan effected the offerings as follows: when BIEL needed funds to continue 
+its operations, IBEX sold hundreds of millions of unrestricted BIEL shares in dozens of 
+unregistered transactions, at the request of Whelan, directly to third party purchasers at a 
+discount to then current market prices.  IBEX retained a percentage of the money obtained 
+from the sales but funneled the rest to BIEL, and, in return, BIEL provided both a 
+“convertible loan” to IBEX and a new grant of unrestricted shares which, in effect, replaced 
+the shares IBEX sold.  When each of these “loans” came due, after one or two years’ time, 
+BIEL “renegotiated” them by providing IBEX with additional purportedly unrestricted 
+shares in return for extending the loan’s due date.  BIEL never repaid any of the “loans” in 
+cash.  These transactions were not registered with the Commission.         
+ 
+12. Starting in mid-2010 and continuing into at least early 2012, BIEL used 
+St. John’s to provide financing using the same type of transaction.  BIEL raised over a 
+million dollars through these offerings in approximately 17 transactions.  These 
+transactions were not registered with the Commission.   
+ 
+13. During the relevant period, Whelan was the President, CEO and principal 
+financial officer of BIEL and directed its daily operations.  Whelan communicated 
+BIEL’s financing needs to IBEX and St. John’s.  And, as BIEL’s President and CEO, he 
+ordered the issuance of BIEL shares to IBEX and St. John’s through BIEL’s transfer 
+agent.  He obtained the approval of the transactions from BIEL’s board of directors.  
+Whelan also met with third party purchasers in order to induce their purchase of BIEL 
+shares through IBEX and St. John’s.     
+ 
+14. During the relevant period, Kelly Whelan was the sole owner, sole 
+employee and managing member of IBEX.  She offered and sold unregistered shares 
+directly to the third party purchasers.  She contacted these third parties, negotiated the 
+terms with them and made the sale.  And she, through her control of IBEX, funneled the 
+proceeds back to BIEL.      
+ 
+15. During the relevant period, IBEX, and St. John’s were affiliates of BIEL as 
+each was under the common control of Whelan, or, at the least, the common control of 
+Whelan and Kelly Whelan.3  Among other things, Whelan determined when IBEX and St. 
+                                                 
+3 Rule 144 defines “affiliate” as “a person that directly, or indirectly through one or more intermediaries, 
+controls, or is controlled by, or is under common control with, such issuer.” 17 C.F.R. § 230.144(a)(1).  
+Although the rule does not define “control,” courts borrow the definition from Rule 405, which defines it as 
+ 5 
+John’s sold shares to the public.  In addition, IBEX and St. John’s paid BIEL’s business 
+expenses, including paying BIEL’s contractors for services rendered and paying Whelan’s 
+travel expenses incurred while performing BIEL related work.  
+ 
+16. IBEX and St. John’s offered and sold shares for BIEL or, in the alternative, 
+acquired securities from BIEL with a view to distributing the securities.  Each sold BIEL 
+shares, at Whelan’s request, for that purpose and Whelan replaced shares sold by IBEX and 
+St. John’s so that the process could be repeated.      
+ 
+17. Accurate, current information about BIEL was not available to the public 
+during the relevant period.  BIEL was delinquent for large periods of that time: it made 
+none of the required filings under Section 12(g) of the Exchange Act prior to the March 
+31, 2010 filing of the 2009 Form 10-K, and while BIEL filed unaudited quarterly reports 
+for the second and third quarters of 2010, it was again delinquent from the fourth quarter 
+of 2010 until it withdrew its registration in April 2011.  Importantly, the 2009 10-K 
+materially overstated BIEL’s revenue, as detailed below.      
+ 
+18. During the relevant period, BIEL did not register any securities offerings 
+with the Commission.   
+ 
+BIEL’s Improper Revenue Recognition 
+ 
+19. On a Form 10-K filed with the Commission on March 31, 2010 (“2009 10-
+K”), BIEL improperly recorded revenue from two transactions in which BIEL retained the 
+goods it claimed to have sold.  These transactions, which totaled $366,000, represented 
+47% of the revenue in 2009 and were material to BIEL.     
+ 
+20. BIEL disclosed an accounting policy in its 10-K filed on March 31, 2010 
+that it “recognize[d] revenue when evidence of an arrangement exists, such as the 
+presence of an executed sales agreement, pricing is fixed and determinable, collection is 
+reasonably assured and shipment has occurred or title of the goods has been transferred to 
+our buyers.”        
+ 
+21. BIEL further disclosed its policy for bill-and-hold revenue recognition. 
+“We recognize revenue on bill and hold arrangements when the following 7 criteria have 
+been met: 1) the risk of ownership has passed to the buyer; 2) the buyer has made a fixed 
+commitment to purchase the goods, preferably in writing; 3) the buyer, and not the seller, 
+has requested that the transaction is on a bill and hold basis; 4) there is a fixed schedule 
+for delivery of the goods, indicating a delivery date that is reasonable and consistent with 
+the buyer’s business purpose; 5) the buyer has not retained any specific performance 
+obligations such that the earnings process is not complete; 6) the ordered goods are 
+segregated from the seller’s inventory and is not being used to fill other orders; and 7) the 
+product must be complete and ready for shipment.  In addition, payment must be received 
+                                                                                                                                                 
+“the possession, direct or indirect, of the power to direct or cause the direction of the management and 
+policies of a person, whether through the ownership of voting securities, by contract, or otherwise.” 17 
+C.F.R. § 230.405. 
+ 6 
+and/or fixed payment dates be agreed with the customer pursuant to which the risk of 
+collection is reduced to a minimal level.”   
+ 
+22. Contrary to its disclosures and Generally Accepted Accounting Principles 
+(“GAAP”), BIEL improperly recognized revenue on two bill and hold transactions.  As 
+BIEL’s President, CEO and principal financial officer, Whelan controlled BIEL and, 
+specifically, its financial statements.   
+ 
+23. BIEL made the first of the two bill and hold transactions pursuant to a 
+distribution agreement between BIEL and YesDTC.  BIEL entered into a distribution 
+agreement with YesDTC on December 31, 2009, the final day of BIEL’s fiscal year.  This 
+transaction failed to meet the criteria for recognizing revenue for multiple reasons.  First, at 
+the time the agreement was entered into and revenue was recognized by BIEL, the sale was 
+not final and no fixed commitment to purchase the goods existed because YesDTC had a 
+contractual right to cancel the distribution agreement for a period of six months.  Second, 
+YesDTC never met the contractual requirement that it obtain regulatory approval to sell 
+BIEL’s products and, resultantly, BIEL would not turn over its product to YesDTC without 
+that approval.  Third, the agreement contained no fixed schedule for delivery of the goods.  
+Specifically, YesDTC had not agreed to take delivery of any specific quantity of product at 
+any specific date.      
+ 
+24. The second bill and hold transaction that failed to meet bill and hold 
+revenue recognition criteria involved BIEL and eMarkets, a distributor of BIEL products.  
+The agreement between BIEL and eMarkets contained no fixed schedule for delivery of the 
+goods related to this transaction, either, i.e.,  eMarkets had not agreed to take delivery of 
+any specific quantity of product at any specific time.  Also, at the time BIEL recognized 
+revenue related to this transaction, certain finishing activities called for under the 
+agreement, such as the application of adhesive strips, had not been completed.                
+ 
+25. Whelan, acting in his capacity as BIEL’s President, CEO and principal 
+financial officer, oversaw the preparation of BIEL’s financial statements.  At the time BIEL 
+prepared its 2009 10-K, the company did not have an internal accounting staff, and Whelan 
+had no accounting training or expertise.  Despite his lack of expertise, but in consultation 
+with outside accountants, Whelan provided BIEL’s auditors with information indicating 
+that both the YesDTC and the eMarkets transactions satisfied the accounting guidelines for 
+revenue recognition, despite having knowledge to the contrary.      
+ 
+ 26. Bedwell was the audit engagement partner responsible for the audit of 
+BIEL’s financial statements included in its 2009 10-K.   
+ 
+ 27.  PCAOB Auditing Standards require an auditor to exercise due professional 
+care in the performance of work.  AU § 150.02, Generally Accepted Auditing Standards, 
+states that “due professional care is to be exercised in the performance of the audit and the 
+preparation of the report.”  Furthermore, “sufficient competent evidential matter is to be 
+obtained … to afford a reasonable basis for an opinion regarding the financial statements 
+under audit.”  AU § 230.06, Due Professional Care in the Performance of Work, states: 
+ 7 
+“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.”   
+ 
+Bedwell’s Improper Professional Conduct 
+ 
+ 28. Bedwell did not make himself knowledgeable about the client through his 
+own actions or the actions of those who worked under him.  He failed to determine that 
+BIEL was a high risk audit client as was evidenced by the lack of adequate accounting 
+staff, the presence of related party transactions, and the hundreds of millions of shares 
+BIEL had issued to the public despite its size and the share price.  He further failed to 
+determine that the two bill and hold transactions themselves exhibited additional red flags 
+over and above being bill and hold transactions: the YesDTC transaction occurred on the 
+final day of the annual reporting period, the two transactions amounted to a significant 
+percentage, i.e., 47%, of BIEL’s revenue, and each was with either claimed as a related 
+party in BIEL’s 10-K, i.e, eMarkets, or a party that had other dealings with BIEL, i.e., 
+YesDTC through its president, who also provided consulting services to BIEL.  Further, he 
+failed to recognize that there was no fixed delivery schedule under either the YesDTC or 
+the eMarkets transactions, he failed to observe the segregation of inventory related to these 
+bill and hold transactions after he became aware of them, and he failed to properly evaluate 
+whether revenue recognition was met given that BIEL’s agreement with YesDTC granted 
+YesDTC a contractual right to cancel that agreement.  
+ 
+ 29. PCAOB Auditing Standards require an auditor to exercise professional 
+skepticism.  AU § 230.07, Due Professional Care in the Performance of Work, defines 
+professional skepticism as “an attitude that includes a questioning mind and a critical 
+assessment of audit evidence.”  AU § 230.09, Due Professional Care in the Performance of 
+Work, states that an “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.” 
+ 
+ 30.  Bedwell’s acceptance of the statements in the bill and hold memorandum, 
+particularly the statements concerning the fixed delivery schedules and the completed 
+nature of the goods sold, without establishing sufficient independent audit evidence, 
+demonstrates that Bedwell failed to exercise the required professional skepticism. 
+ 
+ 31. PCAOB Auditing Standards also require that an auditor obtain sufficient 
+knowledge of the audited company to competently plan and perform the audit.  AU § 
+311.06, Planning and Supervision, states: “[T]he auditor should obtain a level of 
+knowledge of the entity's business that will enable him to plan and perform his audit in 
+accordance with generally accepted auditing standards.  That level of knowledge should 
+enable him to obtain an understanding of the events, transactions, and practices that, in his 
+judgment, may have a significant effect on the financial statements.”  AU § 311.13, 
+Planning and Supervision, states: “[T]he work performed by each assistant should be 
+ 8 
+reviewed to determine whether it was adequately performed and to evaluate whether the 
+results are consistent with the conclusions to be presented in the auditor's report.” 
+ 
+ 32.  As detailed above, Bedwell failed to obtain sufficient knowledge of BIEL, 
+either directly or through his assistants, to recognize that it was a high risk client that 
+entered into high risk transactions.  His failure to obtain sufficient knowledge resulted in an 
+audit that was inadequately planned and executed.       
+ 
+ 33.  PCAOB Auditing Standards require that audit conclusions be supported by 
+competent evidence.  AU § 326.01, Evidential Matter, states 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.”    
+ 
+ 34. Examples of Bedwell’s failure to obtain sufficient competent evidence 
+include his failure to obtain evidence of a fixed delivery schedule under either bill and hold 
+transaction, his failure to obtain evidence that the inventory related to the two bill and hold 
+transactions was segregated after the transactions came to light and his failure to establish 
+evidence that the YesDTC transaction was final with a fixed commitment to purchase the 
+goods and not cancellable.    
+ 
+ 35. PCAOB Auditing Standards require related party transactions be treated 
+with heightened scrutiny.  AU § 334.07, Related Parties, states that an “auditor should 
+place emphasis on testing material transactions with parties he knows are related to the 
+reporting entity.”  Further, at AU § 334.09, Related Parties, provides specific procedures 
+that should be considered when auditing related party transactions including examining 
+“invoices, executes copies of agreements, contracts, and other pertinent documents, such as 
+receiving reports and shipping documents” and “Test for reasonableness the compilation of 
+amounts to be disclosed, or considered for disclosure, in the financial statements.” 
+ 
+ 36. Bedwell failed to properly test the eMarkets transaction, a related party 
+transaction.  Instead, he relied on the representations of management, through the bill and 
+hold memorandum, and eMarkets, the related party, through customer confirmations that a 
+fixed delivery schedule had been established, when, in fact, none had.  Bedwell also failed 
+to consider additional procedures contained in the standards to the eMarkets transaction.   
+   
+VIOLATIONS 
+ 
+37. Section 5(a) of the Securities Act prohibits any person, directly or 
+indirectly, to use the mails or other means of interstate commerce to sell a security unless 
+pursuant to an effective registration statement or an exemption from the registration 
+requirements of the Securities Act.  In addition, Section 5(c) makes it unlawful for any 
+person, directly or indirectly, to offer to sell or buy securities, through a prospectus or 
+otherwise, unless a registration statement has been filed as to such security or pursuant to 
+an exemption.     
+ 
+ 9 
+38. As a result of the conduct described above, BIEL, IBEX, and St. John’s 
+violated, and Whelan and Kelly Whelan willfully violated, Sections 5(a) and 5(c) of the 
+Securities Act.   
+ 
+39. By virtue of the conduct described above, BIEL violated Section 13(a) of 
+the Exchange Act and Rule 13a-1 thereunder, which require issuers of securities registered 
+with the Commission to file with the Commission accurate annual reports.  Whelan was a 
+cause of these violations through his actions as President, CEO and principal financial 
+officer of BIEL.   
+ 
+40. BIEL also violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange 
+Act.  It violated Section 13(b)(2)(A) by failing to make and keep books and records which 
+accurately reflected the transactions of the company.  It violated Section 13(b)(2)(B) by 
+failing to design and maintain internal accounting controls sufficient to provide reasonable 
+assurances that its revenue was not being overstated.  Whelan was a cause of these 
+violations as he knew, or should have known, his conduct or omissions would contribute to 
+BIEL’s violations.      
+ 
+41. Rule 13a-14 of the Exchange Act requires that each report filed on Form 
+10-K include certifications signed by the principal executive and principal financial officer 
+of the issuer attesting to the accuracy of the filings and adequacy of internal controls.  As 
+BIEL’s CEO, President and principal financial officer, Whelan signed certifications 
+pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 stating: (1) that BIEL’s 2009 
+10-K fairly presented, in all material respects, BIEL’s financial condition and results, (2) 
+that BIEL’s 2009 10-K was free of material misstatements and omissions, and (3) that he 
+had designed, or caused to be designed, internal controls 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.  Whelan willfully 
+violated Rule 13a-14 by signing these false certifications with knowledge that the 2009 10-
+K did not fairly present BIEL’s financial condition and results of operations in all material 
+respects.  Also, Whelan had knowledge that BIEL’s 2009 10-K was not free of untrue 
+statements of a material fact, or omitted to state a material fact necessary to make the 
+statements made, in light of the circumstances under which such statements were made, not 
+materially misleading.  And he knew, or should have known, that he had not designed, or 
+caused to be designed, internal controls over financial reporting that provided reasonable 
+assurances regarding the reliability of financial reporting and the preparation of financial 
+statements for external purposes in accordance with GAAP.      
+ 
+42.  Exchange Act Rule 13b2-1 prohibits any person from directly or indirectly 
+falsifying or causing the falsification of any book, record, or account subject to Section 
+13(b)(2)(A).  Exchange Act Rule 13b2-2 prohibits any director or officer of an issuer from 
+making or causing to be made, directly or indirectly, any materially false or misleading 
+statement to an accountant in connection with the preparation or filing of any required 
+document or report with the Commission.  Rule 13b2-2 can be violated by 
+misrepresentations or omissions.  Whelan willfully violated Rules 13b2-1 and 13b2-2 by 
+signing the false certification, participating in the misconduct, directing the preparation of 
+ 10 
+the inflated revenue statements, and/or assisting in the creation of a memorandum to 
+BIEL’s auditor that misrepresented and omitted facts relevant to the bill and hold 
+transactions.  
+ 
+43. Section 4C of the Exchange Act and Rule 102(e)(1) of the Commission’s 
+Rules of Practice provide that the Commission may censure or deny, temporarily or 
+permanently, any person the privilege of appearing or practicing before it if that person 
+engaged in unethical or improper professional conduct or willfully violated Federal 
+securities laws or the rules and regulations thereunder.   
+ 
+44. In light of the conduct described above, Bedwell engaged in improper 
+professional conduct in violation of Section 4C of the Exchange Act and Rule 102(e)(1)(ii) 
+of the Commission’s Rules of Practice. 
+ 
+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: 
+ 
+45.  Whether the allegations set forth in Section II hereof are true and, in 
+connection therewith, to afford respondents an opportunity to establish any defenses to such 
+allegations;  
+ 
+46.  What, if any, remedial action is appropriate in the public interest against 
+respondents Whelan and Kelly Whelan pursuant to Sections 15(b)(6) and 21B(a) of the 
+Exchange Act, including, but not limited to, a censure, disgorgement, a civil penalty and a 
+penny stock suspension or bar;  
+ 
+47. Whether, pursuant to Section 8A of the Securities Act, respondents BIEL, 
+IBEX, St. John’s, Whelan and Kelly Whelan should be ordered to cease-and-desist from 
+committing or causing violations of and any future violations of Sections 5(a) and 5(c) of 
+the Securities Act, whether respondents BIEL, IBEX, St. John’s, Whelan and Kelly Whelan 
+should be ordered to pay a civil penalty pursuant to Section 8A(g) of the Securities Act, and 
+whether respondents BIEL, IBEX, St. John’s, Whelan and Kelly Whelan should be ordered 
+to pay disgorgement pursuant to Section 8A(e) of the Securities Act; 
+ 
+48. Whether, pursuant to Section 21C of the Exchange Act, respondents BIEL 
+and Whelan should be ordered to cease-and-desist from committing or causing violations of 
+and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange 
+Act and Rule 13a-1 thereunder, and whether respondents BIEL and Whelan should be 
+ordered to pay disgorgement pursuant to Sections 21B(e) and 21C(e) of the Exchange Act;  
+ 
+49. Whether, pursuant to Section 21C of the Exchange Act, respondent Whelan 
+should be ordered to cease-and-desist from committing or causing violations of and any 
+future violations of Exchange Act Rules 13a-14, 13b2-1 and 13b2-2, and whether 
+ 11 
+respondent Whelan should be ordered to pay disgorgement pursuant to Sections 21B(e) and 
+21C(e) of the Exchange Act; and 
+ 
+ 50. What, if any, remedial action is appropriate in the public interest against 
+Bedwell under Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s 
+Rules of Practice. 
+ 
+IV. 
+ 
+IT IS ORDERED that a public hearing for the purpose of taking evidence on the 
+questions set forth in Section III hereof shall be convened not earlier than 30 days and not 
+later than 60 days from service of this Order at a time and place to be fixed, and before an 
+Administrative Law Judge to be designated by further order as provided by Rule 110 of the 
+Commission's Rules of Practice, 17 C.F.R. § 201.110.   
+ 
+IT IS FURTHER ORDERED that respondents shall file an Answer to the 
+allegations contained in this Order within twenty (20) days after service of this Order, as 
+provided by Rule 220 of the Commission's Rules of Practice, 17 C.F.R. § 201.220.  
+ 
+If any respondent fails to file the directed answer, or fails to appear at a hearing after 
+being duly notified, that respondent may be deemed in default and the proceedings may be 
+determined against him upon consideration of this Order, the allegations of which may be 
+deemed to be true as provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission's 
+Rules of Practice, 17 C.F.R.  §§ 201.155(a), 201.220(f), 201.221(f) and 201.310. 
+ 
+This Order shall be served forthwith upon respondents as provided for in the 
+Commission’s Rules of Practice.    
+ 
+IT IS FURTHER ORDERED that 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.  17 C.F.R. § 201.360(a).   
+ 
+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 

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+UNITED STATES OF AMERICA 
+Before the 
+SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES ACT OF 1933 
+Release No. 10037 / February 9, 2016 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77087 / February 9, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3741 / February 9, 2016 
+  
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17107 
+ 
+ 
+In the Matter of  
+ 
+MONSANTO COMPANY, 
+SARA M. BRUNNQUELL, CPA, 
+ANTHONY P. HARTKE, CPA, AND 
+JONATHAN W. NIENAS, 
+ 
+Respondents. 
+ 
+ORDER INSTITUTING 
+ADMINISTRATIVE AND CEASE-AND-
+DESIST PROCEEDINGS PURSUANT TO 
+SECTION 8A OF THE SECURITIES ACT 
+OF 1933, SECTIONS 4C AND 21C OF 
+THE SECURITIES EXCHANGE ACT OF 
+1934, AND RULE 102(e) OF THE 
+COMMISSION’S RULES OF PRACTICE, 
+MAKING FINDINGS AND IMPOSING 
+REMEDIAL SANCTIONS AND A CEASE-
+AND-DESIST ORDER  
+ 
+I. 
+The Securities and Exchange Commission (“Commission”) deems it appropriate 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 Monsanto Company (“Monsanto”), Sara M. Brunnquell, Anthony P. Hartke, and 
+Jonathan W. Nienas; and that public administrative proceedings be, and hereby are, instituted 
+against Brunnquell and Hartke pursuant to Exchange Act Section 4C and Rule 102(e)(1)(iii) of 
+the Commission’s Rules of Practice. 
+II. 
+In anticipation of the institution of these proceedings, Respondents have submitted Offers 
+of Settlement (the “Offers”) which the Commission has determined to accept.  Solely for the 
+purpose of these proceedings and any other proceedings brought by or on behalf of the 
+Commission, or to which the Commission is a party, and without admitting or denying the 
+ 
+ 
+2 
+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, as set 
+forth below. 
+III. 
+On the basis of this Order and Respondents’ Offers, the Commission finds1 that: 
+SUMMARY 
+1. Monsanto is an agricultural seed and chemical company that manufactures and 
+sells glyphosate, a herbicide, under the trade name “Roundup.”  During fiscal years 2009, 2010, 
+and 2011,2 Monsanto improperly accounted for millions of dollars of rebates offered to Roundup 
+distributors and retailers in the U.S. and Canada to incent them to purchase Roundup.  Monsanto 
+also improperly accounted for rebate payments to Roundup customers in Canada, France, and 
+Germany as selling, general, and administrative expenses (“SG&A”) rather than rebates, which 
+boosted Roundup gross profit in those countries.  Monsanto did not have sufficient internal 
+accounting controls to identify and properly account for rebate payments promised to customers.   
+2. As a result, Monsanto materially misstated its consolidated earnings, and its 
+revenues and earnings for its Roundup business lines,3 in its periodic reports filed with the 
+Commission for fiscal years 2009, 2010, and 2011.4  As a result of the improper accounting, 
+Monsanto met consensus earnings-per-share analyst estimates for fiscal year 2009. 
+3. On November 14, 2011, Monsanto restated its 2009 and 2010 annual reports on 
+Form 10-K and its 2011 quarterly reports on Form 10-Q (collectively “the Restatement”). 
+4. As a result of the conduct described herein, Monsanto violated Securities Act 
+Sections 17(a)(2) and 17(a)(3), the reporting provisions of Exchange Act Section 13(a) and Rules 
+12b-20, 13a-1, 13a-11, and 13a-13, the books and records provisions of Exchange Act Section 
+13(b)(2)(A), and the internal accounting control provisions of Exchange Act Section 13(b)(2)(B).  
+5. Sara M. Brunnquell, Monsanto’s External Reporting Lead, Anthony P. Hartke, a 
+U.S. Business Analyst at Monsanto, and Jonathan W. Nienas, Monsanto’s former U.S. Strategic 
+Account Lead, caused Monsanto to violate Securities Act Sections 17(a)(2) and 17(a)(3), 
+Exchange Act Sections 13(a) and 13(b)(2)(A), and Rules 12b-20, 13a-1, 13a-11, and 13a-13.  
+These individuals also violated Exchange Act Rule 13b2-1, and Nienas violated Exchange Act 
+Section 13(b)(5). 
+                                                 
+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. 
+2 Monsanto’s fiscal year runs from September 1 to August 31. 
+3 Monsanto’s periodic filings report the results of its Roundup business as part of the Agricultural 
+Productivity segment.  
+4 Monsanto filed earnings releases for 2009, 2010, and 2011 on Forms 8-K, which were also misstated. 
+ 
+ 
+3 
+RESPONDENTS 
+6. Monsanto Company is a Delaware corporation with its principal place of business 
+in St. Louis, Missouri.  Monsanto’s common stock is registered with the Commission under 
+Section 12(b) of the Exchange Act and trades on the New York Stock Exchange under the ticker 
+symbol “MON.”  Monsanto produces seeds and chemicals, such as Roundup, that are used in the 
+agricultural industry.   
+7. Sara M. Brunnquell, 45, is a resident of St. Louis, Missouri.  Brunnquell was the 
+External Reporting Lead at Monsanto from April 2009 through October 2015.  In that capacity, 
+she reported to the Controller of Monsanto.  Brunnquell currently holds the title of Global 
+Commercial Operations Lead, Climate.  She is a Certified Public Accountant in the state of 
+Missouri and maintained an active license from 1995 to 2004 and 2014 to 2015. 
+8. Jonathan W. Nienas, 54, is a resident of Ballwin, Missouri.  Nienas, who had been 
+an employee of Monsanto since 1980, was the U.S. Strategic Account Lead for the Roundup 
+Division from September 1, 2009 until he retired in January 2014.  
+9. Anthony P. Hartke, 46, is a resident of Chesterfield, Missouri.  Hartke held the 
+title of U.S. Business Analyst in the Roundup Division from July 2008 to August 2010.  He is 
+currently Regional FP&A Analysis Lead at the company.  Hartke is a Certified Public 
+Accountant and maintained an active license in Missouri from 1994 to 2010.   
+ACCOUNTING STANDARDS 
+10. The accounting standard governing Monsanto’s rebate programs is set forth in 
+Emerging Issues Task Force (“EITF”) Issue No. 01-9, “Accounting for Consideration Given by a 
+Vendor to a Customer (Including a Reseller of the Vendor’s Products),” codified as ASC 605-
+50.5  Specifically, Issue 6 of EITF 01-9 (ASC 605-50-25-7) requires a vendor like Monsanto to 
+recognize a rebate obligation as a reduction of revenue based on a systematic or rational 
+allocation of the cost of honoring the rebate offer to each underlying transaction that results in 
+progress by the customer towards earning the rebate.  Issue 4 of EITF 01-9 (ASC 605-50-25-3) 
+requires a vendor to recognize the cost of certain sales incentives at the later of the date at which 
+the related revenue is recognized or the date at which the sales incentive is offered.   
+11. Issue 1 of EITF 01-9 (ASC 605-50-45-1) addresses the circumstances in which a 
+vendor may record payments to customers as a cost or expense (e.g., under the SG&A 
+accounting classification) rather than as a reduction of revenue.  EITF 01-9 (ASC 605-50-45-1) 
+requires a vendor like Monsanto to recognize payments to customers to perform services on its 
+behalf (and which provide an identifiable benefit to the vendor) as a reduction of revenue for the 
+amount of the payments that exceeds the estimated fair value of the services rendered.  If the 
+services provided by customers do not provide a benefit to the vendor, it should recognize the 
+total amount as a reduction of revenue.   
+                                                 
+5 EITF 01-9 was the applicable accounting guidance during Monsanto’s fiscal year 2009 and was codified 
+into the Accounting Standards Codification (“ASC”) within ASC 605-50 for fiscal years 2010 and 2011.   
+ 
+ 
+4 
+FACTS 
+Monsanto Loses Roundup Market Share to Generic Producers in Fiscal Year 2009 
+12. Roundup historically was one of Monsanto’s most profitable products, and the 
+company sells it to both retailers and distributors.6  After the patent expired in 2000, competition 
+from generic glyphosate producers began to erode Monsanto’s profit margins.  By fiscal year 
+2009, generic competitors were undercutting Monsanto’s prices in the U.S. and Canada by more 
+than 70%.  Monsanto was losing share in these markets as customers – concerned that they could 
+not profitably sell high-priced Roundup – shifted their purchases to generic brands.  By the end 
+of fiscal year 2009, Monsanto had lost more than half of its share of the glyphosate market 
+(dropping from 55% market share to less than 25%).   
+13. Monsanto faced significant glyphosate price competition in fiscal year 2009.  
+Instead of lowering Roundup prices in the U.S., the company rolled out several price protection 
+programs in the second and third fiscal quarters to address customers’ concerns about the 
+relatively high price of Roundup.  Customers believed that Monsanto would soon lower 
+Roundup prices and were concerned that their high-priced Roundup inventories would be 
+unprofitable.  The price protection programs were intended to persuade customers to purchase 
+more Roundup.  By the fourth quarter of fiscal year 2009, Monsanto was well short of its annual 
+gross profit goals for Roundup in the U.S., and many of its retailers held significant volumes of 
+Roundup purchased at uncompetitive price levels.   
+The 2010 U.S. Loyalty Bonus Program  
+14. To address the channel inventory problem for retailers while still meeting 
+Monsanto’s earnings goals for fiscal year 2009, Monsanto’s marketing group began developing a 
+sales incentive program to provide rebates to customers to lower their inventory costs while 
+encouraging them to purchase Roundup in fiscal year 2009. 
+15. In late May 2009, Monsanto’s sales force began telling retailers in the U.S. that, if 
+they “maximized” their Roundup purchases during the fourth quarter of fiscal year 2009, 
+Monsanto would allow them to participate in a loyalty program to be released in the first quarter 
+of fiscal year 2010.  The sales force told retailers that this program, officially known as the 2010 
+U.S. Loyalty Bonus Program (“LBP”), would make their inventories profitable despite 
+anticipated Roundup price cuts.  In making these communications to retailers, Monsanto’s sales 
+force used talking points on the LBP that Tony Hartke, an accountant working in the Roundup 
+Division, had helped to develop and that Sara Brunnquell, the company’s External Reporting 
+Lead at that time, had approved.   
+16. Telling retailers about the LBP incented them to purchase Roundup in the fourth 
+quarter of fiscal year 2009, despite the fact that generic alternatives were significantly less 
+expensive at the time.  Customers purchased approximately 8.7 million Roundup Equivalent 
+                                                 
+6 Monsanto does not sell Roundup directly to growers. 
+ 
+ 
+5 
+Gallons (“REGs”)7 in the fourth quarter, which represented approximately 33% of the Roundup 
+that Monsanto sold in the U.S. in fiscal year 2009. 
+17. Monsanto did not officially release the written details of the LBP in the U.S. until 
+August 20 and September 10, 2009.8  Under the LBP, if retailers achieved a 2010 sales target, 
+they would be entitled to a rebate for each REG of Roundup held in their inventory at the end of 
+fiscal year 2009.  The amount of the rebate was equal to the difference between the price retailers 
+paid for Roundup in fiscal year 2009 and the new fiscal year 2010 prices, which Monsanto 
+released in late August and early September 2009.  The Roundup prices released at the beginning 
+of fiscal year 2010 were approximately 50% lower than they had been in fiscal year 2009.  The 
+program documents for the LBP required retailers to complete certain activities in order to 
+receive payments under the program (hereinafter “the LBP Requirements”).  For example, the 
+LBP required retailers to fill their tanks with Roundup in the first quarter of fiscal year 2010 and 
+to make Roundup their lead recommendation to growers.   
+18. Monsanto prepaid the LBP rebates to retailers in the second quarter of fiscal year 
+2010, well before they met their volume targets, if retailers had made “substantial progress” 
+toward completing the LBP Requirements.  These payments totaled approximately $194 million.  
+The program included a clawback mechanism by which Monsanto could recover any rebates 
+from retailers that missed their annual volume targets by August 31, 2010.  Nevertheless, in May 
+2010, Monsanto announced that it was waiving the LBP Requirements and would not clawback 
+any unearned payments under the LBP. 
+19. Monsanto improperly accounted for the LBP under EITF 01-9 (Issue 4) by 
+recognizing the related revenue reductions in fiscal year 2010 and ignoring the fact that the 
+company used the program to incent sales in the fourth quarter of fiscal year 2009.   
+20. Hartke helped to prepare the program documents and obtain approval for the 
+LBP, and Brunnquell approved the improper accounting methodology for the program.  In 
+justifying this accounting treatment, Brunnquell indicated to the company’s outside auditor that 
+the company had not communicated the LBP to customers until August 20, 2009.  That 
+statement influenced the auditor’s conclusion that the LBP did not incent more than a de minimis 
+amount of sales during fiscal year 2009, which ended on August 31, 2009.   
+21. Brunnquell and Hartke knew or should have known that Monsanto’s sales force 
+had used the LBP to incent retailers to purchase material amounts of Roundup in the fourth 
+quarter of fiscal year 2009 and that EITF 01-9 (Issue 4) required Monsanto to record the portion 
+of LBP costs related to those sales in fiscal year 2009.9   
+                                                 
+7 The Roundup Equivalent Gallon is a benchmark to compare glyphosate products that have different 
+concentration levels. 
+8 Monsanto released a version of the LBP for a small customer base of its lowest quality of Roundup on 
+August 20, 2009, and then it released another version of the LBP for the bulk of its Roundup products on September 
+10, 2009.  The two different versions of the LBP were virtually identical.  
+9 In the Restatement, Monsanto treated the LBP as a five quarter program starting in the fourth quarter of 
+fiscal year 2009 and, allocating the program costs based on actual and estimated sales, recognized $24 million i n 
+additional rebate costs during fiscal year 2009. 
+ 
+ 
+6 
+The 2010 Earnback Program 
+22. In fiscal year 2009, Monsanto offered distributors a rebate on their total purchases 
+of Roundup if they met agreed-upon volume targets.  Monsanto offered these rebates pursuant to 
+separate agreements with each distributor called Long Term Agreements (“LTAs”).  LTAs 
+generally contained a three-tiered volume target that allowed distributors to earn a progressively 
+larger rebate percentage as their volume of purchases increased.  Distributors generally needed 
+the LTA rebates in order to sell Roundup profitably. 
+23. Throughout fiscal year 2009, Monsanto accrued substantial amounts pursuant to 
+EITF 01-9 (Issue 6) to allocate LTA rebates to the underlying revenue transactions reflecting the 
+distributors’ progress toward earning the LTA rebates.  It planned to recognize the rebates as a 
+reduction in Roundup revenue generated in fiscal year 2009 consistent with a systematic and 
+rational allocation required by GAAP.  
+24. In the last few months of fiscal year 2009, Monsanto reversed approximately 
+$57.3 million of these accruals because seven customers did not achieve their LTA targets and 
+did not qualify for the LTA rebates.  The accrual reversal boosted Monsanto’s reported revenues 
+and gross profit reported on a consolidated and segment basis for fiscal year 2009.  
+25. Monsanto created the “2010 Earnback Program” to allow the seven distributors to 
+“earn back” their LTA rebates in fiscal year 2010.  On paper, the program required these 
+distributors to meet fiscal year 2010 volume targets and to complete a series of activities, such as 
+promoting Roundup to retailers.  As with the LBP, Monsanto made prepayments to several of 
+these distributors in the second quarter of fiscal year 2010 (December 2009), which were subject 
+to clawback if the customers failed to meet their volume targets by the end of that fiscal year.  As 
+with the LBP, Monsanto later waived the Earnback Program requirements in May 2010, 
+including its right to clawback the prepayments. 
+26. In fiscal year 2009, Monsanto’s second largest customer, Customer A, had a 
+three-tiered LTA target, with minimum and maximum targets of 5.0 million and 5.7 million 
+REGs.  The minimum rebate percentage was 6.5% and the maximum percentage was 10.5%.  
+Customer A was approximately 200,000 REGs short of meeting its minimum LTA target (5.0 
+million REGs) in August 2009, and it had submitted orders for enough additional REGs to meet 
+the top-tier target (5.7 million REGs) and earn the 10.5% rebate.   
+27. On August 10, 2009, Jon Nienas10 offered Customer A the opportunity to be paid 
+an amount calculated with the maximum LTA rebate percentage of 10.5%, if it agreed to 
+purchase less than the minimum target of 5.0 million REGs.  As recorded in the 
+contemporaneous notes of the Customer A negotiator, Nienas asked Customer A to “not trigger 
+[the] LTA” and indicated that “4,980[,000 REGs] will pay [the] LTA in full [at] 10.5%” with 
+“[p]ayment by end of calendar year.”  He asked Customer A to hold its pending orders for 
+Roundup to “appear as if [it] didn't make” its minimum LTA volume target for fiscal year 2009.  
+He told Customer A that the 10.5% rebate payment would be tied to “activities” but that it should 
+                                                 
+10 At the time, Nienas was transitioning into the role of U.S. Strategic Account Lead in the Roundup 
+Division. 
+ 
+ 
+7 
+easily achieve them.   
+28. Customer A accepted Monsanto’s offer and earned the top-tier LTA rebate of 
+10.5%, for a total payment of $20.2 million, while missing its minimum LTA target by less than 
+100,000 REGs.  This rebate was paid under the Earnback Program. 
+29. Monsanto prepaid the Earnback payment to Customer A in the second quarter of 
+fiscal year 2010.  At the time of payment, Nienas sent a confirmation letter to Customer A 
+stating that it had earned the payment (even though it had not met any fiscal year 2010 volume 
+targets under the Earnback Program).  The purpose of the confirmation letter was to enable 
+Customer A to record the payment in its fiscal year 2009.  Nienas knew that as of the date of the 
+confirmation letter Customer A had not yet met any fiscal year 2010 volume targets under the 
+Earnback Program. 
+30. Similarly, at the end of fiscal year 2009, Monsanto’s largest Roundup customer, 
+Customer B, was approximately 621,000 REGs from its minimum LTA target and about 2.5 
+million REGs from its maximum target.  To achieve its maximum LTA rebate, Customer B 
+requested, and Monsanto initially agreed, to a “bill and hold” transaction,11 because Customer B 
+lacked the capacity to store the volume of Roundup needed to qualify for the maximum LTA 
+rebate.  During the last week of the fiscal year, Nienas informed Customer B that the transaction 
+would not be necessary.  Nienas said that Monsanto would pay Customer B its LTA rebate using 
+the maximum percentage rate of 9.1% (resulting in a rebate of $24.3 million). 
+31. Customer B asked for a written confirmation of Monsanto’s commitment to pay 
+the maximum LTA rebate.  Upon learning of the request, Nienas told Hartke that Monsanto had 
+agreed to pay Customer B at its maximum LTA rebate rate.  Hartke informed Nienas that the 
+confirmation was not in accordance with the company’s delegation of authority policy, but did 
+not take further action to ensure that the payment was properly recorded. 
+32. On October 7, 2009, Customer B provided a draft confirmation letter to Nienas.  
+Nienas executed the letter the following day promising that Monsanto would pay Customer B the 
+maximum LTA rebate rate on fiscal year 2009 purchases of Roundup.  The rebate totaled $24.3 
+million, and Monsanto later paid it in December 2009 under the Earnback Program.   
+33. Monsanto relied upon the failures of Customers A and B to meet their minimum 
+LTA volume targets as the basis for reversing LTA accruals in the fourth quarter of fiscal year 
+2009.  Hartke participated in recording the reversal of these accruals.  The oral and written side 
+agreements to pay Customers A and B their 2009 LTA rebates created rebate obligations for 
+Monsanto in fiscal year 2009 and contradicted the basis for reversing the accruals, which Nienas 
+and Hartke should have known.  Monsanto improperly increased its fiscal year 2009 revenues 
+and gross profits by approximately $44.5 million when it deferred recording these liabilities until 
+                                                 
+11 In a “bill and hold” transaction, the vendor agrees to a customer request to store product s that the 
+customer has purchased.  The customer receives the risks and rewards of owning the products, despite the fact that 
+they remain with the vendor for a certain period of time. 
+ 
+ 
+8 
+fiscal year 2010.12 
+The 2011 Earnback Program 
+34. The next year, Monsanto offered a second iteration of the Earnback Program for 
+fiscal year 2011 to Customer B and its third-largest Roundup distributor, Customer C.  Both 
+companies missed their 2010 LTA targets, but received their maximum LTA rebates in the form 
+of Earnback payments in fiscal year 2011 (December 2010).  Monsanto reversed fiscal year 2010 
+LTA accruals for these customers, which increased its reported revenues and gross profits on a 
+consolidated and segment basis for the fourth quarter of fiscal year 2010. 
+35. As with the 2010 Earnback Program, Monsanto prepaid the 2011 Earnback 
+rebates to Customers B and C more than eight months before the program was scheduled to end.  
+Although the 2011 Earnback program obligated the distributors to perform certain activities and 
+to purchase Roundup in the future, Nienas provided confirmations to Customers B and C, at the 
+time of prepayment, stating that they had met all program requirements necessary to earn the 
+payments.  Nienas knew that the customers had not met the requirements of the 2011 Earnback 
+Program in December 2010 when he signed the confirmations.  The 2011 Earnback payments to 
+Customers B and C totaled approximately $48 million.   
+36. The manner in which Monsanto administered the previous Earnback Program in 
+2010 – by using side agreements with the customers and subsequently waiving the clawback 
+provisions – demonstrated that Monsanto also lacked the intent to enforce the terms of the 2011 
+Earnback Program.  By the end of fiscal year 2010, competitive pressures in the Roundup 
+business also made it highly unlikely that Monsanto would deny LTA payments to large 
+distributors that relied upon the LTA payments to sell Roundup profitably (as they would likely 
+shift their glyphosate purchases to generic manufacturers if Monsanto actually withheld their 
+LTA payments).  In these circumstances, all $48 million of the rebate costs for the “2011” 
+Earnback Program should have been recorded in fiscal year 2010, as Monsanto lacked an 
+appropriate basis under ASC 605-50 to recognize any of these costs to fiscal year 2011.13 
+The 2010 Loyalty Bonus Program in Canada 
+37. Low-priced generic glyphosate had the same effect in Canada in early 2009 as it 
+had in the U.S., and Monsanto responded similarly by announcing a price protection program in 
+April 2009 without actually lowering prices.  The program was called the Price Risk Protection 
+Program (“PRPP”), and it covered Roundup purchased in Canada through the end of calendar 
+year 2009 (spanning fiscal years 2009 and part of 2010) that remained in a customer’s inventory 
+at the time of any price decrease that year.  
+38. When Monsanto lowered U.S. prices in September 2009, it did not immediately 
+follow suit in Canada because the PRPP would have triggered significant payment obligations 
+                                                 
+12 In the Restatement, Monsanto recognized the costs of the 2010 Earnback Program over fiscal years 2009 
+and 2010, based upon actual and projected sales volume.  Monsanto recorded approximately $20 million in 
+Earnback rebates in fiscal year 2009 and approximately $41 million in fiscal year 2010.  
+13 In its Restatement, Monsanto recorded the $48 million as a reduction of revenue in fiscal year 2010. 
+ 
+ 
+9 
+that year.  Under EITF 01-9 and ASC 605-50-25-1, Monsanto would have been required to 
+accrue for payment obligations under the PRPP if it expected to lower prices in 2009.  Monsanto 
+represented to its auditor that it did not intend to lower Roundup prices in Canada during 
+calendar year 2009 (the term of the PRPP).  Before the end of fiscal year 2009, Monsanto began 
+planning to cancel the PRPP so it could lower Canadian prices without triggering the accrual 
+obligation.  Monsanto, however, could not cancel the PRPP unilaterally – it needed customers to 
+surrender their rights under the program as they had relied on the PRPP in purchasing Roundup 
+during fiscal year 2009.  Monsanto thus offered them an inducement to cancel the PRPP.  
+Specifically, Monsanto’s sales and marketing employees promised customers that, if they signed 
+cancellation forms, it would pay them amounts equivalent to the amounts payable under the 
+PRPP through a sales incentive program similar to the U.S. LBP (hereinafter “the LBP Canada”).  
+Customers responsible for purchasing approximately 89% of the Roundup that Monsanto sold in 
+Canada agreed to the program switch and executed written cancellation forms in late September 
+2009. 
+39. Shortly thereafter, Monsanto’s External Reporting Lead, Sara Brunnquell, asked 
+the company’s auditor what the effect of cancelling the PRPP would be, without disclosing that 
+certain customers had already signed the cancellation forms.  The lead client service partner for 
+the audit firm told Brunnquell that there could be accounting consequences in fiscal year 2009, 
+because presumably Monsanto would have to pay customers consideration for their agreement to 
+cancel the PRPP.  After this discussion with the company’s auditor, she decided to treat the 
+cancellations as being ineffective for accounting purposes.  Brunnquell later made written 
+representations to the auditor that the PRPP was still in effect several weeks after certain 
+customers had signed the cancellation forms.   
+40. Monsanto rolled out the LBP Canada to customers in late September 2009 and 
+began paying rebates under the program in January 2010.  Monsanto calculated these rebates by 
+multiplying the number of gallons in each customer’s ending inventory as of September 9, 2009 
+by the difference between the prices customers originally paid for Roundup and the new prices 
+that Monsanto expected to release in January 2010.   
+41. Monsanto improperly recorded approximately $43 million in rebates under the 
+LBP Canada as a reduction of revenue in fiscal year 2010.  Brunnquell approved this accounting 
+treatment, even though she knew or should have known that customers had signed the PRPP 
+cancellations and that Monsanto had offered the LBP Canada to induce them to do so.  She 
+should have known that EITF 01-9 and ASC 605-50-25 required Monsanto to record the rebate 
+obligations under the LBP Canada as a reduction in revenue during fiscal year 2009.14   
+The 2010 SG&A Program in Canada 
+42. When Monsanto eventually lowered Roundup prices in Canada in January 2010, 
+it had to lower them further than it had originally planned when it released the LBP Canada.  The 
+reason was that the price of competitors’ glyphosate had fallen further than Monsanto had 
+expected.  But lowering Roundup prices by an additional increment meant that the fixed rebates 
+under the LBP Canada were insufficient to make the Roundup volumes held by customers 
+                                                 
+14 Monsanto did not address the LBP Canada in its Restatement. 
+ 
+ 
+10 
+competitive.  To bridge this unexpected gap, Monsanto offered and paid a second round of 
+rebates to Canadian customers through a program it called the “LBP2.”   
+43. In early March 2010, executives at Monsanto approved the LBP2, which was 
+budgeted to rebate customers approximately $18 million.  Monsanto planned to account for the 
+LBP2 as a reduction in revenue which would have decreased its net sales and gross profits in 
+Canada.  Monsanto began paying the LBP2 rebates to customers by issuing them credits on 
+account or, in some cases, checks. 
+44. In April 2010, Monsanto’s executives, with assistance from Brunnquell, decided 
+to convert the LBP2 from a rebate program to a program where the payments would be recorded 
+as SG&A expenses.  Certain expenses related to SG&A programs, in which a vendor pays its 
+customers to perform marketing services on its behalf, are not recorded as reductions of revenue 
+and therefore do not affect gross profit.   
+45. Monsanto’s employees in Canada created program documents that detailed 
+certain marketing services that customers were supposed to perform for Monsanto.  They 
+internally set the value of the services at approximately $18 million, with a pre-determined 
+amount for each customer that exactly equaled the rebates that the approved LBP2 had already 
+paid them.   
+46. Monsanto obtained a fair value estimate of the services from an independent 
+marketing company, and it showed the services were worth approximately $6 million.  Monsanto 
+did not use the estimate and instead its employees created an internal cost estimate to set the 
+amount at approximately $18 million.  There is no evidence that the internal cost estimate 
+accurately reflected the fair value of the services. 
+47. To obtain payments under the SG&A program, customers had to certify that they 
+performed the marketing services described in the program documents.  Customers signed the 
+certifications, but there is no other evidence that they performed these marketing services for 
+Monsanto. 
+48. To account for the SG&A payments, Monsanto reversed the LBP2 rebate credits 
+on customer accounts and then re-posted these same amounts to the customer accounts as SG&A 
+payments consistent with the amounts in the unsupported internal cost estimate. 
+49. In the end, the SG&A program in Canada cost approximately $14 million, and not 
+$18 million, because one customer refused to sign the program certification.15  Monsanto 
+improperly accounted for these program costs as SG&A expenses in fiscal year 2010.  
+Brunnquell approved the accounting treatment, even though she should have known that the 
+payments were rebates and that Monsanto did not receive an identifiable benefit from the 
+customers under ASC 605-50-45-2.  Monsanto was required to record these rebate payments as a 
+                                                 
+15 At the time, Monsanto nevertheless paid the rebate to the customer and recorded the payment as a 
+reduction of revenue in fiscal year 2010. 
+ 
+ 
+11 
+reduction of revenue in fiscal year 2010.16   
+The 2010 SG&A Programs in France and Germany 
+50. In France and Germany, Monsanto’s customers had large inventories of Roundup 
+bought at the high fiscal year 2009 prices that they could not profitably sell in fiscal year 2010.  
+Without some form of rebate, these customers were unlikely to purchase more Roundup. 
+51. Monsanto decided to make payments to customers in France and Germany 
+through an SG&A program.17  Monsanto’s employees drafted a program in which customers 
+received $5 for each liter of Roundup that they sold from inventory.  The program’s budget was 
+$24 million for France and $8.5 million for Germany.  Customers were supposed to treat 25% of 
+the payments as compensation for providing marketing services to Monsanto.  Monsanto 
+expected customers to use the other 75% of the money for “price supports,” which were 
+essentially rebates.   
+52. Monsanto offered the same SG&A program in Germany in fiscal year 2011 
+(approximately $10 million). 
+53. There is no evidence that customers performed any marketing services on 
+Monsanto’s behalf.  
+54. Monsanto improperly accounted for the payments in France and Germany as 
+SG&A expenses.  Monsanto knew or should have known that it did not receive an identifiable 
+benefit from the customers under ASC 605-50-45-2.  Therefore, it was required to record these 
+rebate costs as a reduction of revenue in the fiscal years in which the payments were made (i.e., 
+2010 and 2011).18 
+Monsanto Offered Securities During the Relevant Time Period 
+55. Monsanto offered securities in fiscal years 2009, 2010, and 2011 pursuant to a 
+Form S-8 that it originally filed on January 21, 2005.  The Form S-8 incorporated by reference 
+all subsequent periodic filings under the Exchange Act for securities sold under this registration 
+statement.  Thus, it incorporated Monsanto’s Forms 10-K for fiscal years 2009 and 2010 and its 
+Forms 10-Q for fiscal year 2011.  
+56. Monsanto also filed a Form S-3ASR (automatic shelf registration) on October 31, 
+2008, which incorporated by reference subsequent periodic filings under the Exchange 
+Act.  When Monsanto filed a Form 424B2 prospectus supplement on April 13, 2011, it 
+incorporated by reference the company’s Form 10-K for fiscal year 2010.  
+                                                 
+16 In its Restatement, Monsanto recorded the payments under this program as a reduction of revenue in 
+fiscal year 2010 and not as SG&A. 
+17 Monsanto could not use a rebate program like the U.S. LBP because of concerns that it might violate 
+antitrust laws in the European Union.   
+18 Monsanto’s Restatement did not address the programs in France or Germany. 
+ 
+ 
+12 
+VIOLATIONS 
+57. 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. 
+58. 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. 
+59. Exchange Act Section 13(a) and Rules 13a-1, 13a-11, and 13a-13 thereunder 
+require that every issuer of a security registered pursuant to Exchange Act Section 12 file with 
+the Commission, among other things, annual, quarterly, and current reports as the Commission 
+may require. 
+60. Rule 12b-20 under the Exchange Act requires that, in addition to the information 
+expressly required to be included in a statement or report filed with the Commission, there shall 
+be added such further material information, if any, as may be necessary to make the required 
+statements, in light of the circumstances under which they are made, not misleading. 
+61. Exchange Act Section 13(b)(2)(A) requires reporting companies to make and 
+keep books, records and accounts which, in reasonable detail, accurately and fairly reflect 
+transactions and dispositions of their assets. 
+62. Exchange Act Section 13(b)(2)(B) requires all reporting companies to devise and 
+maintain a system of internal accounting controls sufficient to provide reasonable assurances that 
+transactions are recorded as necessary to permit preparation of financial statements in accordance 
+with GAAP. 
+63. Exchange Act Section 13(b)(5) prohibits any person from knowingly 
+circumventing or knowingly failing to implement a system of internal accounting controls or 
+knowingly falsifying any book, record, or account described in Section 13(b)(2). 
+64. 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). 
+65. As a result of the conduct described above, Monsanto violated Securities Act 
+Sections 17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) 
+and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. 
+66. As a result of the conduct described above, Nienas caused Monsanto to violate 
+Securities Act Sections 17(a)(2) and 17(a)(3), Exchange Act Sections 13(a) and 13(b)(2)(A), and 
+Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.  Nienas also directly violated Exchange Act 
+Section 13(b)(5) and Rule 13b2-1. 
+67. As a result of the conduct described above, Brunnquell caused Monsanto to 
+ 
+ 
+13 
+violate Securities Act Sections 17(a)(2) and 17(a)(3), Exchange Act Sections 13(a) and 
+13(b)(2)(A), and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.  Brunnquell also 
+willfully19 violated Rule 13b2-1. 
+68. As a result of the conduct described above, Hartke caused Monsanto to violate 
+Securities Act Sections 17(a)(2) and 17(a)(3), Exchange Act Sections 13(a) and 13(b)(2)(A), and 
+Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.  Hartke also willfully20 violated Rule 13b2-
+1. 
+MONSANTO’S REMEDIAL EFFORTS 
+In determining to accept Monsanto’s Offer, the Commission considered remedial acts 
+undertaken by Monsanto and cooperation afforded the Commission staff in connection with its 
+investigation. 
+IV. 
+Respondent Monsanto has undertaken to: 
+A. Retain, at Monsanto’s expense within 30 days of issuance of this Order, a qualified 
+independent ethics and compliance consultant (the “Consultant”) with extensive 
+experience in developing, implementing and overseeing organizational compliance and 
+ethics programs, not unacceptable to the staff, to conduct an ethics and compliance 
+program assessment of Monsanto’s Crop Protection business focused on the components 
+of the program delineated in (1)-(2) below.  The Consultant shall also have expertise in, 
+or retain someone with expertise in, internal accounting controls and public company 
+financial reporting as well as vendor rebate and market funding programs.  Taking into 
+account the Company’s remedial actions to date, Monsanto shall cause the Consultant to 
+analyze whether the components of Monsanto’s ethics and compliance program for its 
+Crop Protection business as they relate to the areas described in (1)-(2) below have been 
+implemented successfully and are having the desired effects.  The Consultant will 
+determine whether the culture is supportive of ethical and compliant conduct, including 
+strong, explicit, and visible support and commitment by the Board and senior 
+management.  In discharging this undertaking, the Consultant shall: 
+1. evaluate and assess the effectiveness of the internal accounting controls and 
+financial reporting policies and procedures with respect to Monsanto’s rebate and 
+market funding programs for its Crop Protection business, including but not 
+limited to: 
+                                                 
+19 This use of the word “willfully” does not reflect a finding that Respondent acted with the intent to violate 
+the law or knowledge that she was doing so.  A willful violation of the securities laws means “‘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)). 
+20 See fn. 19, supra. 
+ 
+ 
+14 
+a. whether Monsanto’s internal accounting controls with respect to 
+Monsanto’s rebate and market funding programs for its Crop Protection 
+business are sufficient to provide reasonable assurances that the 
+company is maintaining fair and accurate books, records and accounts, 
+with particular emphasis on whether they are designed to address the 
+integrity of its revenue accounting and ensure consistent accuracy and 
+integrity given the global nature of Monsanto’s business; and 
+b. whether Monsanto has specific accounting and financial reporting 
+controls and procedures sufficient to ensure that all rebate and/or market 
+funding programs for its Crop Protection business comply with 
+applicable accounting rules and policies. 
+2. evaluate whether there are proper resources, oversight and independence of the 
+compliance and ethics function for the Crop Protection business, including 
+seniority of corporate executives responsible for implementation and oversight, 
+reporting lines, autonomy and independence, compensation and rewards, 
+consistent discipline, resources, and access to information and personnel.  The 
+review shall consider the sufficiency of training and guidance overall as well as 
+specifically related to anti-retaliation and whistleblowing policies. 
+B. Provide the Consultant with complete access and resources to review key documents 
+(e.g., business principles, Code of Conduct, policies and procedures, risk assessments, 
+performance evaluation forms, relevant internal training materials and internal 
+communications).  In reviewing the creation, administration and implementation of the 
+compliance and ethics program as it relates to the areas addressed in paragraph A, the 
+Consultant shall conduct an assessment survey and interview relevant personnel.  The 
+assessment need not be a comprehensive review of all business lines, activities and 
+markets, but may use a risk-based approach.  The Consultant shall consider, however, the 
+breakdown of internal controls in multiple markets in which the Crop Protection business 
+operated during the relevant time period of this action; 
+C. Provide a report to Commission staff and Monsanto’s General Counsel and Chief Ethics 
+and Compliance Officer, as described below, regarding the Consultant’s findings and 
+recommendations; 
+D. Provide a copy of the engagement letter detailing the Consultant’s responsibilities to 
+Brian O. Quinn, Assistant Director, Division of Enforcement, U.S. Securities and 
+Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549; 
+E. Cooperate fully with the Consultant, including providing the Consultant with access to its 
+files, books, records and personnel as reasonably requested for the above-described 
+review except to the extent such files, books, or records are protected from disclosure by 
+any applicable protection or privilege such as the attorney-client privilege or the attorney 
+work product doctrine. To the extent that the Consultant believes that documents are 
+being withheld unreasonably, Monsanto shall work cooperatively with the Consultant to 
+resolve the matter, and if they are unable to reach agreement, the Consultant shall 
+ 
+ 
+15 
+promptly notify Commission staff. To ensure the independence of the Consultant, 
+Monsanto shall not have the authority to terminate the Consultant without prior written 
+approval of Commission staff and shall compensate the Consultant and persons engaged 
+to assist the Consultant for services rendered pursuant to this Order at their reasonable 
+and customary rates; 
+F. Require the Consultant to report to Commission staff on his/her activities as the staff 
+shall request; 
+G. Permit the Consultant to engage such assistance, clerical, legal or expert, as necessary 
+and at reasonable cost, to carry out his/her activities, and the cost, if any, of such 
+assistance shall be borne exclusively by Monsanto; 
+H. Require, within 120 days of the issuance of this Order (unless otherwise extended by 
+Commission staff for good cause), the Consultant to complete the review and report to 
+Commission staff and Monsanto’s General Counsel and Chief Ethics and Compliance 
+Officer concerning: 
+ 
+1. the scope and methodologies used by the Consultant in order to complete the 
+review; 
+ 
+2. Monsanto’s compliance with the review;  
+ 
+3. the adequacy of Monsanto’s existing policies, practices and procedures regarding 
+the matters assessed; and 
+ 
+4. the Consultant’s recommendations, if necessary, regarding modification or 
+supplementation of Monsanto’s policies, practices and procedures related to the 
+matters assessed (the “Recommendations”). 
+I. Adopt and implement, within 120 days of Monsanto’s receipt of the Recommendations, 
+all of the Recommendations; provided, however, that as to any Recommendation that 
+Monsanto considers to be, in whole or in part, unduly burdensome or impractical, 
+Monsanto may submit in writing to the Consultant and Commission staff (at the address 
+set forth above), within 60 days of receiving the Recommendations, an alternative policy, 
+practice or procedure designed to achieve the same objective or purpose. Monsanto and 
+the Consultant shall then attempt in good faith to reach an agreement relating to each 
+Recommendation that Monsanto considers to be unduly burdensome or impractical and 
+the Consultant shall reasonably evaluate any alternative policy, practice or procedure 
+proposed by Monsanto.  Such discussion and evaluation shall conclude within 90 days 
+after Monsanto’s receipt of the Recommendations, whether or not Monsanto and the 
+Consultant have reached an agreement.  Within 14 days after the conclusion of the 
+discussion and evaluation by Monsanto and the Consultant, Monsanto shall require that 
+the Consultant inform Monsanto and Commission staff (at the address set forth above) of 
+his/her final determination concerning any Recommendation that Monsanto considers to 
+be unduly burdensome or impractical.  Monsanto shall abide by the determinations of the 
+Consultant and, within 60 days after final agreement between Monsanto and the 
+ 
+ 
+16 
+Consultant or final determination by the Consultant, whichever occurs first, Monsanto 
+shall adopt and implement all of the Recommendations that the Consultant deems 
+appropriate; 
+ 
+J. 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 Monsanto or any of its present or former affiliates, 
+directors, officers, employees or agents acting in their capacity as such.  The agreement 
+will also provide that the 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 the performance of his/her duties under this Order shall not, without the 
+prior written consent of Commission staff, enter into any employment, consultant, 
+attorney-client, auditing or other professional relationship with Monsanto, 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; 
+ 
+K. Certify, in writing, compliance with the undertakings set forth above, including 
+implementation of all Recommendations.  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 
+Brian O. Quinn, 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. 
+ 
+Monsanto may apply to Commission staff for an extension of the deadlines described above 
+before their expiration, and upon a showing of good cause by Monsanto, Commission staff may, 
+in its sole discretion, grant such extensions for whatever time period it deems appropriate. 
+V. 
+In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
+agreed to in Respondents’ Offers. 
+Accordingly, pursuant to Section 8A of the Securities Act, Section 21C of the Exchange 
+Act, and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice, it is hereby ORDERED, 
+effective immediately, that: 
+A. Respondent Monsanto cease and desist from committing or causing any violations 
+and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, 
+Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-
+20, 13a-1, 13a-11, and 13a-13 thereunder;  
+B. Respondent Brunnquell cease and desist from committing or causing any 
+violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the 
+ 
+ 
+17 
+Securities Act, Sections 13(a) and 13(b)(2)(A) of the Exchange Act, and Rules 
+12b-20, 13a-1, 13a-11, 13a-13, and 13b2-1 thereunder; and  
+C. Brunnquell is denied the privilege of appearing or practicing before the 
+Commission as an accountant. 
+D. After two years from the date of this Order, Brunnquell may request that the 
+Commission consider her reinstatement by submitting an application (attention: 
+Office of the Chief Accountant) to resume appearing or practicing before the 
+Commission as: 
+1. a preparer or reviewer, or a person responsible for the preparation or 
+review, of any public company’s financial statements that are filed with 
+the Commission.  Such an application must satisfy the Commission that 
+Brunnquell’s work in her practice before the Commission will be reviewed 
+either by the independent audit committee of the public company for 
+which she works or in some other acceptable manner, as long as she 
+practices before the Commission in this capacity; and/or  
+2. an independent accountant.  Such an application must satisfy the 
+Commission that: 
+a. Brunnquell, or the public accounting firm with which she is 
+associated, is registered with the Public Company Accounting 
+Oversight Board (“Board”) in accordance with the Sarbanes-Oxley 
+Act of 2002, and such registration continues to be effective; 
+b. Brunnquell, or the registered public accounting firm with which she 
+is associated, has been inspected by the Board and that inspection 
+did not identify any criticisms of or potential defects in the 
+respondent’s or the firm’s quality control system that would indicate 
+that the respondent will not receive appropriate supervision; 
+c. Brunnquell 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. Brunnquell acknowledges her responsibility, as long as she appears 
+or practices before the Commission as an independent accountant, to 
+comply with all requirements of the Commission and the Board, 
+including, but not limited to, all requirements relating to registration, 
+inspections, concurring partner reviews and quality control 
+standards. 
+E. The Commission will consider an application by Brunnquell to resume appearing 
+or practicing before the Commission provided that her state CPA license is 
+current and she has resolved all other disciplinary issues with the applicable state 
+boards of accountancy. However, if state licensure is dependent on reinstatement 
+ 
+ 
+18 
+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 Brunnquell’s character, 
+integrity, professional conduct, or qualifications to appear or practice before the 
+Commission. 
+F. Respondent Hartke 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) and 13(b)(2)(A) of the Exchange Act, and Rules 12b-20, 13a-1, 
+13a-11, 13a-13, and 13b2-1 thereunder; and  
+G. Hartke is denied the privilege of appearing or practicing before the Commission 
+as an accountant. 
+H. After one year from the date of this Order, Hartke 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 
+Hartke’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. Hartke, 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. Hartke, 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. Hartke 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. Hartke 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, 
+ 
+ 
+19 
+including, but not limited to, all requirements relating to registration, 
+inspections, concurring partner reviews and quality control 
+standards. 
+I. The Commission will consider an application by Hartke 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 Hartke’s character, integrity, 
+professional conduct, or qualifications to appear or practice before the 
+Commission. 
+J. Respondent Nienas cease and desist from committing or causing any violations 
+and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, 
+Sections 13(a), 13(b)(2)(A), and 13(b)(5) of the Exchange Act, and Rules 12b-20, 
+13a-1, 13a-11, 13a-13, and 13b2-1 thereunder. 
+K. Within 7 days of the entry of this Order, Monsanto shall pay a civil money 
+penalty of $80,000,000; Brunnquell shall pay a civil money penalty of $55,000; 
+Hartke shall pay a civil money penalty of $30,000; Nienas shall pay a civil money 
+penalty of $50,000, to the Securities and Exchange Commission for transfer to the 
+general fund of the United States Treasury, subject to Exchange Act Section 
+21F(g)(3).  If timely payment is not made, additional interest shall accrue 
+pursuant to 31 U.S.C. § 3717. 
+L. Payments must be made in one of the following ways: 
+(1) Respondents may transmit payment electronically to the Commission, 
+which will provide detailed ACH transfer/Fedwire instructions upon 
+request; 
+(2) Respondents may make direct payment from a bank account via Pay.gov 
+through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or 
+(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 
+ 
+M. Payments by check or money order must be accompanied by a cover letter 
+ 
+ 
+20 
+identifying the Respondent in these proceedings, and the file number of these 
+proceedings; a copy of the cover letter and check or money order must be sent to 
+Brian O. Quinn, Assistant Director, Division of Enforcement, Securities and 
+Exchange Commission, 100 F St., NE, Washington, DC 20549. 
+N. Respondent Monsanto shall comply with the undertakings enumerated above in 
+Section IV. 
+O. 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 Brunnquell, Hartke and Nienas, and further, 
+any debt for disgorgement, prejudgment interest, civil penalty or other amounts 
+due by these Respondents under this Order or any other judgment, order, consent 
+order, decree or settlement agreement entered in connection with this proceeding, 
+is a debt for the violation by these Respondents of the federal securities laws or 
+any regulation or order issued under such laws, as set forth in Section 523(a)(19) 
+of the Bankruptcy Code, 11 U.S.C. §523(a)(19). 
+By the Commission.  
+ 
+Brent J. Fields 
+Secretary 
+ 

raw/aaer/2016/AAER-3742.txt

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+ 
+1 
+ 
+ 
+UNITED STATES OF AMERICA 
+Before the  
+SECURITIES AND EXCHANGE COMMISSION 
+     
+ 
+SECURITIES ACT OF 1933 
+Release No. 10039 / February 11, 2016 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77114 / February 11, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No. 3742 / February 11, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17112 
+ 
+ 
+In the Matter of 
+ 
+FRAZER FROST, LLP; SUSAN WOO, 
+CPA; and MIRANDA SUEN, CPA,  
+ 
+Respondents  
+ORDER INSTITUTING PUBLIC 
+ADMINISTRATIVE AND CEASE-
+AND-DESIST PROCEEDINGS 
+PURSUANT TO SECTION 8A OF 
+THE SECURITIES ACT OF 1933 AND 
+SECTION 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 and in 
+the public interest that public administrative and cease-and-desist proceedings be, and hereby 
+are, instituted against Frazer Frost LLP, Susan Woo, and Miranda Suen pursuant to Section 8A 
+of the Securities Act of 1933 (“Securities Act”), Sections 4C1 and 21C of the Securities 
+Exchange Act of 1934 (“Exchange Act”), and Rule 102(e)(1)(ii)2 and (iii)3 of the Commission’s 
+Rules of Practice.  
+                                                 
+1 Section 4C provides, in relevant part, that: “The Commission may censure any person, or deny, temporarily or 
+permanently, to any person the privilege of appearing or practicing before the Commission in any way, if that person 
+is found . . . (1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character or 
+integrity, or to have engaged in unethical or improper professional conduct; or (3) to have willfully violated, or 
+willfully aided and abetted the violation of, any provision of the securities laws or the rules and regulations 
+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. 
+ 
+ After an investigation, the Division of Enforcement and the Office of Chief Accountant 
+allege that: 
+ 
+SUMMARY 
+ 
+Frazer Frost, LLP (“Frazer”), an audit firm, and two of its accountants, engagement 
+partner Susan Woo (“Woo”) and manager Miranda Suen (“Suen”), (together, “Respondents”), 
+engaged in multiple instances of improper professional conduct during their third quarter 2010 
+review of interim financial information and their 2011 year-end audit of China Valves 
+Technology, Inc. (“CVVT”).  In 2010, CVVT misled investors about its acquisition of Watts 
+Valve (Changsha) Co., Ltd (“Changsha Valve”) and, in 2011, materially overstated income and 
+understated liabilities incurred by subsidiary Shanghai Pudong Hanwei Valve Co., Ltd. (“Hanwei 
+Valve”) in its financial statements.  Respondents failed to conduct the review and audit during 
+the time in which these misstatements occurred in accordance with PCAOB auditing standards.  
+As a result, Respondents engaged in improper professional conduct as defined in Section 4C of 
+the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.  Additionally, 
+Respondents willfully4 violated and/or caused violations of Rules 2-02 and 2-06 of  
+Regulation S-X. 
+ 
+During Respondents’ review of CVVT’s third quarter 2010 financial statements included 
+in Form 10-Q but before the third quarter 2010 Form 10-Q was filed, Respondents received an 
+email from CVVT’s CEO admitting that certain material information concerning the acquisition 
+of Changsha Valve was misstated or not included in the notes to the financial statements for the 
+first and second quarter 2010 Forms 10-Q.  The misstated or omitted information included:  (i) 
+the identity of the seller; (ii) the role of an undisclosed related party in the transaction; (iii) the 
+price of the acquisition; (iv) the structure of the acquisition; and (v) the allocation of assets and 
+liabilities.  After receiving the email, Respondents performed procedures that confirmed that 
+information in the first and second quarter 2010 financial statements filed in Forms 10-Q was 
+materially incorrect.  Respondents documented proposed changes to the notes to the financial 
+statements in their work papers.  Respondents, however, failed to take appropriate steps to 
+communicate the inaccuracies and proposed changes to CVVT’s management or its audit 
+committee and the third quarter 2010 Form 10-Q was issued without correction and repeated the 
+known, material misstatements.   
+ 
+Respondents’ professional misconduct continued during the ensuing 2011 year-end audit 
+of CVVT’s financial statements.  Respondents correctly recognized the need to exercise 
+heightened professional skepticism during that audit.  In fact, they found CVVT’s internal 
+controls to be ineffective and identified critical areas of the audit as high risk that merited 
+extended audit procedures, including testing value-added-tax (“VAT”) payments made by 
+CVVT’s subsidiaries.  However, Respondents failed to follow their own audit plan for the 
+                                                                                                                                                             
+3 Rule 102(e)(1)(iii) provides, in pertinent part, that: “The Commission may . . . deny, temporarily or permanently, 
+the privilege of appearing or practicing before it . . . to any person who is found . . . to have willfully violated, or 
+willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations 
+thereunder.” 
+4 “Willfully” as used in this Order means knowingly committing the act which constitutes the violation.  See 
+Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). 
+ 
+3 
+Hanwei Valve subsidiary and did not perform extended procedures to test $1.7 million in VAT 
+payments purportedly made to a local tax bureau by Hanwei Valve.5  They also failed to replace 
+those procedures with adequate alternatives or to document why those procedures were no longer 
+necessary.  Instead, in contravention of the risks they had identified, Respondents relied solely 
+on information provided by CVVT and, in doing so, failed to obtain sufficient audit evidence.  
+As a result, Respondents did not learn—unlike CVVT’s two subsequent auditors—that Hanwei 
+Valve had not made the $1.7 million in VAT payments as recorded in CVVT’s books and 
+records and reported in the 2011 financial statements included in Form 10-K.  Respondents’ 
+improper professional conduct resulted in their improper issuance of an audit report containing 
+an unqualified opinion as to CVVT’s 2011 financial statements, when in actuality the financial 
+statements materially overstated net income by 6.22% and materially understated tax liabilities 
+by 22.5%. 
+ 
+RESPONDENTS 
+ 
+1. Frazer Frost, LLP is a PCAOB-registered accounting firm that maintains two 
+offices in California.  Frazer currently has thirteen partners who provide auditing, consulting and 
+tax services.  Frazer has not issued an audit report for a public company since 2012.6  In 2011, 
+Frazer issued only one audit report:  the report containing an unqualified opinion as to CVVT’s 
+2011 financial statements.  Most of Frazer’s audit clients are companies with operations in the 
+People’s Republic of China (“China”).  Such audits were handled by Frazer’s Asia Services 
+Group, which had two audit partners:  Kerry Dean Yamagata (“Yamagata”) and Respondent 
+Woo.  In December 2010, the Commission issued a cease-and-desist order that found that 
+Yamagata and Frazer’s predecessor-entity, Moore Stephens Wurth Frazer & Torbet, LLP, 
+engaged in improper professional conduct in connection with its audits and quarterly reviews of 
+another China-based U.S. issuer, China Energy Saving Technology, Inc. (“China Energy).7 
+Respondent Woo acted as manager for the China Energy audits. 
+ 
+2. Susan Woo, age 53, is a certified public accountant and an engagement partner at 
+Frazer.  Woo has worked at Frazer since 1994, and became the Director of its Asia Services 
+Group in 2002 and a partner in 2006.  She was the engagement partner responsible for the 2010 
+interim review and 2011 audit of CVVT at issue in this matter.  Woo supervised the Frazer audit 
+staff, reviewed and signed-off on the majority of relevant work papers, was ultimately 
+responsible for the work conducted, and approved the issuance of the 2011 CVVT audit report 
+containing an unqualified opinion on CVVT’s financial statements.   
+ 
+3. Miranda Suen, age 42, is a certified public accountant and has worked at Frazer 
+since 2006.  She became a manager in 2009.  She was the engagement manager responsible for 
+the 2010 interim review and 2011 audit of CVVT at issue in this matter.  Suen was responsible 
+for the day-to-day work conducted for the 2010 interim review and 2011 audit, supervised other 
+                                                 
+5 The relevant tax bureau is the Shanghai Pudong Third Tax Office.  For ease of reference,  this order will refer to it 
+as the Hanwei tax bureau.   
+6 Frazer also does business under the name Frazer LLP.  Frazer LLP is not separately registered with the PCAOB, 
+and audit opinions are issued by the firm under the name Frazer Frost, LLP.   
+7 The Commission censured the firm pursuant to Section 8A of the Securities Act and Section 4C of the Exchange 
+Act and sanctioned Yamagata under Rule 102(e).  See In re Moore Stephens Wurth Frazer & Torbet LLP and K. 
+Dean Yamagata, CPA, Ex. Act. Rel. No. 9166 (Dec. 20, 2010).   
+ 
+4 
+staff working on each engagement with Woo, and reviewed and signed off on the relevant work 
+papers.     
+RELATED PARTIES 
+ 
+4. China Valves Technology, Inc. is a Nevada corporation with operations solely in 
+China.  CVVT develops and manufactures water flow management products.  CVVT became a 
+U.S. issuer in December 2007 through a reverse merger with Intercontinental Resources, Inc., a 
+Nevada shell corporation.  CVVT’s common stock was listed on the Nasdaq Global Market 
+(NASDAQ) under the symbol “CVVT.”  On September 21, 2012, CVVT filed a Form 25 
+voluntarily withdrawing its securities from listing and registration on NASDAQ.  The 
+Commission revoked the registration of CVVT’s securities on March 4, 2015 pursuant to Section 
+12(j) for failing to file periodic reports.  On September 29, 2014, the Commission filed an action 
+alleging fraud and other related misconduct against CVVT and three of its officers related to the 
+disclosures concerning the Changsha Valve acquisition and the mischaracterization of $1.7 
+million in VAT payments.  The company and two of the three officers charged settled that action 
+in May 2015.8 
+ 
+FACTS 
+ 
+Respondents Failed to Conduct the 2010 Third Quarter Review of CVVT’s  
+Interim Financial Statements in Accordance with PCAOB Standards 
+ 
+A. CVVT Misstates the Changsha Valve Acquisition 
+ 
+5. In January 2010, CVVT purchased Changsha Valve from Watts Water 
+Technologies, Inc. (“Watts”).  CVVT purchased the subsidiary from Watts through Able Delight, 
+a related-party entity created by CVVT solely to facilitate its purchase of Changsha Valve. 
+ 
+6. On February 8, 2010, CVVT filed a Form 8-K announcing that it had purchased 
+the assets of Changsha Valve from Able Delight “for a cash price of approximately $15 million.”   
+ 
+7. CVVT’s first, second, and third quarter 2010 Forms 10-Q similarly stated that 
+CVVT acquired “100% of the assets of Able Delight [(Changsha) Valve Co. Ltd] for a total cash 
+consideration of $15.0 million.  The acquisition was accounted as a business combination in 
+accordance to the terms of the purchase agreement.”  The Forms 10-Q also disclosed that the 
+acquisition included $4,944,755 in inventory, $10,113,703 in buildings and equipment, and zero 
+liabilities. 
+ 
+8. As described below, the Form 8-K and the 2010 Forms 10-Q fundamentally 
+misstated the Changsha Valve transaction concerning:  (i) the identity of the seller; (ii) the true 
+role of Able Delight, an undisclosed related party, in the transaction; (iii) the price of the 
+acquisition; (iv) the structure of the acquisition; and (v) the allocation of assets and liabilities. 
+ 
+ 
+ 
+                                                 
+8 See Litigation Release No. 23266 (May 20, 2015).   
+ 
+5 
+B. Respondents Learn that CVVT’s Disclosures Materially Misstate the Changsha Valve 
+Acquisition 
+ 
+9. On October 7, 2010, more than a month before CVVT filed its third quarter 2010 
+Form 10-Q, Respondent Woo received an email from CVVT’s CEO Jianbao Wang (“Wang”) to 
+an industry analyst (the “Wang Email”). 
+ 
+10. The Wang Email disclosed a number of material facts about the Changsha Valve 
+transaction that were inconsistent with, or had not been included in, CVVT’s prior disclosures. 
+ 
+11. Among other things, the Wang Email stated that: 
+ 
+a. “CVVT Changsha subsidiary was previously a subsidiary of WATTS Water.   
+CVVT made the acquisition through an intermediary Able Delight . . . .” 
+ 
+b. “But the CVVT principles [sic] insisted to be appointed as principles [sic] of Able 
+Delight (Changsha), a subsidiary of Able Delight (Hong Kong) to secure the risk 
+during the transaction”; 
+ 
+c. “Able Delight paid WATTS Regulator 6.11 [million] USD, WATTS Shanghai 8 
+[million] RMB. and WATTS Tianjin 8 [million] RMB respectively. Able Delight 
+has also paid 44691304.28 RMB to clean up the remained debts [sic] and costs 
+such as lawyer cost, 350 employees working years complete ‘bought off’ and 
+suspended sales commission etc.  The total cost is 15 [million] USD”; and  
+ 
+d. “This transaction has form of equity transaction . . . .” 
+ 
+12. Respondent Woo forwarded the Wang Email to Respondent Suen and other audit 
+staff shortly after she received it and instructed them to “verify and confirm all the legal 
+documents including the payments made to various entities according to the statements [made by 
+Wang].” 
+ 
+13. Respondents should have exercised heightened professional skepticism after 
+receiving the Wang Email.  
+ 
+14. In its work papers for the third quarter 2010 interim review, Respondents 
+documented that they performed procedures that confirmed the statements in the Wang Email.  
+Accordingly, they concluded in their work papers that:   
+ 
+a. Watts was the true seller of Changsha Valve and “because Able Delight is a 
+related party, [Frazer] will ensure that this related party is disclosed in FN” to the 
+2010 third quarter 10-Q; 
+ 
+b. “Based on the procedures [documented in the work papers], Frazer Frost verified 
+that the Company had paid out $15 [million] to third parties, $6.07 million as 
+acquisition of Changsha, while $8.4 million as payments to settle Changsha’s 
+previous liabilities and $.6 million as legal and due diligent [sic] fees”; 
+ 
+ 
+6 
+c. The transaction was an equity, not an asset, purchase; and 
+ 
+d. Proposed corrections should be made concerning net assets and liabilities. 
+ 
+C. Respondents Fail to Take Corrective Action and CVVT’s Third Quarter Form 10-Q 
+Repeats the Material Misstatements and Does Not Conform with GAAP  
+ 
+15. Although Respondents verified during their 2010 third quarter review that the 
+information in the Wang Email was correct and that CVVT’s 2010 financial statements included 
+in Forms 10-Q misstated the acquisition, Respondents failed to act in accordance with PCAOB 
+interim review standards and recommend modifications to CVVT’s management or audit 
+committee to make the Form 10-Q conform to Generally Accepted Accounting Principles 
+(“GAAP”). 
+ 
+16. Respondents’ work papers contain no documentation of discussions with CVVT’s 
+management or audit committee concerning the need for modifications to make the Form 10-Q 
+conform to GAAP or any steps taken to address the needed modifications. 
+ 
+17. Respondents Woo and Suen signed off on their review of the notes to the third 
+quarter financial statements, and CVVT’s third quarter Form 10-Q was issued on November 15, 
+2010. 
+ 
+18. Despite the auditors’ awareness of the inaccuracies, CVVT’s third quarter 2010 
+financial statements included in its Form 10-Q repeated the material misstatements from the two 
+previous quarters and did not conform with GAAP.9 
+ 
+D. Respondents Failed to Act in Accordance with Interim Review Obligations (AU § 722) 
+or Exercise Due Care (AU § 230) 
+ 
+19. PCAOB standards “require”10 that auditors exercise due professional care in 
+performing reviews of interim financial information.  (AU §§ 722.01 and 230.01.)  Due care 
+requires that the auditor exercise professional skepticism, “an attitude that includes a questioning 
+mind and a critical assessment of audit evidence.”  (AU § 230.07.)  When an auditor discovers 
+information that causes it to question the accuracy of prior information in the financials, the 
+                                                 
+9 See ASC 805-10-50, which provides that: “the acquirer shall disclose the following information for each business 
+combination that occurs during the reporting period: a. the name and description of the acquiree; b. the acquisition 
+date; c. the percentage voting equity interests acquired; and d. the primary reasons for the business combination and 
+a description of how the acquirer obtained control of the acquiree.  Additionally, ASC 805-20-50 states the acquirer 
+shall disclose “the amounts recognized as of the acquisition date for each major class of assets acquired and 
+liabilities assumed.” 
+10 PCAOB Rule 3101 discusses the meaning of certain terms used in the PCAOB standards.  The rule provides the 
+degree of responsibility the PCAOB standards impose on auditors.  The rule states that the words “must,” “shall,” 
+and “is required” indicate unconditional responsibilities.  The word “should” indicates responsibilities that are 
+presumptively mandatory.  The phrase “PCAOB standards require” is used herein when discussing both 
+unconditional responsibilities and presumptively mandatory responsibilities.  This is appropriate because under Rule 
+3101(a)(2) the “[f]ailure to discharge a presumptively mandatory responsibility is a violation of the relevant standard 
+and Rule 3100 unless the auditor demonstrates that, in the circumstances, compliance with the specified 
+responsibility was not necessary to achieve the objectives of the standard.” 
+ 
+7 
+auditor should consider what steps should be taken, including discussing the information with the 
+client and preventing reliance on the financials.  (AU §§ 722.46 and 561.04.)  When an 
+accountant becomes aware of misstatements, the accountant should evaluate the information to 
+determine whether material modifications should be made to the interim financial information 
+for it to conform with GAAP, and, where the accountant determines that a material modification 
+should be made, “the accountant should communicate the matter(s) to the appropriate level of 
+management as soon as practicable.”  (AU §§ 722.22, 722.26 and 722.29.)  If management does 
+not respond appropriately within a reasonable period of time, the auditor should communicate 
+the matter to the audit committee (or others with equivalent authority) and, if the audit committee 
+does not appropriately respond, should consider whether to resign.  (AU §§ 722.30 and 722.31.)  
+The communication to the audit committee can be oral or in writing, but, if oral, should be 
+documented.  (AU § 722.30.)  Finally, PCAOB standards require accountants to document any 
+significant findings or issues, such as procedures that indicate that the interim financial 
+statements could be materially misstated, and actions taken to address those findings.  (AU § 
+722.52.) 
+ 
+20. Respondents received information directly from CVVT management that made it 
+clear that the company’s disclosures concerning the Changsha Valve acquisition in its first and 
+second quarter 2010 Forms 10-Q were false.  Respondents failed to exercise due professional 
+care and an appropriate level of professional skepticism in evaluating this new information and 
+in considering whether actions were needed to correct the disclosures and prevent future reliance 
+on the inaccurate Forms 10-Q for the first two quarters of 2010. 
+ 
+21. Respondents knew that CVVT’s notes to the third quarter 2010 financial 
+statements materially misstated the Changsha Valve acquisition before they were filed with the 
+Commission.  In fact, Respondents repeatedly noted in the work papers that corrections were 
+needed.  Nevertheless, Respondents failed to raise the inaccuracies with CVVT management or 
+CVVT’s audit committee as required by PCAOB standards. 
+ 
+22. Respondents further failed to document, as required by AU §§ 722.30 and 722.52, 
+communications with the audit committee, if any, and what actions, if any, were taken to address 
+their findings that the notes to the 2010 third quarter financial statements were inaccurate or why 
+they deemed it unnecessary to recommend the corrections noted in their work papers.  As a result 
+of these failures, CVVT’s third quarter 2010 Form 10-Q repeated the material misstatements 
+from the two previous quarters about the Changsha Valve acquisition and did not conform to 
+GAAP. 
+ 
+Respondents Failed to Conduct the 2011 CVVT Audit in  
+Accordance with PCAOB Standards and Regulation S-X 
+ 
+A. CVVT’s 2011 Form 10-K Misstated the Hanwei Valve VAT Payments 
+   
+23. Frazer was the independent auditor for the 2011 audit of CVVT’s financial 
+statements for the fiscal year ended September 30, 2011.  On November 18, 2011, Frazer issued 
+an audit report containing an unqualified opinion as to CVVT’s 2011 financial statements. 
+ 
+24. In a November 3, 2011 Form 8-K, CVVT announced that Frazer’s service as 
+CVVT’s independent auditor would terminate at the completion of the 2011 audit.  In that same 
+ 
+8 
+filing, CVVT announced that it had retained a China-based accounting firm (Successor Auditor 
+A) to serve as the company’s independent auditor starting with the first quarter ended December 
+31, 2011. 
+ 
+25. In a February 14, 2012 Form 8-K, CVVT disclosed that during the interim review 
+of financial statements for the quarter ended December 31, 2011, Successor Auditor A 
+discovered that the VAT return for CVVT’s Hanwei subsidiary “could not be reconciled to the 
+Company’s financial statements for the fiscal year ended September 30, 2011.”  CVVT further 
+disclosed that, as a result of an initial investigation, management had determined that a 
+restatement was necessary and “that the Company’s unaudited financial statements for the 
+quarters ended March 31, 2011 and June 30, 2011 as well as its audited financial statements for 
+the year ended September 30, 2011, should no longer be relied upon.” 
+ 
+26. In an August 12, 2013 Form 8-K/A, CVVT announced that: 
+ 
+After internal auditing and investigation, 
+management found that Hanwei purchased certain 
+equipment from a third party to perform reverse 
+engineering and improve its products. Since the 
+third party did not provide Hanwei with an invoice  
+or any other written record of the sale and, because 
+Hanwei was concerned that its purchase of the 
+equipment might cause it to become the subject of a 
+challenge with respect to intellectual property rights 
+associated with the equipment, Hanwei’s 
+management made the determination to account for 
+this purchase transaction as VAT and 
+supplementary tax payments against the VAT 
+payable and paid the third party as such.  
+ 
+CVVT further disclosed that, as a result, approximately $1.7 million in VAT had not been paid 
+in fiscal year 2011 and was misstated in the 2011 Form 10-K. 
+ 
+B. Respondents Identified VAT Payments as High Risk Yet Failed to Perform  
+Planned Extended Procedures Designed to Test Hanwei’s VAT Payments 
+ 
+27. In its 2010 and 2011 audit reports, Frazer concluded that CVVT’s internal 
+controls over financial reporting were ineffective and identified material weaknesses and 
+significant deficiencies in critical areas, including CVVT’s control environment and the U.S. 
+GAAP expertise of CVVT accounting staff.  
+ 
+28. Respondents determined that they would exercise heightened skepticism for the 
+2011 audit of CVVT. 
+ 
+29. On October 3, 2011, the PCAOB issued Staff Audit Practice Alert No. 8, Audit 
+Risks in Certain Emerging Markets, which advised auditors of the increased risks of auditing 
+companies in emerging market such as China, including the risk of wrongdoing by company 
+management and the need to independently authenticate management representations (“PCAOB 
+ 
+9 
+Alert No. 8”).  
+ 
+30. In response to PCAOB Alert No. 8, Respondents’ designed an extended audit 
+approach for the area covering VAT payments. 
+  
+31. The 2011 fiscal year VAT payable for Hanwei Valve exceeded the $1.1 million 
+materiality threshold assessed by Respondents for the audit. 
+ 
+32. Respondents did not conduct internal controls testing for the area covering VAT 
+taxes, and therefore assessed control risk as high for all assertions.   
+  
+33. Accordingly, Respondents’ designed the extended procedure of “go[ing] to the 
+tax authority directly and confirm[ing] amount paid” in order to independently verify VAT tax 
+paid (the “Tax Authority Procedure”). 
+ 
+34. Respondents determined it was necessary and planned to perform the Tax 
+Authority Procedure in addition to standard tracing procedures that relied solely on information 
+and documents provided to them by CVVT. 
+ 
+35. In addition to the Tax Authority Procedure, Respondent Woo instructed her staff 
+to “observe the VAT and income tax return online using the Company’s IC card,” which could 
+be placed into a computer system residing at the subsidiary to independently observe VAT 
+amounts directly through the tax bureau system, including the amount of VAT paid (the “IC 
+Card Procedure”). 
+ 
+i. Respondents Failed to Conduct the Tax Authority Procedure or Adequate 
+Alternative Extended Procedures 
+ 
+36. Respondents failed to perform the Tax Authority Procedure or adequate 
+alternative extended procedures to meet the audit objective of independently verifying the VAT 
+paid by Hanwei Valve. 
+ 
+37. Respondents’ work papers contain no documentation that Respondents performed 
+or attempted to perform the Tax Authority Procedure or adequate alternative extended 
+procedures to meet the audit objective of independently verifying the VAT paid by Hanwei 
+Valve.   
+ 
+38. A Skype exchange between two Frazer audit staff states: “we didn’t go [to the tax 
+authorities] apparently . . . [and] per [a Frazer independent contractor conducting the work], the 
+VAT tax return she saw was the one w/out tax bureau stamp . . . [and] apparently we didn’t trace 
+all the tax payments when we did the audit . . . I’m getting this from Susan [Woo]. . .” 
+ 
+39. Respondents’ work papers do not document the basis for their conclusions and 
+opinions regarding why they did not perform the Tax Authority Procedure and what, if any, 
+alternative extended procedures were considered. 
+ 
+40. Respondents performed the Tax Authority Procedure for two other CVVT 
+subsidiaries, Henan Kaifeng High Pressure Valve Co. (“Kaifeng”) and Zhengzhou City ZD 
+ 
+10 
+Valve Co. Ltd. (“ZD”).  The work papers for Kaifeng and ZD state that Frazer staff went to the 
+tax authorities and “the tax bureau personnel reconciled the numbers on VAT tax filing and the 
+system.  All numbers agreed and then stamped.  [Frazer] observed beginning balance of OCT 
+agreed to the Sep ending balance per VAT tax filing, and the stamp was the same as the stamp 
+[provided by the company].” 
+ 
+41. In its review of CVVT’s interim financial statements for the quarter ended 
+December 31, 2011, Successor Auditor A discovered that Hanwei Valve’s VAT tax return did 
+not reconcile to CVVT’s financial statements.  After that discovery, Successor Auditor A visited 
+the Hanwei tax bureau and verified the correct VAT tax return.   
+ 
+42. In a July 23, 2012 Form 8-K, CVVT announced the resignation of Successor 
+Auditor A as its independent auditor.  In a June 3, 2013 Form 8-K, CVVT announced that it had 
+engaged a U.S.-based accounting firm (“Successor Auditor B”) as the company’s independent 
+auditor.  
+ 
+43. In August 2013, Successor Auditor B also visited the Hanwei tax bureau and 
+verified that Hanwei Valve had paid approximately $44,000, and not $1.7 million, in VAT 
+during fiscal year 2011.  Thus, Successor Auditor B was able to determine the correct amount of 
+VAT paid by Hanwei Valve by performing—in substance—the Tax Authority Procedure 
+outlined in Respondents’ audit plan. 
+ 
+ii. Respondents Failed to Conduct the IC Card Procedure or Adequate Alternative 
+Extended Procedures 
+ 
+44. Respondents failed to perform the IC Card Procedure or adequate alternative 
+extended procedures to meet the audit objective of independently verifying the VAT paid by 
+Hanwei Valve. 
+ 
+45. Respondents’ work papers do not document the basis for their conclusions and 
+opinions regarding why they did not perform the IC Card Procedure for Hanwei Valve and what, 
+if any, alternative extended procedures they considered. 
+ 
+46. A China-based accounting firm subsequently hired by CVVT used the IC Card 
+system to determine that Hanwei Valve paid approximately $44,000, and not $1.7 million, in 
+VAT payments to the Hanwei tax bureau during the 2011 fiscal year. 
+ 
+C. Respondents Failed to Exercise Due Care (AU § 230), Obtain a Reasonable Basis for 
+Believing that the Financial Statements were Accurate (AU §§ 230 and 316 and AS 
+Nos. 8 and 13), Obtain Sufficient Evidential Matter (AS No. 15 and AU § 150), and 
+Instead Placed Undue Weight on Management Representations (AU § 333) 
+ 
+47. PCAOB standards require auditors to exercise due professional care when 
+conducting an audit and preparing a report.  (AU § 230.01.)  Under this standard, auditors must 
+maintain an attitude of professional skepticism, which includes “a questioning mind and a critical 
+assessment of audit evidence.”  (AU § 230.07.)  “The auditor neither assumes that management 
+is dishonest nor assumes unquestioning honesty.”  (AU § 230.09.)  “The exercise of due 
+professional care allows the auditor to obtain reasonable assurance about whether the financial 
+ 
+11 
+statements are free of material misstatement, whether caused by error or fraud . . . Although not 
+absolute assurance, reasonable assurance is a high level of assurance.”  (AU § 230.10.) 
+ 
+48. Auditors must design and perform audit procedures to obtain reasonable 
+assurance that the financial statements are free of material misstatement due to error or fraud.  
+(AS Nos. 8.3 and 13.3.)  “The necessary extent of a substantive audit procedure depends on the 
+materiality of the account or disclosure, the assessed risk of material misstatement, and the 
+necessary degree of assurance from the procedure.”  (AS No. 13.42.)  “The auditor must plan and 
+perform audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable 
+basis for his or her opinion.”  (AS No. 15.4.)  The higher the assessed risk of material 
+misstatement, the more persuasive audit evidence the auditor should obtain from substantive 
+audit procedures.  (A.S. Nos. 13.37, 13.9, and 15.5.)  In determining the amount of audit 
+evidence needed, the auditor should consider the risk associated with the relevant internal control 
+and the quality (i.e. the relevance and reliability) of the evidence obtained.  (AS Nos. 15.5 and 
+15.6.)  Among other things, “[e]vidence obtained from a knowledgeable source that is 
+independent of the company is more reliable than evidence obtained only from internal company 
+sources.”  (AS No. 15.8.)  When audit evidence is provided by the company, the auditor should 
+evaluate the sufficiency and appropriateness of the evidence 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 No. 15.10.)  
+ 
+49. Auditing standards require that “[s]ufficient appropriate evidential matter is to be 
+obtained through inspection, observation, inquiries, and confirmations to afford a reasonable 
+basis for an opinion regarding the financial statements under audit.”  (AU § 150.02.)  
+Management’s representations should not act as a substitute for auditing procedures necessary to 
+obtain a reasonable basis about the financial statements.  (AU § 333.02.)  Rather, auditors must 
+plan and perform procedures to address the fraud risks and obtain reasonable assurance that the 
+financial statements do not contain material misstatements.  (AU §§ 316.01 and 316.52.)  In 
+doing so, the auditor “should not be satisfied with less-than-persuasive evidence because of a 
+belief that management is honest.”  (AU § 333.03.) 
+ 
+50. Respondents failed to exercise due care and professional skepticism in performing 
+the 2011 year-end audit of Hanwei Valve.  Respondents specifically designed the extended Tax 
+Authority Procedure and IC Card Procedure to account for the risk of material misstatement.  
+Nonetheless, Respondents failed to ensure that the planned procedures were actually performed 
+for Hanwei Valve.  
+ 
+51. Respondents failed to ensure that alternative extended procedures to the Tax 
+Authority Procedure or IC Card Procedure were performed to independently verify the VAT 
+payments recorded by Hanwei Valve and obtain a reasonable basis for concluding that the 
+financial statements were free of material misstatements.  Accordingly, Respondents violated the 
+standards of due care and professional skepticism, failed to ensure that appropriate procedures 
+were performed to address the risk of material misstatement, and failed to obtain sufficient audit 
+evidence.   
+ 
+52. Respondents placed undue weight on management’s representations by relying 
+solely on documentation and information provided by CVVT instead of performing the 
+ 
+12 
+specifically designed extended procedures or adequate alternative extended procedures designed 
+to meet the audit objective of independently verifying the VAT paid by Hanwei Valve. 
+ 
+D. Respondents Failed to Document Procedures or Retain Documents (AS No. 3) and, by 
+doing so, Frazer Violated and Woo and Suen Caused Frazer’s Violation of Rule 2-06 
+of Regulation S-X 
+ 
+53. PCAOB standards require that auditors document the procedures performed, the 
+evidence obtained, and the conclusions reached.  (AS No. 3.6.)  Notably, “audit documentation 
+must clearly demonstrate that the work was in fact performed,” regardless of whether the work 
+was performed by the engagement team or specialists assisting the auditor.  Id.  Audit 
+documentation must contain information sufficient to allow an auditor with no connection to the 
+work to understand the procedures performed, evidence obtained and conclusions reached and to 
+determine who performed the work, when the work was completed, the person who reviewed the 
+work, and the date of the review.  Id.   
+ 
+54. “Because audit documentation is the written record that provides the support for 
+the representations in the auditor’s report, it should:  a. Demonstrate that the engagement 
+complied with the standards of the PCAOB, b. Support the basis for the auditor’s conclusions 
+concerning every relevant financial statement assertion, and c. Demonstrate that the underlying 
+accounting records agreed or reconciled with the financial statements.”  (AS No. 3.5.)  “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.”  (A.S. No. 3.12).  Significant findings or issues include “e. circumstances that 
+cause difficulty in applying auditing procedures” and “f. significant changes in the auditor’s risk 
+assessments, including risks that were not identified previously, and the modifications to audit 
+procedures or additional audit procedures in response to those changes.”  Id. 
+ 
+55. Rule 2-06 of Regulation S-X imposes documentation and retention obligations on 
+accountants.  Rule 2-06 requires that accountants retain certain relevant audit records for a period 
+of seven years, including work papers and other documents that contain conclusions, opinions, 
+analyses, or financial data.  Rule 2-06 also requires documentation of any significant matters 
+considered during the audit.  As noted in the adopting release, “[i]f such work is performed but 
+not documented, the auditor generally would violate [generally accepted auditing standards] or 
+new rule 2-06.”11 
+ 
+56. Respondents failed to document the extended procedures, if any, performed to test 
+Hanwei Valve’s VAT payments.   
+ 
+57. Respondents failed to ensure that Frazer staff documented the basis for their 
+conclusions and opinions regarding why the designed extended procedures were not performed, 
+why sufficient alternative extended procedures that achieved the same audit objective were not 
+performed, and how reasonable assurances that the financial statements were free of material 
+misstatements were obtained in the absence of these procedures.   
+ 
+58. Respondents failed to ensure adequate documentation of who performed and 
+                                                 
+11 Final Rule: Retention of Records Relevant to Audits and Reviews, 17 CFR Part 210.   
+ 
+13 
+reviewed procedures concerning the Hanwei Valve VAT payments and when that work was 
+performed.   
+ 
+59. Respondents also failed to ensure the documentation and retention of documents 
+that contain conclusions, opinions, analyses, and financial data concerning the Hanwei audit as 
+required under Rule 2-06 of Regulation S-X, including: tax bureau vouchers, bank account 
+statements, monthly VAT returns, or any other financial data concerning the VAT purportedly 
+paid by Hanwei. 
+ 
+E. Respondents Failed to Adequately Supervise Staff (AS No. 10). 
+ 
+60. PCAOB standards require auditors to supervise the audit engagement “so that the 
+work is performed as directed and supports the conclusions reached.”  (AS No. 10.2.)  “[T]he 
+engagement partner is responsible for proper supervision of the work of the engagement team 
+members and for compliance with PCAOB standards.”  (A.S. No. 10.3.)  The engagement 
+partner may obtain assistance from other team members in supervising the audit staff, and such 
+team members are similarly responsible for complying with supervisory standards.  (AS No. 
+10.4.)  The engagement partner and other staff members assisting with supervision should inform 
+staff members of their responsibilities, including, among other things: (1) the objectives of the 
+procedures, (2) the nature, timing, and extent of the procedures to be performed, and (3) any 
+relevant issues that could affect the performance of the procedures.  (AS No. 10.5.)  In 
+determining the extent of supervision, the engagement partner and staff members assisting with 
+supervision should take into account “the risk of material misstatement; and the knowledge, skill, 
+and ability of each engagement team member.”  (A.S. No. 10.6.)   Additionally, the engagement 
+partner and staff members assisting with supervision should review the work of their team 
+members “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 No. 10.5.)   
+ 
+61. Respondent Woo, as the engagement partner, was responsible for supervising her 
+audit staff and for the conduct of the audit in accordance with PCAOB standards.   
+ 
+62. Respondent Suen, the audit manager, directed the fraud and audit planning 
+discussions12 and assisted in supervising the audit staff and reviewing the work performed.   
+ 
+63. Respondents Woo and Suen failed to adequately supervise staff in connection 
+with the audit of Hanwei Valve.  
+ 
+64. Respondent Woo assigned a manager (“Assisting Manager”), who was not 
+originally assigned to the CVVT engagement, to perform field work for Hanwei Valve.  
+Respondents Woo and Suen reviewed the Assisting Manager’s work.   
+ 
+65. The Assisting Manager’s involvement in the CVVT engagement began after 
+planning was completed and field work was underway; thus, she was not involved in the initial 
+                                                 
+12 The engagement partner is responsible for planning the audit and may seek assistance from appropriate 
+engagement team members in fulfilling these responsibilities.  (A.S. No. 9.3.)  Engagement team members who 
+assist the engagement partner with audit planning must also comply with the relevant PCAOB standards governing 
+planning.  Id. 
+ 
+14 
+fraud discussion and audit planning.  The Assisting Manager was not aware of and did not 
+conduct the designed Tax Authority Procedure, IC Card Procedure, or adequate alternative 
+extended procedures to independently verify the VAT paid by Hanwei Valve. 
+ 
+66. A China-based independent contractor assisted Respondents on the 2011 audit 
+(“Independent Contractor”).  The Independent Contractor purportedly performed standard 
+tracing procedures to test Hanwei Valve’s VAT payments, but did not perform the designed Tax 
+Authority Procedure, the IC Card Procedure, or adequate alternative extended procedures to 
+independently verify the VAT paid by Hanwei Valve. 
+ 
+67. Respondents Woo and Suen failed to ensure that the Independent Contractor—
+who was not a licensed U.S. accountant and hired only to perform low-level administrative 
+tasks—performed procedures that were commensurate with her qualifications. 
+ 
+68. Respondents Woo and Suen violated their obligations when they failed to 
+adequately inform the Assisting Manager and Independent Contractor of the designed 
+procedures, the extent and objectives of the procedures, and the risks involved in the audit.  In 
+particular, Respondents Woo and Suen failed to supervise the Assisting Manager and 
+Independent Contractor when they failed to evaluate whether the designed procedure were 
+performed, that the objectives of the procedures were achieved, and that the results of the work 
+supported the conclusions reached. 
+ 
+69. Although the designed extended procedures or adequate alternative extended 
+procedures to independently verify the VAT paid by Hanwei Valve were not performed, 
+Respondents Woo and Suen reviewed and signed off on the relevant work papers and provided 
+improper assurance on the 2011 financial statements, which materially misstated the amount of 
+VAT paid. 
+ 
+70. On November 18, 2011, Frazer issued an audit report containing an unqualified 
+opinion as to CVVT’s 2011 financial statements, which materially misstated the VAT payable.  
+ 
+F. Frazer Violated Rule 2-02(b)(1) of Regulation S-X and Woo Caused Frazer’s Violation 
+by Issuing an Audit Report Falsely Stating that the Audit Complied with GAAS 
+ 
+71. Rule 2-02(b)(1) of Regulation S-X requires that an auditor’s report state, “whether 
+the audit was made in accordance with generally accepted auditing standards [GAAS].”13  17 
+C.F.R. 210.2-02(b)(1).  An auditor violates Rule 2-02(b)(1) if it issues a report stating that it 
+conducted its audit in accordance with PCAOB standards when it did not.  Frazer’s 2011 audit 
+report stated that the firm had conducted the audits in accordance with PCAOB standards.  These 
+representations were false, and thus Frazer willfully violated Rule 2-02(b)(1).  Woo, as an 
+engagement partner at Frazer, approved the signing of the firm’s name to the audit report and its 
+issuance for inclusion in the filings with the Commission.  As a result, Woo caused Frazer’s 
+violation of Rule 2-02(b)(1). 
+ 
+ 
+                                                 
+13 These standards include the auditing standards adopted by the PCAOB following passage of the Sarbanes-Oxley 
+Act of 2002. 
+ 
+15 
+VIOLATIONS 
+ 
+Rule 102(e)(1)(ii) and Section 4C(a)(2) of the Exchange Act 
+ 
+72. As a result of the conduct described above, Respondents engaged in improper 
+professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and Rule 
+102(e)(1)(ii) of the Commission’s Rules of Practice. 
+  
+73. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) provide, in part, that the 
+Commission may censure or deny, temporarily or permanently, the privilege of appearing or 
+practicing before the Commission to any person who is found by the Commission to have 
+engaged in “improper professional conduct.”  In relevant part, Section 4C(b)(2) and Rule 
+102(e)(1)(iv)(B) define “improper professional conduct” as one of two types of negligent 
+conduct: (1) a single instance of highly unreasonable conduct in circumstances for which 
+heightened scrutiny is warranted; or (2) repeated instances of unreasonable conduct that indicate 
+a lack of competence.  As discussed above, Respondents’ failures to conform to applicable 
+professional standards in connection with the 2010 interim review and the 2011 audit of CVVT 
+constitute both repeated instances of unreasonable conduct and single instances of highly 
+unreasonable conduct under circumstances that warranted heightened scrutiny. 
+ 
+Rules 2-02 and 2-06 of Regulation S-X 
+ 
+74. An auditor violates Rule 2-02(b)(1) of Regulation S-X by issuing a report falsely 
+stating that an audit was conducted in accordance with PCAOB standards. As a result of the 
+conduct described above, Respondent Frazer willfully violated and Respondent Woo caused 
+Frazer’s violation of Rule 2-02(b)(1). 
+ 
+75. Rule 2-06 under Regulation S-X provides that for a period of seven years after an 
+accountant concludes an audit or review of an issuer’s financial statements, the accountant shall 
+retain records relevant to the audit or review, including work papers and other documents that 
+form the basis of the audit or review, and memoranda, correspondence, communications, other 
+documents and records (including electronic records), which: “(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 auditor or review.”  The rule also requires documentation of any 
+significant matters considered during the audit.  Frazer willfully violated Rule 2-06 as a result of 
+its documentation and retention failures, and Woo and Suen caused Frazer’s violation of Rule 2-
+06. 
+ 
+Rule 102(e)(1)(iii) and Section 4C(a)(3) of the Exchange Act 
+ 
+76. As a result of the conduct described above, Frazer willfully violated certain 
+provisions of the federal securities laws or the rules and regulations thereunder pursuant to 
+Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of 
+Practice. 
+ 
+77. Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s 
+Rules of Practice provide that the Commission may deny the privilege of appearing or practicing 
+before the Commission to any person found “[t]o have willfully violated, or willfully aided and 
+ 
+16 
+abetted the violation of, any provision of the Federal securities laws or the rules and regulations 
+thereunder.” As a result of the conduct described above, Frazer willfully violated certain 
+provisions of the federal securities laws or rules and regulations thereunder pursuant to Section 
+4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. 
+ 
+III. 
+ 
+In view of the allegations made by the Division of Enforcement and the Office of Chief 
+Accountant, the Commission deems it necessary and appropriate in the public interest that public 
+administrative and cease-and-desist proceedings be instituted to determine: 
+ 
+A. Whether the allegations set forth in Section II hereof are true and, in connection 
+therewith, to afford Respondents an opportunity to establish any defenses to such allegations;  
+ 
+B. What, if any, remedial action is appropriate in the public interest against 
+Respondents pursuant to Section 4C of the Exchange Act and 102(e) of the Commission’s Rules of 
+Practice. 
+ 
+C. What, if any, remedial action is appropriate and in the public interest, pursuant 
+Section 21B and 21C of the Exchange Act.   
+ 
+IV. 
+ 
+IT IS ORDERED that a public hearing for the purpose of taking evidence on the questions 
+set forth in Section III hereof shall be convened not earlier than 30 days and not later than 60 days 
+from service of this Order at a time and place to be fixed, and before an Administrative Law Judge 
+to be designated by further order as provided by Rule 110 of the Commission's Rules of Practice, 17 
+C.F.R. § 201.110.   
+ 
+IT IS FURTHER ORDERED that Respondents shall file an Answer to the allegations 
+contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220 
+of the Commission’s Rules of Practice, 17 C.F.R. § 201.220.  
+ 
+If Respondents fail to file the directed answer, or fail to appear at a hearing after being duly 
+notified, the Respondents may be deemed in default and the proceedings may be determined against 
+them upon consideration of this Order, the allegations of which may be deemed to be true as 
+provided by Rules 155(a), 220(f), 221(f), and 310 of the Commission’s Rules of Practice, 17 C.F.R. 
+§§ 201.155(a), 201.220(f), 201.221(f), and 201.310. 
+ 
+This Order shall be served forthwith upon Respondents 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. 
+ 
+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 
+ 
+17 
+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 

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+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77145 / February 16, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No. 3743 / February 16, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17118 
+ 
+ 
+In the Matter of 
+ 
+PTC 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 PTC Inc. (“PTC” 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.    
+ 
+III. 
+ 
+ On the basis of this Order and Respondent’s Offer, the Commission finds1 that: 
+                                                 
+1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding 
+on any other person or entity in this or any other proceeding. 
+ 
+ 2 
+ 
+Summary 
+ 
+1. This matter concerns violations of the anti-bribery, books and records and internal 
+accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by PTC.  From at 
+least 2006 into 2011, two wholly-owned PTC subsidiaries (collectively, “PTC-China”) provided 
+improper payments totaling nearly $1.5 million to government officials (“Chinese government 
+officials” or “officials”) who were employed by Chinese state owned entities (“SOEs”) that were 
+PTC customers.  These payments were made to obtain or retain business from the SOEs.  
+Specifically, PTC-China provided non-business travel, primarily sightseeing and tourist activities, 
+as well as improper gifts and entertainment, to the Chinese government officials.  PTC earned 
+approximately $11.85 million in profits from sales contracts with SOEs whose officials received 
+the improper payments.    
+ 
+2. PTC-China made these improper payments in two primary ways: 1) by providing at 
+least $1,179,912 to third party agents, disguised as commission payments or sub-contracting fees, 
+which were then used to pay for non-business related foreign travel for Chinese government 
+officials; and 2) by allowing its sales staff to provide Chinese government officials with gifts and 
+excessive entertainment of over $274,313.  The payments were recorded as legitimate 
+commissions and business expenses in PTC-China’s books and records, when in fact they were 
+improper payments designed to benefit the Chinese government officials.  PTC-China’s books and 
+records were consolidated into PTC’s books and records, thereby causing PTC’s books and records 
+to be inaccurate.  PTC failed to devise and maintain an adequate system of internal accounting 
+controls sufficient to prevent and detect these improper payments that occurred over several years. 
+ 
+Respondent 
+ 
+3. PTC Inc. (formerly Parametric Technology Corporation) is a Massachusetts 
+corporation with its headquarters in Needham, Massachusetts.  PTC designs, manufactures, and 
+sells Product Lifecycle Management Systems software (i.e., software that manages a company’s 
+products from design through manufacturing and distribution) and maintains operations in the 
+Americas, Europe, and Asia Pacific, including China.  PTC manages its China operations through 
+two wholly-owned subsidiaries, Parametric Technology (Shanghai) Software Company Limited 
+and Parametric Technology (Hong Kong) Limited.  PTC’s common stock is registered with the 
+Commission pursuant to Section 12(b) of the Exchange Act and is listed on the NASDAQ Global 
+Select Market (ticker: PTC). 
+ 
+Facts 
+ 
+A. PTC Exercised Substantial Control Over PTC-China 
+ 
+4. During the relevant period, although PTC-China was structured as two entities, it 
+conducted business as a single unit.  Until July 2008, all China local employees were assigned to 
+the Hong Kong subsidiary; in August 2008, they all became direct employees of the Shanghai 
+ 
+ 3 
+subsidiary.  And throughout this period, both the Hong Kong and Shanghai subsidiaries shared 
+common directors, all of whom were senior members or officers of PTC’s legal and finance 
+departments.  
+ 
+5. PTC exercised substantial control over PTC-China.  The employees of PTC’s 
+subsidiaries, including PTC-China, had global functional reporting lines to PTC, rather than an 
+independent management structure.  The functional reporting lines provided PTC with control over 
+PTC-China’s activities, including its sales process.  PTC-China’s senior sales staff reported to a 
+Division Vice President of Sales, who was a PTC employee based in China.  For most of the 
+relevant period, this Division Vice President either reported to the General Manager of the Asia 
+Pacific Region, or directly to PTC’s Executive Vice President of Sales, who was based in 
+Needham, Massachusetts.  For other functions, including sales operations and global services, 
+various PTC-China employees reported up to PTC employees, both based in China and the United 
+States.  Consistent with the functional reporting structure, PTC often moved its key employees to 
+various subsidiaries throughout the world.   
+ 
+6. For the sales, sales operations, and global services functions, the review of 
+proposed transactions followed a hierarchical approach through PTC-China and, if needed, to 
+employees at other PTC entities, including the parent company.  PTC employees approved pricing 
+discounts above certain thresholds for PTC-China and reviewed certain PTC-China contract 
+documents.  PTC, not PTC-China, was the counter party on most of the contracts with PTC-
+China’s SOE customers. 
+ 
+7. Further, PTC set the business and financial goals for its subsidiaries, including 
+PTC-China.  Each PTC function (including sales, marketing and finance) received a worldwide 
+budget from PTC to allocate among its various subsidiaries.  PTC also set regional sales targets 
+(i.e., for the Pacific Rim, in which China was included) and had regional managers who allocated 
+the sales targets among the countries and subsidiaries.   
+ 
+B. PTC-China Used Business Partners to Pay Bribes to 
+Chinese Government Officials ___________________ 
+ 
+8. For sales to Chinese SOEs, PTC-China routinely hired third parties – called 
+“business partners” – both to find deals, for which PTC-China paid a commission or “success fee,” 
+as well as to provide information technology and other services, which PTC-China subcontracted 
+to the business partner.  Business partners were generally Chinese companies, purportedly with 
+specific knowledge of, and relationships with, PTC-China’s customers.   
+ 
+9. PTC employees knew that many of PTC-China’s customers were SOEs whose 
+employees were Chinese government officials.  Certain business partners had long standing 
+relationships with these Chinese government officials.  Generally, the business partners provided 
+PTC-China with lobbying or “influence services” (i.e., arranging seminars and meetings with 
+officials of the SOEs) and information technology services.  Often the Chinese government 
+officials chose the business partner with whom they wished to collaborate.   
+ 
+ 4 
+ 
+10. Despite the routine use of business partners in many deals, and the risk of 
+corruption inherent in paying for influence services, PTC failed to conduct a sufficient review of 
+the business capabilities or ethics programs of these business partners.  
+ 
+11. Senior PTC-China sales staff had wide discretion in setting the fee arrangements 
+with business partners.  PTC-China did not have a fixed success fee arrangement with its business 
+partners, instead negotiating the fee for each particular deal.  When PTC-China initially engaged 
+the business partner, its sales team generally agreed to a price range for the business partners’ 
+commission – from as low as 15% to as high as 30% of the contract price – if the deal was 
+successful.  PTC-China’s senior sales staff finalized the commission with the business partner at or 
+about the time a deal closed.   PTC-China’s senior sales staff reported to a PTC employee who had 
+authority over the commission approval process.   
+ 
+12. For information technology and other subcontracted services, PTC-China relied on 
+sign offs provided by the SOE’s officials as evidence that the agreed upon services had been 
+performed.  Once the business partner and/or the Chinese government officials confirmed that the 
+business partner had completed the services, PTC-China made the agreed-upon payments to the 
+business partner.  PTC-China did not independently verify the extent to which, if at all, the 
+business partners in fact performed the subcontracted services.   
+ 
+13. Beginning in 2005, PTC-China recorded the commission and information 
+technology subcontracting payments to business partners as “Complete Outsourced Deals” or 
+“COD” expenses.  After 2008, PTC-China began paying commissions to business partners as it 
+received customer payment on the deals.  PTC-China sales staff tracked the payments to business 
+partners on spreadsheets that they kept on their computers, and which were separate from PTC-
+China’s electronic accounting records. 
+ 
+14. During contract negotiations with SOEs, Chinese government officials, in 
+conjunction with a business partner, often requested that PTC-China provide them with overseas 
+“training,” which involved primarily tourist and sightseeing visits.  The three parties would settle 
+on a travel budget and the Chinese government officials would typically agree to “gross up” the 
+SOE’s contract price by the amount of the anticipated travel costs.  PTC-China sales staff itemized 
+the overseas travel costs in the initial contract documents for approval by senior PTC-China sales 
+staff.  Once approved, however, PTC-China employees removed the line item for overseas travel 
+from the final contract documents that were signed by PTC and the SOEs.  Instead, the funds 
+budgeted for the overseas travel were disguised by PTC-China personnel as COD expenses related 
+to success fees or subcontracting payments for business partners. 
+ 
+15. Because PTC-China employees negotiated success fees with a business partner on a 
+deal by deal basis, they were able to include the costs of the overseas travel as part of a business 
+partner’s fees without raising suspicion.  In turn, the business partner used part of its success fee to 
+pay for the overseas sightseeing trips.  Alternatively, PTC-China employees sometimes disguised 
+the overseas travel payments as a payment purportedly for providing information technology or 
+ 
+ 5 
+other subcontracted services.  The business partner (or customer) then provided PTC-China with 
+documents indicating that it had performed the subcontracted services, and used a part of the 
+subcontract fee to pay for the Chinese government officials’ sightseeing trips.  For certain more 
+expensive trips, PTC-China employees spread the overseas travel payments over several contracts, 
+each with its own COD budget.  Because many deals with SOEs involved long term contracts that 
+took several years to complete, the actual sightseeing trip sometimes occurred up to two to three 
+years after the deal was negotiated.  
+ 
+16. PTC-China sales staff tracked on spreadsheets kept separate from PTC-China’s 
+regularly maintained books and records the overseas travel payments made by business partners to 
+or for the benefit of PTC’s SOE customers.  Senior PTC-China sales staff used the spreadsheets to 
+understand the composition of, and negotiate, the success and other fees with the business partners. 
+ 
+C. PTC-China Improperly Funded Leisure Travel for Chinese  
+Government Officials______________________________ 
+ 
+17.   PTC-China employees and the business partners typically arranged the overseas 
+sightseeing trips in conjunction with a visit to a PTC facility.  Most often, PTC-China sales staff 
+arranged for Chinese government officials to visit PTC’s corporate headquarters in Massachusetts, 
+for PTC to market and demonstrate the company’s products and services.  The trips typically 
+consisted of one day of business activities at PTC’s facility, followed or preceded by additional 
+days of sightseeing visits that lacked any business purpose, all of which were paid for by the 
+business partners using funds from their grossed up success fees and subcontracting payments.  
+Some PTC employees in the United States generally understood that SOE officials were spending 
+additional days in the country, including for tourist activities.  And certain PTC employees based 
+in China were aware that PTC-China employees were accompanying Chinese government officials 
+to tourist destinations.   
+ 
+18. Typical travel destinations in the United States included New York, Las Vegas, San 
+Diego, Los Angeles, and Honolulu, and involved guided tours, golfing, and other leisure activities.  
+PTC-China sales staff usually accompanied the Chinese government officials on these trips.  The 
+Chinese government officials who went on the trips in turn were often signatories on the purchase 
+agreements with PTC.    
+ 
+19. Examples of these overseas trips are described below: 
+ 
+ In April 2008, six officials of an SOE (“SOE Customer A”) and a senior PTC-
+China salesperson visited PTC’s Massachusetts office for a one-day meeting.  The 
+PTC-China salesperson further arranged for a business partner to pay $51,495 for 
+sightseeing visits to New York, Boston, Los Angeles and Honolulu for the Chinese 
+government officials (and himself).  The ten day trip included lodging at five star 
+hotels; tours of Rockefeller Center, the Statue of Liberty, the United Nations, and 
+the Empire State Building, along with tickets to a professional basketball game 
+while in New York; tours of MIT, Harvard, and Faneuil Hall while in Boston; a 
+ 
+ 6 
+tour of the Grand Canyon while in Las Vegas; a city tour while in Los Angeles; and 
+a city tour, a tour of Pearl Harbor, a visit to the Polynesian Cultural Center, golfing, 
+and a sunset dinner cruise while in Honolulu.  As a result, during 2008, PTC and 
+PTC-China received an improper benefit of at least three contracts, signed by PTC, 
+worth $1.2 million, from SOE Customer A.     
+ 
+ In December 2007, during contract negotiations with an SOE (“SOE Customer B”), 
+a PTC-China employee agreed to provide its officials with over $84,000 for future 
+overseas travel expenses.  The PTC-China employee emailed his supervisor at 
+PTC-China the terms of a deal with SOE Customer B that included $84,429 for the 
+overseas travel, which he initially recorded as “overseas training.”  Later, the PTC-
+China employee disguised “overseas training” as COD costs, stating: “I replace the 
+‘oversea training’ in the sheet to the ‘COD1’ ….  As you know, the customers just 
+want sightseeing instead of oversea training.”  Subsequently, the PTC-China 
+employee disguised the overseas travel costs as COD expenses in three deals, 
+signed by PTC, worth nearly $1.7 million, with SOE Customer B. 
+ 
+ PTC-China provided SOE Customer B with the agreed-upon overseas travel in 
+2010, when it arranged for nine of its officials to visit PTC’s Massachusetts office 
+for a one-day meeting.  PTC-China employees concurrently had a business partner 
+provide these Chinese government officials with sightseeing visits to New York, 
+Washington, D.C., Los Angeles, and Honolulu, including among the activities, 
+tours of West Point Academy, Rockefeller Center, and the Statue of Liberty while 
+in New York; Universal Studios while in Los Angeles; and Pearl Harbor while in 
+Honolulu.  
+ 
+ In December 2007, while negotiating a $3.4 million deal with an SOE (“SOE 
+Customer C”), a PTC-China salesperson emailed his supervisors at PTC-China 
+contract documents that included overseas travel expenses of $173,400.  In July 
+2008, while negotiating a $1.2 million deal with SOE Customer C, another PTC-
+China salesperson emailed the same supervisors contract documents that included 
+overseas travel expenses of $104,000.  When completing both deals, PTC-China 
+employees excluded the overseas travel expenses from the final contract documents 
+that were signed by PTC and SOE Customer C.    
+ 
+ PTC-China provided SOE Customer C with the agreed-upon overseas travel in May 
+2010, when it arranged for five of its officials to visit PTC’s Massachusetts office 
+for a one-day meeting.  PTC-China employees concurrently had a business partner 
+provide these Chinese government officials with a sightseeing visit to New York, 
+Las Vegas, and Los Angeles, including among other activities, tours of the United 
+Nations, the Statue of Liberty, and West Point while in New York; the Grand 
+Canyon while in Las Vegas; and Universal Studios while in Los Angeles.   
+ 
+ 
+ 7 
+ In May 2010, a PTC-China salesperson accompanied two officials of an SOE 
+(“SOE Customer D”) on a visit to PTC’s Massachusetts office for a one-day 
+meeting.  PTC-China sales staff concurrently had a PTC-China business partner 
+provide these Chinese government officials with sightseeing visits to New York, 
+Boston, Atlanta, Las Vegas, and Los Angeles, including among other activities, 
+tours of the Grand Canyon while in Las Vegas; Universal Studios while in Los 
+Angeles; and shopping excursions.  In July 2010, another PTC-China salesperson 
+accompanied seven officials of SOE Customer D on a second visit to PTC’s U.S. 
+offices.  Once again, PTC-China sales staff had one of its business partners provide 
+these Chinese government officials with sightseeing visits to New York, Boston, 
+New London, Connecticut, Washington, D.C., Las Vegas, San Diego and Los 
+Angeles, including among other activities, tours of Niagara Falls, the Statue of 
+Liberty, the Empire State Building, and the Intrepid Sea, Air & Space Museum 
+Complex while in New York; the Submarine Force Library & Museum while in 
+New London; the Grand Canyon while in Las Vegas; Universal Studios while in 
+Los Angeles; and shopping excursions.  These trips influenced SOE Customer D to 
+purchase over $9 million of products from PTC and PTC-China.   
+ 
+20. Overall, from 2006 into 2011, PTC-China, through its business partners, paid at 
+least $1,179,912 to fund at least 10 trips for Chinese government officials that included significant 
+non-business travel.  The costs of these trips were improperly recorded in PTC’s books and records 
+as COD or business partner related commissions or subcontracting payments, without any 
+indication that they were primarily for sightseeing and other non-business related activities.  PTC 
+improperly profited by at least $11,858,000 from contracts obtained from the SOEs whose 
+government officials participated on these trips. 
+ 
+D. PTC-China Improperly Provided Officials of SOEs 
+with Gifts and Excessive Entertainment____________  
+ 
+21. From 2009 through 2011, PTC-China sales staff corruptly provided at least 
+$274,313 in improper gifts and entertainment directly to Chinese government officials.  The value 
+of the gifts and entertainment generally ranged from $50 to $600, and often included small 
+electronics (e.g., cell phones, iPods, and GPS systems), gift cards, wine, and clothing.  PTC-China 
+sales staff’s long standing practice of providing the gifts to Chinese government officials was done 
+at least in part to obtain or retain SOE business. 
+ 
+22.  By providing these gifts, PTC-China violated PTC’s corporate governance and 
+internal controls policies.  These policies included: $50 monetary limits on the provision of gifts 
+and business entertainment to government officials; requiring PTC-China sales staff to obtain pre-
+approvals for business expenses over $500; and requiring that PTC-China sales staff document the 
+date, place, attendees, and purpose of business entertainment and the recipient.  These gifts were 
+improperly recorded as legitimate business expenses. 
+ 
+ 
+ 
+ 8 
+E. PTC-China Failed to Devise and Maintain a System  
+of Internal Accounting Controls ________________ 
+ 
+23. From at least 2006 through 2011, PTC failed to devise and maintain an adequate 
+internal accounting controls system to address the potential FCPA problems posed by its 
+ownership of, and control over, PTC-China.  Notably, during 2006, 2008, and 2010, PTC 
+investigated compliance issues at PTC-China, including possible corruption involving its business 
+partners.  However, PTC failed to identify and stop the ongoing and systemic illicit payments to 
+Chinese government officials by PTC-China personnel as described above and did not undertake 
+effective remedial actions. 
+ 
+24. Despite these compliance issues, PTC failed to undertake periodic comprehensive 
+risk assessments for PTC-China and to ensure that its internal accounting controls procedures were 
+suited to PTC-China’s particular circumstances (in particular, its ongoing dealings with Chinese 
+government officials).  PTC’s Code of Ethics and Anti-Bribery policies for the provision of 
+business entertainment were vague (i.e., stating that employees should use “good taste” and 
+consider the “customary business standards in the community” when providing business 
+entertainment) and not risk-based to China.  And PTC did not have independent compliance staff 
+or an internal audit function that had authority to review and test its internal accounting controls 
+processes or intervene into management decisions and, if appropriate, take remedial actions. 
+ 
+25. As a result, PTC failed to identify and correct corporate governance and compliance 
+breakdowns at PTC-China.  Notably, PTC failed to: properly vet PTC-China’s business partners, 
+which played a significant role for PTC-China as described above; police for corrupt payments by 
+its business partners; monitor and supervise PTC-China’s senior sales staff to ensure that they 
+enforced anti-corruption policies and kept accurate records concerning gifts to Chinese government 
+officials; properly scrutinize travel related expenses to prevent reimbursement for employees’ 
+airfare, lodging, and other expenses that were either personal in nature or gifts for customers; limit 
+the number or total value of gifts PTC-China’s sales staff could provide to any single individual or 
+entity; and provide sufficient FCPA training for its employees.   
+ 
+Legal Standards and Violations 
+ 
+26. Under Section 21C(a) of the Exchange Act, the Commission may impose a cease-
+and-desist order upon any person who is violating, has violated, or is about to violate any provision 
+of the Exchange Act or any 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. 
+ 
+Violations of the Anti-Bribery Provisions of the FCPA 
+ 
+27. Under Section 30A of the Exchange Act it is unlawful for any issuer, officer, 
+director, employee, or agent of such issuer or any stockholder thereof acting on behalf of the issuer 
+to make use of the mails or any means or instrumentality of interstate commerce corruptly in 
+ 
+ 9 
+furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or 
+offer, gift, promise to give, or authorization of the giving of anything of value to any foreign 
+official or any person, while knowing that all or a portion of such money or thing of value will be 
+offered, given, or promised, directly or indirectly, to any foreign official for the purposes of (i) 
+influencing any act or decision of such foreign official in his official capacity, (ii) inducing such 
+foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) 
+securing any improper advantage in order to assist such issuer in obtaining or retaining business for 
+or with, or directing business to, any person.  [15 U.S.C. § 78dd-1]. 
+ 
+28. PTC-China used third party business partners to pay bribes in the form of travel, 
+gifts and entertainment to Chinese government officials to obtain and retain business.  PTC 
+exercised substantial control over PTC-China by, among other things, creating functional reporting 
+lines, approving PTC-China’s key decisions, and setting PTC-China’s business and financial goals.  
+PTC entered into contracts directly with the SOEs as a result of the bribes paid through PTC-
+China’s business partners, and earned significant income from these contracts.  Under applicable 
+agency principles, PTC-China and its employees acted as agents of PTC during the relevant time 
+and were acting within the scope of their authority and for the benefit of PTC when participating in 
+the bribery scheme.   
+ 
+Violations of the Recordkeeping and Internal  
+Accounting Controls Provisions of the FCPA 
+ 
+29. 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 the 
+transactions and disposition of the assets of the issuer.  15 U.S.C. § 78m(b)(2)(A). 
+ 
+30. Section 13(b)(2)(B) of the Exchange Act requires reporting companies to devise 
+and maintain a system of internal accounting controls sufficient to provide reasonable assurances 
+that the transactions: (i) are executed in accordance with management’s general or specific 
+authorization; and (ii) are recorded as necessary to permit preparation of financial statements in 
+conformity with generally accepted accounting principles (“GAAP”) or any other criteria 
+applicable to such statements, and to maintain accountability for assets.  15 U.S.C. § 78m(b)(2)(B). 
+ 
+31. PTC-China made payments, directly and indirectly, to Chinese government 
+officials that were improperly recorded on its books and records as legitimate commissions and 
+business expenses.  The books and records of PTC-China were consolidated into PTC’s books and 
+records.  As a result of the misconduct of its China subsidiaries, PTC failed to make and keep 
+books and records which, in reasonable detail, accurately and fairly reflected its transactions and 
+the disposition of its assets as required by Section 13(b)(2)(A) of the Exchange Act.   
+ 
+32. The improper payments by PTC-China described above took place over several 
+years.  During the relevant period, PTC failed to implement an adequate system of internal 
+controls, including an appropriate FCPA compliance and training program at PTC-China, which 
+was commensurate with the risks of doing business in China, and particularly the risks of 
+ 
+ 10 
+businesses that regularly sold products to SOEs.  Accordingly, in violation of Section 13(b)(2)(B) 
+of the Exchange Act, PTC failed to devise and maintain a system of internal accounting controls 
+sufficient to provide reasonable assurances that it maintained accountability for its assets, and that 
+its transactions were executed in accordance with management’s authorization.   
+ 
+PTC’s Self-Disclosure and Remedial Efforts 
+ 
+33. PTC only discovered the improper payments to or for the benefit of Chinese 
+government officials in 2011, while investigating complaints concerning a senior PTC-China 
+salesperson.  Upon learning this information, PTC, with the oversight of the Audit Committee of 
+the Board of Directors, engaged independent counsel and an independent forensic consulting firm 
+to undertake an investigation.  PTC voluntarily self-reported the results of its internal investigation 
+to the Commission and responded to information requests from the Commission staff.  PTC did 
+not, however, uncover or disclose the full scope and extent of PTC-China’s FCPA issues until 
+2014.     
+ 
+34. As part of its internal review and investigation, PTC undertook significant remedial 
+measures including terminating the senior staff at PTC-China implicated in the FCPA violations.  
+PTC also revised its pre-existing compliance program, updated and enhanced its financial 
+accounting controls and its compliance protocols and policies worldwide, and implemented 
+additional specific enhancements in China.  These steps included:  (1) reviewing and enhancing its 
+anti-bribery policy, code of ethics, and gifts and entertainment policies to correct previous 
+deficiencies; (2) establishing a dedicated compliance team, including a chief compliance officer 
+and a new compliance director in China; (3) expanding its other compliance resources in China, 
+including hiring a new vice president of finance for Asia and adding additional legal staff in China; 
+(4) hiring a new management team in China, including a new China President; (5) enhancing its 
+FCPA training for employees; (6) severing its relationships with the business partners that were 
+implicated in the FCPA violations and discontinuing the use of COD partners or business referral 
+partners generally; (7) implementing a comprehensive due diligence program for all other business 
+partners that includes a risk-scoring system operated by a third party vendor and that includes 
+FCPA training as part of the onboarding process; (8) obtaining quarterly anti-corruption 
+certifications from sales staff; and (9) undertaking periodic compliance audits.   
+ 
+Non-Prosecution Agreement 
+ 
+35. Respondent’s subsidiaries have entered into non-prosecution agreements that 
+acknowledge responsibility for criminal conduct relating to the findings in the Order.  Specifically, 
+Respondent’s subsidiaries acknowledge responsibility for violating Section 104A of the Foreign 
+Corrupt Practices Act of 1977.  15 U.S.C. § 78dd-3.   
+ 
+ 
+ 
+ 
+ 
+ 
+ 11 
+Non-Imposition of a Civil Penalty 
+ 
+36. Respondent acknowledges that the Commission is not imposing a civil penalty 
+based upon its payment of a $14,540,000 criminal fine as part of Respondent’s subsidiaries’ 
+settlement with the United States Department of Justice.  
+ 
+IV. 
+ 
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
+agreed to in Respondent PTC’s Offer. 
+ 
+ Accordingly, it is hereby ORDERED that: 
+ 
+A. Pursuant to Section 21C of the Exchange Act, Respondent PTC 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 ten (10) days of the entry of this Order, pay disgorgement 
+of $11,858,000, which represents profits gained as a result of the conduct described herein, and 
+prejudgment interest of $1,764,000 to the Securities and Exchange Commission for transfer to the 
+general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3).  If timely 
+payment is not made, additional interest shall accrue pursuant to SEC Rule of Practice 600 and 31 
+U.S.C. § 3717.  Payment must be made in one of the following ways:   
+ 
+(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 PTC 
+as a Respondent in these proceedings, and the file number of these proceedings; a copy of the  
+ 
+ 
+ 
+ 12 
+ 
+ 
+cover letter and check or money order must be sent to Paul G. Block, Assistant Director, Foreign 
+Corrupt Practices Act Unit, Boston Regional Office, Securities and Exchange Commission, 33 
+Arch Street, Suite 2300, Boston, Massachusetts 02110. 
+ 
+ By the Commission. 
+ 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 

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+ 
+ 
+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77161 / February 17, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3744 / February 17, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17120 
+ 
+ 
+In the Matter of 
+ 
+DONALD J. GLIDEWELL, 
+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 J. Glidewell (“the Respondent”). 
+ 
+II. 
+  
+ In anticipation of the institution of these proceedings, the Respondent has submitted an 
+Offer of Settlement (the “Offer”), that the Commission has determined to accept.  Solely for the 
+purpose of these proceedings and any other proceedings brought by or on behalf of the 
+Commission, or to which the Commission is a party, and without admitting or denying the findings 
+herein, except as to the Commission’s jurisdiction over him and over the subject matter of these 
+proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-
+and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making 
+Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below.   
+ 
+ 
+ 2 
+III. 
+ 
+ On the basis of this Order and the Respondent’s Offer, the Commission finds1 that: 
+ 
+Summary 
+ 
+1. This matter involves misstated revenues at Marrone Bio Innovations, Inc. (“MBI” 
+or “the Company”), a Davis, California-based company that manufactures and sells biological-
+based pest management and plant health products.  The misstatements were the result of MBI’s 
+former Chief Operating Officer and Head of Sales directing MBI’s sales employees to offer 
+various sales concessions to MBI’s distributors in order to meet sales targets and analysts’ revenue 
+expectations, while simultaneously concealing those concessions from MBI’s finance and 
+accounting personnel.  Accordingly, MBI improperly and prematurely recognized more than $4 
+million in revenue from March 2013 through June 2014 (the “relevant period”), including $2 
+million in revenue that will never be recognized because the distributors returned the product to 
+MBI. 
+ 
+2. As a result, MBI reported materially false financial results in its financial 
+statements filed with the Commission over the period from July 1, 2013 through May 15, 2014.  
+On September 3, 2014, MBI announced that its previously filed financial statements could not be 
+relied upon.  On November 10, 2015, MBI filed with the Commission restated financial statements 
+for its 2013 quarterly and annual periods, as well as the quarterly periods ended March 31, 2014 
+and June 30, 2014. 
+ 
+ 3. MBI’s former Chief Financial Officer, Donald J. Glidewell, received bonuses 
+during the 12-month periods following the filings containing financial results that MBI has restated 
+as a result of misconduct.  The Commission does not allege that Glidewell participated in the 
+misconduct giving rise to the restatement.  Glidewell has not, however, reimbursed MBI for those 
+bonuses as required under Section 304(a) of the Sarbanes-Oxley Act. 
+ 
+Respondent 
+ 
+ 4. Donald J. Glidewell, age 59, is a resident of Benicia, California.  He served as 
+MBI’s Chief Financial Officer from April 2011 until his resignation in March 2014.  Glidewell is a 
+certified public accountant licensed in California.  Before joining MBI, Glidewell served as the 
+CFO at a private company in the Sacramento area from 2000 to 2007 and as a Senior Director of 
+Finance at the U.S. subsidiary of a Japanese-based public company from 2007 to 2011. 
+                                                 
+1  The findings herein are made pursuant to Respondent’s Offer of Settlement and 
+ is not binding on any other person or entity in this or any other proceeding. 
+ 
+ 
+ 
+ 3 
+ 
+Other Relevant Entity 
+  
+ 5. MBI is a public company incorporated in Delaware and headquartered in Davis, 
+California.  At all relevant times, MBI’s common stock has been registered under Section 12(b) of 
+the Exchange Act.  MBI had its initial public offering (“IPO”), in August 2013, after which its 
+stock traded on the Nasdaq Global Market under the ticker symbol “MBII”.  On June 6, 2014, MBI 
+undertook both a secondary and a follow-on offering in which it netted $39.9 million.  On 
+November 10, 2015, MBI restated its financial statements for its year ended December 31, 2013, as 
+well as its quarterly results for the periods ended March 31, 2013, June 30, 2013, September 30, 
+2013, March 31, 2014, and June 30, 2014. 
+ 
+Facts 
+ 
+MBI Conducts an Initial Public Offering and Issues Revenue Guidance 
+ 
+ 6. On September 12, 2013, MBI held its first quarterly earnings call where it 
+announced that revenues for the first six months of 2013 totaled $7.2 million and that MBI 
+expected revenues for 2013 to double those of 2012 (which were $7.1 million).  After that, MBI’s 
+senior leaders consistently urged MBI’s employees to ensure the Company met its goal; the 
+doubling of revenue became a key financial metric for MBI’s leadership.  Analysts covering MBI 
+cared about the Company’s expected sales and sales growth and the doubling of revenue was the 
+only guidance that MBI’s management provided to analysts.     
+ 
+ 7. MBI primarily sold its products to distributors who would then sell the product to 
+growers and other end users.  MBI historically recognized revenue on a “sell-in” basis, which 
+meant that it recognized revenue upon sale to a distributor rather than waiting to recognize revenue 
+until products were sold to the ultimate grower or end user.  This was appropriate under MBI’s 
+revenue recognition policy as long as persuasive evidence of an arrangement existed, delivery and 
+transfer of title had occurred or services had been rendered, the price was fixed and determinable, 
+and collectability was reasonably assured and no contingencies existed.  MBI’s revenue 
+recognition policy did not allow for recognition of revenue at the time of sale if any 
+contingencies—such as rights of return, or extended payment terms—were offered; rather, revenue 
+could be recognized only once the contingencies expired. 
+ 
+MBI Sales Employees Offer, And Hide From MBI’s Accounting Department, Numerous 
+Sales Concessions to Meet Previously-Announced Revenue Targets 
+ 
+ 8. Towards the end of 2013, MBI’s former Chief Operating Officer became concerned 
+that MBI might not meet its goal of doubling its 2012 revenue because its distributors did not have 
+any more capacity to buy MBI’s products.  To close the gap, MBI’s former COO—then Head of 
+Sales—instructed his sales employees to offer inventory protection on deals to ensure they moved 
+as much product as they could by the end of the year.  The inventory protection offered took three 
+general forms:  (1) rights to return unsold product; (2) credit and re-bill arrangements, which 
+ 
+ 4 
+extended payment dates beyond the originally agreed-upon terms; and (3) allowing payment for 
+products upon sales to the end user, rather than pursuant to stated payment terms with the 
+distributor. 
+ 
+ 9. In addition to offering inventory protection on certain deals in the first and second 
+quarters of MBI’s 2013 fiscal year, the former COO and other MBI sales employees offered 
+significantly more inventory protection towards the end of the year.  During the relevant period, 
+MBI’s former COO offered, and directed others to offer, inventory protection on at least eleven 
+sales transactions totaling approximately $4 million. 
+ 
+ 10. MBI’s former COO knew that inventory protection could preclude immediate 
+revenue recognition on deals sold through to distributors and that MBI’s accounting department 
+needed to know the terms of all sales transactions to ensure MBI’s revenue was accurately 
+recorded and reported.  Respondent Glidewell, MBI’s chief executive officer, and MBI’s controller 
+told the former COO on multiple occasions throughout 2013 and 2014 about the revenue 
+implications of offering inventory protection. 
+ 
+ 11. Despite knowing that it was important for MBI’s accounting department to be 
+aware of all terms and conditions of each sales transaction, MBI’s former COO instructed MBI’s 
+employees to conceal the inventory protection terms from MBI’s accountants.  For example, in late 
+2013, he instructed MBI’s former Customer Service Manager to hide a side letter in her office 
+desk, which detailed inventory protection on a large sales transaction transacted late in the fourth 
+quarter of 2013.  He also instructed the former Customer Service Manager to physically remove 
+the inventory protection terms from the face of a purchase order on another sales transaction.  
+These actions caused MBI to file financial statements that were not in accordance with GAAP.  See 
+Accounting Standards Codification 605-15-25-1. 
+ 
+ 12. Additionally, despite knowing he personally had offered, and authorized his sales 
+employees to offer, inventory protection on several sales transactions in 2013 and 2014, MBI’s 
+former COO consistently denied knowing about transactions with inventory protection in several 
+quarterly and annual disclosure committee meetings, the purpose of which was to help MBI’s 
+accounting department ensure that MBI appropriately recorded and reported its revenue.  MBI’s 
+former COO also lied on a sales certification provided to him by MBI’s independent auditor in 
+connection with their year-end 2013 audit by certifying in writing that he was not aware of any 
+terms or conditions MBI had agreed to with distributors that were not reflected in written 
+agreements or purchase orders. 
+ 
+ 13. On March 6, 2014, MBI held its 2013 full-year earnings call.  During the call, 
+MBI’s former COO attributed the Company’s achievement of doubling its 2012 revenue to the 
+successful launch of a new product into row crops in the Midwest and the stellar performance of 
+another product in its first full year of sales. 
+ 
+ 14. On March 25, 2014, MBI filed its 2013 Form 10-K with the Commission.  
+Revenue, as reported, more than doubled from $7.1 million in 2012 to $14.5 million in 2013. 
+ 
+ 5 
+ 
+ 15. MBI’s former COO, as well as several of his sales employees, continued to offer 
+inventory protection throughout at least the first quarter of 2014 and continued to hide it from 
+MBI’s accounting department.  All told, MBI’s former COO caused MBI to improperly recognize 
+revenue on at least eleven sales transactions totaling approximately $4 million.  Without offering 
+inventory protection on these sales transactions, MBI would have missed its doubling-of-revenue 
+target for 2013 because many of the Company’s distributors would not have purchased its products 
+without assurances that they could return them in the future. 
+ 
+ 16. MBI’s former COO also engaged in other fraudulent conduct to maximize revenue 
+and allow MBI to recognize revenue earlier than allowed under GAAP.  During 2013, the former 
+COO instructed employees in MBI’s supply chain department to ship the wrong product to a 
+distributor and in early 2014, the former COO directed MBI’s former Customer Relations Manager 
+to backdate a shipping document.  In an additional attempt to book certain sales transactions, the 
+former COO authorized MBI to pay a distributor’s freight costs and storage fees, and then directed 
+the former Customer Relations Manager to mischaracterize these expenses as promotional 
+marketing expenses in the Company’s books and records, resulting in MBI filing financial 
+statements that were not in accordance with GAAP.  See Accounting Standards Codification 605-
+50-45-2. 
+ 
+Scope and Impact of the Fraud at MBI 
+ 
+ 17. MBI’s revenues were materially overstated in its financial statements filed with the 
+Commission as a result of the hidden inventory protection.  Specifically, MBI misstated its 
+financial statements in Forms 10-Q and 10-K for fiscal year 2013 and Forms 10-Q for 2014.  MBI 
+also misstated its financial statements in the Company’s Forms S-1 filed on July 1, 2013 and May 
+16, 2014.  Finally, MBI incorporated the misstated first quarter 2013 financial statements, as 
+included in the first Form S-1, in its Form S-8 filed on September 6, 2013. 
+ 
+ 18. These misstatements are material.  Without the inventory protection on several 
+sales transactions in 2013, MBI would not have doubled its 2012 revenue and would have missed 
+its revenue target for the year.  MBI’s distributors returned approximately $2 million in product 
+after June 30, 2014 pursuant to inventory protection rights and the Company will not recognize this 
+revenue in any future period. 
+ 
+MBI’s Restatement 
+ 
+ 19. On September 3, 2014, MBI announced that its Audit Committee had commenced 
+an independent investigation into whether revenue for a particular transaction had been 
+appropriately recognized.  It also announced that it had concluded, after consultation with 
+management, that its previously reported financial statements as of December 31, 2013, included 
+in its annual report on Form 10-K for the year ended December 31, 2013, and the unaudited 
+interim financial statements included in the Company’s quarterly reports on Forms 10-Q for the 
+quarters ended March 31, 2014 and June 30, 2014, should no longer be relied upon. 
+ 
+ 6 
+ 
+ 20. On November 10, 2015, MBI filed with the Commission restated financial results, 
+for its quarterly periods ending March 31, 2013, June 30, 2013, September 30, 2013, March 31, 
+2014, and June 30, 2014, as well as its annual results for the year ended December 31, 2013.  For 
+certain distributors, MBI changed its method of recognizing revenue from “sell-in” to “sell-
+through,” meaning that, for those distributors, it will delay the recognition of revenue until the 
+product is sold through to an end user. 
+ 
+ 21. In its restated Form 10-K, MBI disclosed that its Audit Committee had determined 
+that, as a result of the failure of certain former employees to share with the Company’s accounting 
+department or external auditor important transaction terms with distributors, including inventory 
+protection agreements that would permit the distributors to return to the Company certain unsold 
+products, the Company inappropriately recognized revenue for certain historical sales transactions 
+prior to satisfying the criteria for revenue recognition required under GAAP.  MBI also concluded 
+that mitigating controls were not in place to discourage, prevent or detect management override of 
+internal accounting control by certain sales personnel related to MBI’s process for recognizing 
+revenue, and that its controls were not effectively designed to identify instances when sales 
+personnel made unauthorized commitments with certain distributors, including inventory 
+protection arrangements, that would permit the distributors to return to MBI certain unsold 
+products.      
+ 
+Compensation of CFO Glidewell 
+ 
+ 22. During the 12-month periods that followed the filing of the periodic reports 
+requiring restatement, Glidewell received bonuses that were tied to MBI’s achievement of certain 
+revenue targets. 
+ 
+ 23. Glidewell has not reimbursed those amounts to MBI. 
+ 
+Violations 
+ 
+ 24. Section 304 of the Sarbanes-Oxley Act of 2002 requires the chief executive officer 
+or chief financial officer of any issuer required to prepare an accounting restatement due to 
+material noncompliance with the securities laws as a result of misconduct to reimburse the issuer 
+for:  (i) any bonus or incentive-based or equity-based compensation received by that person from 
+the issuer during the 12-month periods following the false filings; and (ii) any profits realized from 
+the sale of securities of the issuer during that 12-month periods.  Section 304 does not require that a 
+chief executive officer or chief financial officer engage in misconduct to trigger the reimbursement 
+requirement.  Glidewell received bonuses during the 12-month periods following the filings 
+containing financial results that MBI was required to restate.  He has not, to date, reimbursed the 
+Company for those amounts.  Glidewell has, therefore, violated Sarbanes-Oxley Section 304. 
+ 
+ 
+ 
+ 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, pursuant to Section 21C of the Exchange Act, that: 
+ 
+ A. Respondent Glidewell cease and desist from committing or causing any violations 
+and any future violations of Section 304 of the Sarbanes-Oxley Act. 
+ 
+ B. Respondent Glidewell shall, within 30 days of the entry of this Order, reimburse 
+MBI for a total of $11,789 pursuant to Section 304(a) of SOX.  Respondent shall simultaneously 
+deliver proof of satisfying this reimbursement obligation to Erin E. Schneider, Division of 
+Enforcement, Securities and Exchange Commission, 44 Montgomery Street, Suite 2800, San 
+Francisco, California 94104. 
+ 
+ 
+ 
+ 
+ By the Commission. 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 

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+UNITED STATES OF AMERICA 
+Before the 
+SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77162 / February 17, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3745 / February 17, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17121 
+ 
+ 
+ 
+In the Matter of 
+ 
+Julieta Favela Barcenas, 
+ 
+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 Julieta Favela Barcenas (“Favela” or 
+“Respondent”). 
+ 
+II. 
+ 
+ In anticipation of the institution of these proceedings, Favela 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 her and the subject matter of these proceedings, which are 
+admitted, Favela consents to the entry of this Order Instituting Cease-and-Desist Proceedings 
+Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a 
+Cease-and-Desist Order (“Order”), as set forth below. 
+ 2 
+III. 
+ 
+ On the basis of this Order and Respondent’s Offer, the Commission finds1 that: 
+ 
+Summary 
+ 
+ 1. This matter involves misstated revenues and filings at Marrone Bio Innovations, Inc. 
+(“MBI” or “the Company”), a Davis, California-based company that manufactures and sells 
+biological-based pest management and plant health products.  The misstatements were the result of 
+a scheme led by Hector M. Absi, Jr. (“Absi”), MBI’s former Chief Operating Officer and Head of 
+Sales, to direct MBI’s sales employees to offer various sales concessions to MBI’s distributors in 
+order to meet sales targets and analysts’ revenue expectations, but simultaneously conceal those 
+concessions from MBI’s finance and accounting personnel.  As a result, from March 2013 through 
+June 2014 (the “relevant period”), MBI improperly and prematurely recognized more than $4 
+million in revenue, including approximately $2 million in revenue that will never be recognized 
+because the distributors returned the product to MBI.  Additionally, Absi engaged in expense report 
+fraud, which rendered MBI’s definititive proxy statement filed with the Commission in April 2014 
+materially false and misleading. 
+ 
+2. As a result, MBI reported materially false and misleading financial results in its 
+financial statements filed with the Commission during the period July 1, 2013 through May 15, 
+2014.  On September 3, 2014, MBI announced that its previously filed financial statements could 
+not be relied upon.  On November 10, 2015, MBI filed restated financial statements for its 2013 
+quarterly and annual periods, as well as the quarterly periods ended March 31, 2014 and June 30, 
+2014. 
+ 
+3. Respondent served as MBI’s Customer Relations Manager from March 2013 
+through January 2015 and reported to Absi.  During that time, she was responsible for, among other 
+things, communicating all the terms of MBI’s sales transactions to MBI’s accounting department to 
+ensure MBI properly accounted for those sales.  At Absi’s direction, however, Respondent on 
+multiple occasions hid critical information from MBI’s accounting department, including:  (1) 
+failing to provide a side letter, which gave a distributor the right to return product; (2) causing others 
+to backdate a shipping document to make it appear as though MBI shipped products earlier than it 
+actually did; and (3) causing the removal of an important sales term from a purchase order so as to 
+divert attention away from the fact that return rights were part of the sales transaction.  Respondent 
+also provided false information to MBI’s accounting department about MBI’s shipment of incorrect 
+products, which the Company then communicated to its independent auditors.   
+ 
+4. At Absi’s direction, Respondent also altered Absi’s bank and credit card statements 
+to make it appear as though several of Absi’s personal expenses were legitimate business expenses 
+                                                 
+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 
+that MBI should reimburse.  As a result, MBI’s proxy statement also materially understated the 
+amount of perquisites MBI disclosed that it paid to Absi as executive compensation.    
+ 
+Respondent 
+ 
+5. Favela, age 36, resides in Davis, California.  Favela was MBI’s Customer Relations 
+Manager from approximately March 2013 until the Company terminated her employment in 
+January 2015. 
+ 
+Other Relevant Entity and Individual 
+ 
+ 6. MBI is a public company incorporated in Delaware and headquartered in Davis, 
+California.  At all relevant times, MBI’s common stock has been registered under Section 12(b) of 
+the Exchange Act.  MBI had its initial public offering (“IPO”), in August 2013, after which it 
+traded on the Nasdaq Global Market under the symbol “MBII.”  On June 6, 2014, MBI undertook 
+a secondary and a follow-on offering in which it netted $29,959,000.  On November 10, 2015, 
+MBI restated its financial statements for its year ended December 31, 2013, as well as its quarterly 
+results for the periods ended March 31, 2013, June 30, 2013, September 30, 2013, March 31, 2014, 
+and June 30, 2014. 
+ 
+ 7. Hector M. Absi, Jr., age 47, resides in Las Vegas, Nevada.  Absi served as MBI’s 
+Chief Operating Officer from January 2014 until his resignation in August 2014.  From October 
+2012 to January 2014, Absi served as MBI’s Vice President of Commercial Operations.  In 
+connection with this matter, the Commission has charged Absi with committing fraud and other 
+violations of the federal securities laws. 
+ 
+Facts 
+ 
+8. On or about September 12, 2013, MBI held its first quarterly earnings call where it 
+announced that revenues for the first six months of 2013 totaled $7.2 million and that MBI 
+expected revenues for 2013 to double those of 2012 (which were $7.1 million).  After that, MBI’s 
+senior leaders consistently urged MBI’s employees to ensure the Company met its goal; the 
+doubling of revenue became a key financial metric for MBI’s senior executives.  Absi was well 
+aware of MBI’s desire to double its revenue by the end of 2013. 
+ 
+9. MBI primarily sold its products to distributors who would then sell the product to 
+growers and other end users.  MBI historically recognized revenue on a “sell-in” basis, which 
+meant that it recognized revenue upon sale to a distributor rather than waiting to recognize revenue 
+until products were sold to the ultimate grower or end user.  This was appropriate under MBI’s 
+revenue recognition policy as long as persuasive evidence of an arrangement existed, delivery and 
+transfer of title occurred or services rendered, the price was fixed and determinable, and 
+collectability was reasonably assured and no contingencies existed.  Under MBI’s revenue 
+recognition policy, the Company could not recognize revenue at the time of sale if any 
+contingencies—such as rights of return, or extended payment terms—were offered; rather, MBI 
+ 4 
+could only recognize revenue once the contingencies expired.  During the relevant period, Absi 
+was aware of MBI’s revenue recognition policy. 
+ 
+Absi Offered and Hid, and Directed MBI Sales Employees to Offer and Hide, 
+Numerous Sales Concessions to Meet Previously-Announced Revenue Targets 
+ 
+10. Towards the end of 2013, Absi became aware that MBI might not meet its goal of 
+doubling its 2012 revenue because its distributors did not have any more capacity to buy MBI’s 
+products.  To close the gap, Absi instructed his sales employees to offer inventory protection on 
+deals to sell as much product as they could by the end of the year.  The inventory protection 
+offered took three general forms:  (1) rights to return unsold product; (2) credit and re-bill 
+arrangements, which extended payment dates beyond the originally agreed-upon terms; and (3) 
+allowing payment for products upon sales to the end-user, rather than pursuant to stated payment 
+terms with the distributor. 
+ 
+11. In addition to offering inventory protection on certain deals in the first and second 
+quarters of MBI’s 2013 fiscal year, Absi and other MBI sales employees offered significantly more 
+inventory protection towards the end of the year.  During the relevant period, Absi offered, and 
+directed others to offer, inventory protection on at least eleven sales transactions totaling 
+approximately $4 million. 
+ 
+12. On or about March 25, 2014, MBI filed its 2013 Form 10-K with the Commission.  
+Revenue, as reported, more than doubled from $7.1 million in 2012 to $14.5 million in 2013.  
+Without offering inventory protection, MBI would have missed its doubling-of-revenue target for 
+2013.  In 2014, MBI was unable to sustain its 2013 sales rate so Absi continued to authorize his 
+sales employees to offer inventory protection and other sales concessions in order to close as many 
+sales transactions as possible. 
+ 
+13.   Absi also engaged in other fraudulent conduct to maximize revenue and allow MBI 
+to recognize revenue earlier than allowed under GAAP.  During 2013, Absi instructed employees 
+in MBI’s supply chain department to ship the wrong product to a distributor and in early 2014, 
+Absi directed Respondent to backdate a shipping document in order to book revenue in a particular 
+quarter.  In an additional attempt to book certain sales transactions, Absi authorized MBI to pay a 
+distributor’s freight costs and storage fees, and then directed Respondent to mischaracterize these 
+expenses in the Company’s books and records as promotional marketing expenses. 
+ 
+Respondent Helped Absi Provide False and Misleading Information to MBI’s Accounting 
+Department 
+   
+ 14. As MBI’s Customer Relations Manager, Respondent served as an important 
+intermediary between MBI’s sales organization and accounting department.  On several occasions, 
+Respondent helped Absi hide information from, and provide false and misleading information to, 
+MBI’s accounting department.  
+ 
+ 5 
+ 15. First, during the fourth quarter 2013, Respondent, at Absi’s direction, helped Absi 
+conceal the presence of inventory protection from MBI’s accounting department.  In late 
+December 2013, MBI was engaged in negotiations with a distributor to sell the distributor 
+approximately $870,000 worth of product.  To close the deal, the distributor requested inventory 
+protection so that it could return any unsold product.  Absi agreed to provide inventory protection 
+on the deal and included it on a term sheet that memorialized the terms of the agreement between 
+MBI and the distributor.  At Absi’s instruction, Respondent put the term sheet in her office desk 
+drawer and did not inform MBI’s accounting department of the document’s existence or that the 
+sales transaction included inventory protection.  On another occasion, in January 2014, when a 
+central California distributor submitted a purchase order with inventory protection, Absi lied to 
+MBI’s accounting department by falsely telling them that inventory protection was not a term of 
+the deal, when, in fact, inventory protection was an important term in the sales transaction.  
+Respondent, at Absi’s direction, obtained a revised purchase order from the distributor without 
+inventory protection on it and she did not tell MBI’s accounting department that the transaction 
+continued to include inventory protection.  Both of these instances led to recognition of revenue on 
+each of the transactions in violation of  GAAP (Accounting Standards Codification 605-15-25-1). 
+ 
+ 16. Second, Respondent altered a shipping document to facilitate the recognition of 
+revenue.  Specifically, on the last day of the first quarter of 2014, MBI completed a sale to a 
+distributor, but needed to ship the product on that day for the Company to recognize revenue in the 
+quarter.  At Absi’s instruction, Respondent, who owns a 20% interest in a freight shipping 
+company, arranged for the shipping company to ship MBI’s product and backdate a bill of lading 
+to make it appear that the shipment occurred on the last day of the quarter.  Respondent did not 
+inform MBI’s accounting department that the shipping documents contained false information.  
+MBI recognized revenue on the transaction during the first quarter of 2014, in violation of MBI’s 
+revenue recognition policy and sooner than it should have under GAAP (Accounting Standards 
+Codification 605). 
+ 
+17. Third, Respondent provided false and misleading explanations to MBI’s accounting 
+department about why the Company’s supply chain shipped the wrong product to an MBI 
+distributor.  In or around September 2013, Absi, attempting to recognize revenue on a sale, 
+directed supply chain personnel to ship the wrong product to a Midwest distributor because MBI 
+did not have sufficient quantities of the ordered product available.  In or around October 2013, the 
+distributor contacted MBI’s accounting department inquiring if MBI had shipped it the wrong 
+product.  At Absi’s direction, Respondent reported to MBI’s accounting department that the 
+distributor received the correct product.  In or around March 2014, however, the distributor 
+returned the product to MBI.  Notwithstanding the fact that Respondent knew that MBI had 
+intentionally shipped the wrong product so that it could record and report the associated revenue, 
+she told MBI’s accounting department that the shipment resulted from the supply chain department 
+mistakenly shipping the wrong product to the distributor.  In or around May 2014, Absi gave 
+similarly false explanations to MBI’s independent auditors when they asked why the supply chain 
+department shipped the wrong product.  MBI ultimately deferred the revenue on the transaction, 
+however, until payment came due and was successfully collected, which occurred in the second 
+quarter of 2014.  Based on Absi’s and Respondent’s claims, MBI’s first quarter 2014 Form 10-Q 
+improperly disclosed a material weakness in controls and characterized its material weakness as 
+ 6 
+the result of a supply chain department “shipping error,” rather than an intentional override of 
+MBI’s internal accounting controls for the purpose of prematurely recognizing revenue. 
+ 
+ 18. At Absi’s direction, Respondent engaged in additional conduct, which resulted in 
+falsified books and records and caused MBI’s filing of false annual and periodic reports, including:  
+(1) requesting and receiving an invoice from a distributor that mischaracterized freight charges as 
+sales promotional meetings; (2) in connection with a different distributor, charging warehousing 
+fees on Respondent’s personal credit card but expensing them as promotional sales meetings; and 
+(3) creating a phony invoice, purporting to be from a distributor, for a promotional sales meeting to 
+provide support for one of Absi’s personal expenses that Absi charged to MBI as business 
+expenses.  Instances (1) and (2) resulted in the violation of GAAP (Accounting Standards 
+Codification 605-50-45-2). 
+ 
+19. Finally, Respondent helped Absi falsify his personal bank and credit card 
+statements in connection with MBI’s internal audit of Section 16 Officer expense reports.  During 
+the 2013 year-end close process, MBI’s accounting department tested Section 16 Officer expense 
+reports.  MBI’s accounting department noticed what appeared to be duplicate expense submissions 
+when reviewing Absi’s expense report information.  MBI’s accounting department randomly 
+selected sixty report line items and asked Absi to provide bank and credit card statements 
+supporting each line item.  To support the sixty selections, Respondent, working with Absi, altered 
+Absi’s bank and credit card statements to hide personal and duplicate expenses, thereby misleading 
+MBI’s accounting department into thinking that these expenses were legitimate business expenses.  
+ 
+MBI’s Restatement 
+ 
+20. Due in part to Respondent’s conduct, MBI materially overstated its revenue in 
+several filings filed with the Commission (i.e., Form S-1s, Form S-8, Form 10-K and Form 10-Qs) 
+during the relevant period.  On November 10, 2015, MBI filed with the Commission restated 
+financial results, for its quarterly periods ending March 31, 2013, June 30, 2013, September 30, 
+2013, March 31, 2014, and June 30, 2014, as well as its annual results for the year ended 
+December 31, 2013. 
+ 
+21. In its restated Form 10-K, MBI disclosed that its Audit Committee had determined 
+that, as a result of the failure of certain former employees to share with the Company’s accounting 
+department or external auditors important transaction terms with distributors, including inventory 
+protection agreements that would permit the distributors to return to the Company certain unsold 
+products, the Company improperly recognized revenue for certain historical sales transactions prior 
+to satisfying the criteria for revenue recognition required under GAAP. 
+ 
+22. MBI’s restatement included transactions for which Respondent hid, or otherwise 
+provided false and misleading information to MBI’s accounting department, as discussed above.  
+This included hiding the side letter in connection with the approximately $870,000 sales 
+transaction, causing the removal of inventory protection language from a purchase order issued by 
+a central California distributor, and causing the backdating of a bill of lading on a shipment of 
+product to a Midwest distributor.  MBI permanently reversed approximately $2 million in 
+ 7 
+previously reported revenue because some distributors who received inventory protection later 
+returned product to MBI.  This included the approximately $870,000 sales transaction, referenced 
+above. 
+ 
+Violations 
+ 
+23.  As a result of the conduct described above, Favela violated Section 13(b)(5) of the 
+Exchange Act and Rule 13b2-1 thereunder, which prohibits any person from knowingly 
+circumventing or knowingly failing to implement a system of internal accounting controls or 
+knowingly falsifying any book, record, or account that an issuer is required to maintain, and from 
+directly or indirectly falsifying, or causing the falsification of, any book, record, or account 
+required by Exchange Act Section 13(b)(2)(A). 
+ 
+24. Additionally, Favela caused violations of Section 13(b)(2)(A) by MBI, which 
+requires issuers to make and keep books and records that accurately and fairly reflect their 
+transactions and assets.  Because of the conduct described above, MBI’s books and records did not 
+accurately reflect the Company’s transactions and assets during the relevant period. 
+  
+IV. 
+ 
+ Respondent acknowledges that the Commission is not at this time imposing a civil penalty 
+based on her agreement to cooperate in a related enforcement action.  However, pursuant to this 
+Order, Respondent agrees to additional proceedings in this proceeding to determine what, if any, 
+civil penalties pursuant to Section 21B(a) of the Exchange Act against Respondent are in the public 
+interest.  In connection with such additional proceedings:  (a) Respondent agrees that she will be 
+precluded from arguing that she did not violate the federal securities laws as described in this 
+Order; (b) Respondent agrees that she may not challenge the validity of this Order; (c) solely for 
+the purposes of such additional proceedings, the findings of this Order shall be accepted as and 
+deemed true by the hearing officer; and (d) the hearing officer may determine the issues raised in 
+the additional proceedings on the basis of affidavits, declarations, excerpts of sworn deposition or 
+investigative testimony, and documentary evidence. 
+ 
+V. 
+ 
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
+agreed to in Respondent Favela’s Offer. 
+ 
+ Accordingly, it is hereby ORDERED that: 
+ 
+ A. Pursuant to Section 21C of the Exchange Act, Respondent Favela shall 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. IT IS FURTHER ORDERED, pursuant to Rule 100(c) of the Commission’s Rules 
+of Practice, 17 C.F.R. § 201.100(c), in the interest of justice and without prejudice to any party, that 
+ 8 
+a public hearing for the purpose of taking evidence on the questions set forth in Section IV hereof 
+shall be convened at a time and place to be fixed, and before an Administrative Law Judge to be 
+designated by further order as provided by Rule 110 of the Commission’s Rules of Practice, 17 
+C.F.R. § 201.110, following the entry of a final judgment against the last remaining defendant in 
+Securities and Exchange Commission v. Hector M. Absi, Jr., (E.D. Cal.) (the “Related Action”). 
+ 
+ If Respondent fails to appear at a hearing after being duly notified, Respondent may be 
+deemed in default and the proceedings may be determined against her upon consideration of this 
+Order, the allegations of which may be deemed to be true as provided by Rules 155(a), 220(f), 
+221(f), and 310 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), 
+201.221(f), and 201.310.  
+ 
+ This Order shall be served forthwith upon Respondent personally or by certified mail. 
+ 
+ C. IT IS FURTHER ORDERED, pursuant to Rule 100(c) of the Commission’s Rules 
+of Practice, 17 C.F.R. § 201.100(c), in the interest of justice and without prejudice to any party, that 
+the Administrative Law Judge shall issue an initial decision no later than 300 days from the date of 
+the entry of a final judgment in the Related Action. 
+ 
+ In the absence of an appropriate waiver, no officer or employee of the Commission engaged 
+in the performance of investigative or prosecuting functions in this or any factually related 
+proceeding will be permitted to participate or advise in the decision of this matter, except as witness 
+or counsel in proceedings held pursuant to notice.  Since this proceeding is not “rule making” within 
+the meaning of Section 551 of the Administrative Procedure Act, it is not deemed subject to the 
+provisions of Section 553 delaying the effective date of any final Commission action. 
+ 
+ By the Commission. 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 
+ 
+ 

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+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77207 / February 23, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3746 / February 23, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17126 
+ 
+ 
+In the Matter of 
+ 
+JASON MAIHER,  
+ 
+Respondent. 
+ 
+ORDER INSTITUTING 
+ADMINISTRATIVE AND CEASE-AND-
+DESIST PROCEEDINGS PURSUANT 
+TO SECTIONS 4C, 15(b) 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 
+and in the public interest that public administrative and cease-and-desist proceedings be, 
+and hereby are, instituted pursuant to Sections 4C, 15(b) and 21C of the Securities 
+Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s 
+Rules of Practice against Jason Maiher (“Respondent” or “Maiher”).   
+ 
+II. 
+ 
+After an investigation, the Division of Enforcement alleges that: 
+ 
+ A.  RESPONDENT 
+ 
+1. Maiher, age 41, was KeyBanc Capital Markets Inc.’s (“KBCM”) 
+Chief Financial Officer (“CFO”) from April 2007 through November 2011 and Series 27 
+Financial and Operations Principal (“FinOp”) from April 2007 through December 2011.  
+KBCM terminated Maiher’s employment in May 2012.  Maiher was primarily responsible 
+for maintaining KBCM’s financial records.  He submitted KBCM’s Annual Audited 
+Report to the Commission and oversaw the filing of its monthly Financial and Operational 
+Combined Uniform Single Reports (“FOCUS Reports”) with FINRA, which then furnished 
+the FOCUS Reports to the Commission.  Pursuant to internal policies and procedures that 
+were applicable to KBCM, Maiher was required to certify after the close of each month 
+that KBCM’s general ledger balance sheet information had been compared with, and 
+ 2 
+reconciled to, the underlying back-office system information.  Maiher is currently an 
+assistant controller for a wholly owned banking subsidiary of a publicly traded company. 
+ 
+ B. RELEVANT ENTITY 
+ 
+  2. KBCM is a broker-dealer registered with the Commission and is a 
+subsidiary of KeyCorp, a financial services company headquartered in Cleveland, Ohio.  
+ 
+C. KBCM’S BOOKS AND RECORDS WERE INACCURATE 
+ 
+ 3. Beginning at some point prior to January 2011, and through January 
+2012, Maiher, who was KBCM’s CFO (until November 2011) and FinOp, directed that 
+unsubstantiated or “plug” entries be made to one or more accounts in KBCM’s general 
+ledger, in order to complete KBCM’s monthly close-the-books process.  The amount of the 
+plug entries varied over time.     
+ 
+ 4. The plug entries resulted in KBCM overstating its assets and income 
+in its fiscal year 2010 financial statements, which were included in its fiscal year 2010 
+Annual Audited Report filed with the Commission in February 2011.  Maiher signed this 
+report, affirming that the accompanying financial statements were “true and correct.” 
+ 
+ 5. The plug entries to the general ledger also resulted in inaccurate 
+financial information being included in KBCM’s monthly FOCUS Reports that Maiher 
+caused to be filed with FINRA, which then furnished the FOCUS Reports to the 
+Commission, for some point prior to January 2011 through January 2012.  In 2012, 
+KBCM filed amended FOCUS Reports.   
+ 
+6. In its Annual Audited Report for the year ended December 31, 2011, 
+KBCM disclosed that its prior period financial statements (for fiscal year 2010) included 
+unsubstantiated assets of $13,679,000 ($8,591,000 net of taxes) and omitted liabilities of 
+$4,305,000 ($2,701,000 net of taxes).  Specifically, the 2011 Annual Audited Report stated 
+“[t]he December 31, 2010, Statement of Financial Condition included $13,679[,000] in net 
+trade date receivables that was found to be unsubstantiated during 2011.”  KBCM’s write-
+off of the unsubstantiated assets and accrual of the unrecorded liabilities resulted in restated 
+net income of $3,136,000, a 78% reduction versus the previously reported $14,428,000, 
+and restated shareholder’s equity of $316,796,000, an $11,292,000 reduction, from the 
+previously reported $328,088,000. 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 3 
+D. RESPONDENT DIRECTED THAT PLUG ENTRIES BE MADE TO 
+KBCM’S GENERAL LEDGER 
+ 
+7. KeyCorp’s written policies and procedures1 that were applicable to 
+KBCM required KBCM’s finance department, led by Maiher, to reconcile certain general 
+ledger accounts to the back office securities trading and inventory software system.  The 
+general ledger system was referred to as MSA.  MSA was the source of the official books 
+and records of KBCM.  The back office system for KBCM was referred to as Broadridge.   
+ 
+8. The purpose of reconciling accounts was to ensure that the 
+information in MSA was accurate.  Generally, reconciliation is an accounting process used 
+to compare two sets of records to ensure the figures are in agreement.  During the relevant 
+period, KeyCorp’s Reconcilement Process & Account Certification Procedure stated that 
+the goal of reconciliation was “to verify that the balance and activity in the [general ledger] 
+account agrees with the expected balance and activity as recorded elsewhere.”  This 
+document further explained that “[w]hen external reports are published to our shareholders 
+and government agencies, it is critical that the general ledger system from which those 
+reports are prepared be correct.” 
+ 
+9. The applicable policies and procedures required accounts to be 
+reconciled on a periodic basis, which was generally daily or weekly “unless the account has 
+very low transaction volume.”  At a minimum, all accounts were to be reconciled monthly. 
+ 
+10. Among the accounts that Maiher and his team were required to 
+reconcile were the firm’s inventory accounts.  According to a KBCM Inventory 
+Accounting Process Narrative, “KBCM buys, sells, and maintains inventory positions in 
+federal, municipal, and corporate bonds and stocks in order to make markets, earn trading 
+profits, or act as a wholesaler.  KBCM makes markets for approximately 200 
+(OTC/NASDAQ) stocks.”  Despite the fact that the inventory accounts did not have “very 
+low transaction volume,” they were reconciled only monthly.  
+ 
+11. The applicable policies and procedures required Maiher to segregate 
+the duties of preparing, reviewing, and certifying the inventory accounts reconciliations.  
+Accordingly, one of KBCM’s accountants was responsible for preparing the 
+reconciliations, KBCM’s Controller was responsible for reviewing the reconciliations, and 
+Maiher was responsible for certifying them.  Specifically, Maiher was responsible for 
+timely certifying the inventory accounts in KeyCorp’s On-Line Certification System.     
+ 
+12. As explained in KeyCorp’s policies and procedures, Maiher’s 
+certification of a general ledger account was a formal attestation that: properly documented 
+controls and procedures were in place; reconciliations were routinely performed according 
+to an established schedule; the reconciliation for the account was current; and the 
+                                                 
+1 The policies and procedures include “Policy ACC-403: KeyCorp Reconciliation and 
+Certification Policy” and “Procedure AR-5001: Reconcilement Process & Account 
+Certification.” 
+ 4 
+supporting sub-system, which is Broadridge in this instance, was in agreement with the 
+general ledger.    
+13. Further, as stated in the policies and procedures, by certifying an 
+account, Maiher was making himself “personally accountable for the integrity of the 
+account” and stating that “a formal reconciliation, with all pertinent documentation, has 
+been prepared and reviewed, and that all reconciling items have been adequately 
+documented.”   
+ 
+14. As part of KBCM’s reconciliation process, any difference between 
+related account balances in MSA and Broadridge needed to be identified and was 
+considered a reconciling item.  Reconciling items needed to be researched and resolved 
+within established time limits.  The inventory accounts were subject to a 30-day aging 
+period, after which any unresolved differences between MSA and Broadridge were to be 
+written off consistent with KeyCorp policy.  The approval needed to charge off an item 
+depended on the dollar amount.  Maiher’s write-off authority was capped at $100,000 per 
+KeyCorp policy.  Stale items in excess of $100,000 were only to be written off with the 
+approval of KeyCorp’s Chief Accounting Officer, CFO or Corporate Controller. 
+ 
+15. If a reconciling item was deemed a “reportable exception,” it needed 
+to be recorded in the on-line certification system.  A “reportable exception” was defined as 
+a reconciling item “deemed significant enough to alert senior management to a potential 
+problem which may indicate a breakdown of internal controls or present the possibility of 
+significant loss.”  Variances between MSA and Broadridge of $10,000 or more, which had 
+not cleared through the normal transaction life cycle, fell into this category. 
+16. It was Maiher’s responsibility, as certifier of the inventory accounts, 
+to describe any reportable exception in clear language, explain the efforts being made to 
+correct the exception, and provide the anticipated date of resolution.  Maiher had until the 
+20th of each month to timely certify the prior-month inventory account balances and 
+document any reportable exceptions in the on-line certification system.  Certifications 
+submitted after the 20th were considered late.  A monthly report summarizing the results of 
+the certification program, including any reported exceptions, was provided to senior 
+finance management of KeyCorp.  As explained in the policies and procedures, “[t]his 
+[exception reporting] afford[ed] senior management reasonable assurance that appropriate 
+internal controls are in place and that problems are identified and resolved in a timely 
+manner.” 
+ 
+17. Beginning at some point prior to 2011, and through January 2012, 
+Maiher directed that “plug” entries be made to the general ledger in order to balance and be 
+able to close the books on a monthly basis.   
+18. During 2010, 2011, and January 2012, as part of the monthly close-
+the-books process, at Maiher’s direction, the staff accountant populated the reconciliation 
+spreadsheet for the inventory accounts.  The initial iteration of this spreadsheet showed the 
+variances between the general ledger and Broadridge.  At Maiher’s direction, the staff 
+accountant also prepared a corresponding “correcting entry” spreadsheet that, in more 
+ 5 
+summary fashion, compared the month-end MSA long and short inventory balances with 
+the long and short inventory trade date balances in Broadridge.  The “correcting entry” 
+spreadsheet was a tool that served as the basis for a series of manual adjusting entries that 
+were then made to the general ledger to make the general ledger match Broadridge.  These 
+adjusting entries were described as “Trade Date Long” or “Trade Date Short” and were 
+made to the 129186 “Trading Inv-Other” and 273500 “Liab for Shrt Positions” accounts.  
+The number of such adjusting entries, as well as the dollar amounts, varied by month.  In 
+2011, there were typically 10 or more such adjusting entries made during the monthly 
+close.  After these entries were posted to the general ledger, the staff accountant updated 
+the reconciliation spreadsheet; certain variances that appeared on the pre-close version of 
+the spreadsheet were thus absent from the final version that was signed by Maiher as 
+certifier, post-close. 
+19. The securities inventory reconciliation and the related “correcting 
+entry” spreadsheet also computed manual adjustments that were made each month to 
+general ledger accounts 196727 “Trade Date Receivable” and 299220 “Trade Date 
+Payable.”  Maiher directed these adjustments, in combination with the manual adjustments 
+to accounts 129186 and 273500, to be made in order to purportedly reflect the MSA 
+inventory account balances on a trade date basis for regulatory reporting purposes.  An 
+interface or graph between Broadridge and MSA automatically computed the firm’s trade 
+date receivable and payable data on a daily basis.  In approximately April 2011, Maiher had 
+the interface turned off so that the trade date receivable and payable data was no longer 
+being automatically fed into MSA and had to be computed manually. 
+20. If all of the month-end adjusting entries did not result in MSA 
+balancing, the staff accountant, at Maiher’s direction, would include an additional adjusting 
+entry to plug the unexplained difference in order to be able to close the books in the firm’s 
+internal system.  In most instances, Maiher directed that this plug entry be described as a 
+“Trade Date Adjustment.”  All of the manual adjusting entries were typically made on 
+either day 1 or day 2 after the month-end and the books were closed on day 3.   
+21. For February, July, August, September, November, and December, 
+Maiher directed that the additional plug entry, without which the books would not balance, 
+be made to the “Trade Date Receivable” account.  For March and October, Maiher directed 
+that this additional adjusting entry be made to the “Trading Inv–Other” account.  For 
+January, April, May, and June, Maiher directed that this additional adjusting entry be made 
+to an income statement account.  Below are the additional adjusting entries that were made 
+to balance and close the books monthly for December 2010 through December 2011: 
+DATE ACCOUNT ENTRY DESCRIPTION 
+Dec. 2010 482434 P/L 76,754.36 Inventory Adjustment 
+Jan. 2011 482439 P/L 2,239,211.72 P&L Adjustment 
+Feb. 2011 196727 Trade Date Receivable 2,949,720.49 Trade Date Adjustment 
+Mar. 2011 129186 Trading Inv-Other (3,751,660.38) Trade Date Adjustment 
+Apr. 2011 482439 P/L 440,170.57 Trade Date Adjustment 
+May 2011 482439 P/L 1,893,944.88 Trade Date Adjustment 
+June 2011 482439 P/L 152,539.67 Trade Date Adjustment 
+ 6 
+July 2011 196727 Trade Date Receivable 12,502,416,22 GPS Placeholder Offset 
+Sept. 2011 196727 Trade Date Receivable 17,607,368.97 Trade Date Adjustment 
+Oct. 2011 129186 Trading Inv-Other 31,618,733.55 Trade Date Adjustment 
+Nov. 2011 196727 Trade Date Receivable 22,804,384.26 Trade Date Adjustment 
+Dec. 2011 196727 Trade Date Receivable 18,674,052.00 Trade Date Adjustment 
+    
+22. Although the purpose of the KBCM inventory reconciliation process 
+was to identify, research and timely resolve any differences between corresponding account 
+balances in MSA and the Broadridge subsystem, through the process undertaken by Maiher 
+and his staff, differences were routinely eliminated through the expedient of adjusting 
+entries made during the monthly close, after which the inventory account balances were 
+certified by Maiher as reconciled.  For example, for February, March, April and June 2011, 
+Maiher certified the inventory accounts without an exception of any kind.  For other 
+months, he certified with exception(s) but did not disclose that there was an unexplained 
+variance.  Rather, he gave assurances the variance was or would be properly resolved.  
+Maiher also repeatedly failed to certify the inventory accounts or report exceptions within 
+the time period required by KeyCorp policy. 
+ 
+23. By coming up with the process by which the reconciler determined 
+the adjusting entries, directing that they be made to the general ledger, and then certifying 
+the inventory account reconciliations, Maiher also failed to ensure appropriate segregation 
+of duties, in violation of the applicable policies and procedures. 
+ 
+24. KBCM hired a new CFO in November 2011.  After he was hired, 
+the new CFO discovered the variances after reviewing the most recent reconciliations and 
+notified KBCM’s and KeyCorp’s management.  Maiher did not begin to report that there 
+was a potential unexplained variance until late in 2011, after the new CFO had been hired, 
+and even then he was not transparent about the plug entries he had directed be made to 
+balance the firm’s books. 
+ 
+25. Maiher was subsequently terminated from KBCM in May 2012.  In 
+the Form U5 termination notice that KBCM filed with the Financial Industry Regulatory 
+Authority, KBCM explained that Maiher was terminated for “involvement in inaccurate 
+entries in the firm’s general ledger, failure to ensure substantiating documentation relating 
+to those entries and failure to ensure appropriate segregation of duties.”   
+ 
+26. Through the conduct described above, Maiher caused 
+unsubstantiated entries to be made in the records of KBCM; caused the records of KBCM 
+to be inaccurate; and caused false FOCUS Reports and financial statements to be filed with 
+FINRA, which then furnished the FOCUS Reports to the Commission. 
+ 
+E. VIOLATIONS 
+ 
+27. Section 17(a)(1) of the Exchange Act requires registered broker-
+dealers to make and keep records, and to make and disseminate reports prescribed by 
+Commission rule.  The requirements to make and keep required records includes the 
+ 7 
+requirement that such records be accurate.  Rule 17a-3(a)(2) of the Exchange Act requires, 
+among other things, that every broker-dealer make and keep current ledgers reflecting all 
+assets and liabilities relating to the firm’s business.  As a result of the conduct described 
+above, KBCM violated Section 17(a) of the Exchange Act and Rule 17a-3(a)(2) thereunder 
+because its general ledger did not accurately reflect all of the firm’s assets and liabilities.  
+Section 17(e) of the Exchange Act requires registered broker-dealers to annually file with 
+the Commission a balance sheet and income statement certified by a public accounting 
+firm.  Rule 17a-5(a) requires periodic FOCUS Reports.  Rule 17a-5(d) requires registered 
+broker-dealers to file with the Commission annual audited reports.  KBCM violated 
+Section 17(e) of the Exchange Act and Rules 17a-5(a) and 17a-5(d) thereunder by 
+including unsubstantiated assets in its monthly FOCUS Reports filed with FINRA, which 
+then furnished the FOCUS Reports to the Commission, prior to 2011 through January 
+2012, among other months, and in its fiscal year 2010 Annual Audited Report. 
+ 
+28. Respondent Maiher willfully aided and abetted and caused KBCM’s 
+violations of Sections 17(a) and 17(e) of the Exchange Act and Rules 17a-3(a)(2), 17a-5(a), 
+and 17a-5(d) thereunder. 
+ 
+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 Maiher an opportunity to establish any defenses to such 
+allegations;  
+ 
+B. What, if any, remedial action is appropriate in the public interest against 
+Maiher pursuant to Section 15(b) of the Exchange Act including, but not limited to, civil 
+penalties pursuant to Section 21B of the Exchange Act;  
+ 
+C. What, if any, remedial action is appropriate in the public interest against 
+Maiher pursuant to Section 4C of the Exchange Act and Rule 102(e)(1) of the 
+Commission’s Rules of Practice; and 
+ 
+D. Whether, pursuant to Section 21C of the Exchange Act, Maiher should be 
+ordered to cease and desist from committing or causing violations of and any future 
+violations of Section 17 of the Exchange Act and Rules 17a-3 and 17a-5 thereunder, 
+whether Maiher should be ordered to pay a civil penalty pursuant to Section 21B(a) of the 
+Exchange Act. 
+ 
+IV. 
+ 
+IT IS ORDERED that a public hearing for the purpose of taking evidence on the 
+questions set forth in Section III hereof shall be convened not earlier than 30 days and not 
+ 8 
+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 Maiher 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 Maiher fails to file the directed answer, or fails to appear at a hearing after being 
+duly notified, he 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 Maiher as provided for in the 
+Commission’s Rules of Practice.    
+ 
+This Order shall be served upon Maiher as provided for in Rule 141(a)(2)(iv) of the 
+Commission’s Rules of Practice, 17 C.F.R § 201.141(a)(2)(iv), by any method specified in 
+paragraph (a)(2) of that rule, or by any other method reasonably calculated to give notice, 
+provided that the method of service used is not prohibited by the law of the foreign country 
+where Respondent may be found. 
+ 
+IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an 
+initial decision no later than 300 days from the date of service of this Order, pursuant to 
+Rule 360(a)(2) of the Commission’s Rules of Practice.  
+ 
+In the absence of an appropriate waiver, no officer or employee of the Commission 
+engaged in the performance of investigative or prosecuting functions in this or any factually 
+related proceeding will be permitted to participate or advise in the decision of this matter, 
+except as witness or counsel in proceedings held pursuant to notice.  Since this proceeding is 
+not “rule making” within the meaning of Section 551 of the Administrative Procedure Act, it 
+is not deemed subject to the provisions of Section 553 delaying the effective date of any 
+final Commission action. 
+ 
+ By the Commission. 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 
+ 

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@@ -0,0 +1,108 @@
+  
+UNITED STATES OF AMERICA  
+Before the  
+SECURITIES AND EXCHANGE COMMISSION  
+SECURITIES EXCHANGE ACT OF 1934 
+Release No.  77224 / February 24, 2016 
+INVESTMENT ADVISERS ACT OF 1940  
+Release No.  4344 / February 24, 2016 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No.  3747 / February 24, 2016 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17130  
+In the Matter of 
+David S. Lee , Esq., CPA 
+Respondent.  
+ORDER INSTITUTING 
+ADMINISTRATIVE PROCEEDINGS 
+PURSUANT TO SECTION 203(f) OF 
+THE INVESTMENT ADVISERS ACT 
+OF 1940 AND RULE 102(e) OF THE 
+COMMI SSION’S RULES OF 
+PRACTICE, MAKING FINDINGS, 
+AND IMPOSING REMEDIAL 
+SANCTIONS 
+ 
+I. 
+The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 
+public interest that public administrative proceedings be, and hereby are, instituted pursuant to 
+Section 203(f) of the Investment Advisers Act of 1940 (“Advisers Act”) and Rule 102(e)(3)(i) of 
+the Commission’s Rules of Practice1 against David S. Lee, Esq., CPA (“Respondent”). 
+                                              
+1 Rule 102(e)(3)(i) provides, in relevant part, that: 
+ 
+    The Commission, with due regard to the public interest and without preli minary 
+hearing, may, by order, . .. suspend from appear ing or practicing before it any  attorney, 
+accountant, … or other professional or expert 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 th e 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 (“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 over the subject matter of these proceedings, and the 
+findings contained in Section III.2 below, which are admitted, Respondent consents to the entry of 
+this Order Instituting Administrative Proceedings Pursuant to Section 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 (“Order”), as set forth below. 
+III. 
+On the basis of this Order and Respondent’s Offer, the Commission finds that: 
+1. Respondent, age 58, is a resident of Los Altos, California and is a member of the 
+California State Bar.  Respondent was President and a 50% owner of Jim Ward & Associates 
+(“JWA”) from 2001 until early 2006.  Respondent was responsible for, among other duties at JWA, 
+legal compliance matters, preparing offering materials, property acquisitions, project management, 
+and overseeing bookkeeping and accounting personnel.  From 2002 until at least early 2006, JWA 
+was investment adviser to Blue Chip Realty Fund LLC (“Blue Chip”) and Respondent was 
+associated with JWA.  During the same period, Respondent held an inactive California CPA license. 
+2. On March 22, 2011, the Commission filed a complaint against Respondent and 
+others in Securities and Exchange Commission v. JSW Financial Inc., et al. (Civil Action No. 
+11-cv-01356 SC), in the United States District Court for the Northern District of California.  On 
+January 20, 2016, the court entered an order permanently enjoining Respondent, by consent, 
+from future violations of Sections 17(a) of the Securities Act of 1933, Section 10(b) of the 
+Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of 
+the Advisers Act. 
+3. The complaint in the District Court action alleged, inter alia, that Respondent, 
+together with the other officers of JWA, made materially false and misleading statements to 
+investors and potential investors in Blue Chip by misrepresenting that investors’ money would be 
+and was being used to make loans secured by first or second deeds of trust on real estate to a 
+maximum 65% loan-to-value ratio, and that loans by Blue Chip to affiliates of JWA would not 
+exceed 25% of Blue Chip’s total assets.  The complaint alleged that Respondent and the other 
+officers knew at least by 2003, or were reckless in not knowing, that the Blue Chip offering 
+materials were materially false and misleading because investor money was used primarily to make 
+loans to various entities owned and controlled by the officers on an unsecured basis and in excess of 
+the maximum 65% loan-to-value ratio.  The complaint further alleged that Respondent and the other 
+officers knew at least by 2004, or were reckless in not knowing, that the Blue Chip offering 
+materials were materially false and misleading because nearly 90% of Blue Chip’s total assets by 
+that time were loans to borrowers controlled by the JWA officers. 
+ -3- 
+4. The conduct that is the basis of Respondent’s permanent injunction arises out of the 
+conduct of the business of an investment adviser and occurred while Respondent was associated 
+with an investment adviser. 
+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: 
+A. Pursuant to Section 203(f) of the Advisers Act, Respondent be, and hereby is: 
+barred from association with any broker, dealer, investment adviser, municipal 
+securities dealer, or transfer agent. 
+Any reapplication for association by 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 Respondent, whether or not the Commission has fully or partially 
+waived payment of such disgorgement; (b) any arbitration award related to the conduct that served 
+as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a 
+customer, whether or not related to the conduct that served as the basis for the Commission order; 
+and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct 
+that served as the basis for the Commission order. 
+B. Pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of Practice, Respondent be, 
+and hereby is: 
+suspended from appearing or practicing before the Commission as an attorney or 
+accountant. 
+By the Commission. 
+ 
+ 
+ Brent J. Fields 
+ Secretary 

raw/aaer/2016/AAER-3748.txt

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+UNITED STATES OF AMERICA  
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No.  77231 / February 25, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No.  3748 / February 25, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17134 
+ 
+ 
+In the Matter of 
+ 
+  TIMOTHY QUINTANILLA, CPA., 
+ 
+     Respondent. 
+ 
+ 
+ORDER INSTITUTING PUBLIC 
+ADMINISTRATIVE PROCEEDINGS AND 
+IMPOSING TEMPORARY SUSPENSION 
+PURSUANT TO RULE 102(e)(3) OF THE 
+COMMISSION’S RULES OF PRACTICE 
+                    
+     
+I. 
+ 
+ The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 
+public interest that public administrative proceedings be, and hereby are, instituted pursuant to 
+Rule 102(e)(3)1 of the Commission’s Rules of Practice against Timothy Quintanilla (“Respondent” 
+or “Quintanilla”).   
+ 
+II. 
+ 
+The Commission finds that: 
+ 
+A. RESPONDENT 
+ 
+1. Timothy Quintanilla, age 47, is and has been a certified public accountant 
+(“CPA”) licensed by the California Board of Accountancy .  From at least August 2006 through 
+December 2009, Quintanilla was a partner at Mendoza Berger & Co. LL P, an accounting firm. In 
+                                              
+1  Rule 102(e)(3)(i) provides, in relevant part, that: 
+ 
+ The Commission, with due regard to the public interest and without preliminary hearing, 
+may, by order, . . .  suspend from appearing or  practicing before it any attorney, accountant, 
+engineer, or other professional or expert who has been by name . . . permanently enjoined by any 
+court of competent jurisdiction, by reason of his or her misconduct in an action brou ght 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 
+December 2009, Quintanilla left to open Q Accountancy.   Quintanilla was the engagement partner 
+on Mendoza Berger’s audits of the 2006, 2007 and 2008 financial statements for Electronic Game 
+Card, Inc. (“EGMI”), a company that purported to be a seller of credit-card sized electronic games 
+and that had common stock registered with the Commission pursuant to Section 12(g) of the 
+Securities Exchange Act of 1934 (“Exchange Act”) during the relevant period.  Quintanilla is a 
+resident of Laguna Niguel, California. 
+   
+ B. CIVIL INJUNCTION 
+ 
+2. On December 4, 2015, the U.S. District Court for the Southern District of 
+New York entered a final judgment on consent against Quintanilla which: (a) permanently enjoins 
+him from future violations, direct or indirect, of  Section 17(a) of the Securities Act of 1933  
+(“Securities Act”), Sections 10(b), 10A(a)(1), and 10A(b)(1) of the Exchange Act, and Rule 10b-5 
+thereunder; and (b) ord ers him to pay a $100,000 civil penalty.   Securities and Exchange 
+Commission v. Cole et al., Civil Action Number 12-CV-8167 (S.D.N.Y. RJS).   
+ 
+3. The Commission’s 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.  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 po sition” of 
+EGMI.   
+ 
+4. The Commission’s complaint further alleged that 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 hav e 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.   
+ 
+5. The Commission’s complaint further alleged that to conceal those fai lures, 
+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. 
+ 
+III. 
+ 
+Based upon the foregoing, the Commission finds that a court of competent jurisdiction has 
+permanently enjoined Quintanilla from violating the Federal securities laws within the meaning of 
+Rule 102(e)(3)(i)(A) of the Commission ’s Rules of Practice.   In view of these  findings, the 
+Commission deems it appropriat e and in the public interest that Quintanilla be temporarily 
+suspended from appearing or practicing before the Commission. 
+   
+ IT IS HEREBY ORDERED that Quintanilla be, and hereby is, temporarily suspended from 
+appearing or practicing before the Commission.  This Order shall be effective upon service on the 
+Respondent. 
+ 3 
+ 
+ IT IS FURTHER ORDERED that Quintanilla may within thirty days after service of this 
+Order file a petition with the Commission to lift the temporary suspension.   If the Commission 
+within thirty days after service of the Order receives no petition, the suspension shall become  
+permanent pursuant to Rule 102(e)(3)(ii). 
+  
+ If a petition is received within thirty days after service of this Order, the Commission shall, 
+within thirty days after the filing of the petition, either lift the temporary suspension, or set the 
+matter down for hearing at a time and place to be designated by the Commission, or both.   If a 
+hearing is ordered, following the hearing, the Commission may lift the suspension, censu re the 
+petitioner, or disqualify the petitioner from appearing or practicing before the Commission for a 
+period of time, or permanently, pursuant to Rule 102(e)(3)(iii). 
+ 
+This Order shall be served forthwith upon Respondent as provided for in the Commission’s 
+Rules of Practice. 
+ 
+ By the Commission. 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 
+ 
+ 
+ 
+ 

raw/aaer/2016/AAER-3751.txt

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+ 
+ 
+ 
+ 
+UNITED STATES OF AMERICA  
+Before the  
+SECURITIES AND EXCHANGE COMMISSION  
+SECURITIES EXCHANGE ACT OF 1934  
+Release No. 77261 / March 1, 2016 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No. 3751 / March 1, 2016 
+ADMINISTRATIVE PROCEEDING  
+File No. 3-17145 
+ 
+In the Matter of   
+QUALCOMM 
+INCORPORATED,   
+Respondent.   
+ORDER INSTITUTING CEASE-AND-
+DESIST PROCEEDINGS PURSUANT TO 
+SECTION 21C OF THE SECURITIES 
+EXCHANGE ACT OF 1934, MAKING 
+FINDINGS, AND IMPOSING A 
+CEASE­AND-DESIST ORDER   
+ 
+I. 
+The Securities and Exchange Commission (“Commission”) deems it appropriate that 
+cease­and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the 
+Securities Exchange Act of 1934 (“Exchange Act”), against Qualcomm Incorporated 
+(“Qualcomm” or “Respondent”).  
+II.   
+In anticipation of the institution of these proceedings, Qualcomm 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, Qualcomm 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 Qualcomm’s Offer, the Commission finds1 that:  
+Summary  
+ 
+1. This matter concerns Qualcomm’s violations of the anti-bribery, books and 
+records, and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”).  From 
+2002 through 2012, Qualcomm provided things of value to foreign officials – including high-
+ranking employees of state owned enterprises (“SOEs”) and government ministers – to try to 
+influence these decision makers to favor and/or promote Qualcomm-developed technology in an 
+evolving international telecommunications market, thereby providing Qualcomm with a business 
+advantage.    
+ 
+2. Qualcomm’s extensive international operations accounted for more than 90% of 
+the company’s revenue.  Even so, Qualcomm’s internal controls were insufficient to prevent or 
+detect improper payments to foreign officials.  In several areas of its business operations, 
+including hiring, hospitality planning, and business development, Qualcomm lacked an adequate 
+oversight process to determine whether things of value that it provided to foreign officials were 
+made with the intent to induce those officials to provide a business benefit to Qualcomm.   
+ 
+3. Qualcomm’s insufficient internal controls resulted in books and records 
+violations.  Qualcomm misrepresented in its books and records that things of value provided to 
+foreign officials were legitimate business expenses.     
+ 
+4. In sum, Qualcomm, through its agents and subsidiaries, violated Section 30A of 
+the Exchange Act by providing things of value to foreign officials to obtain and retain business 
+in China.  Qualcomm also violated Section 13(b)(2)(B) of the Exchange Act by failing to devise 
+and maintain internal accounting controls sufficient to provide reasonable assurance of 
+preventing or detecting the authorization or payment of improper payments.  Qualcomm violated 
+Section 13(b)(2)(A) of the Exchange Act by having recorded improper payments to foreign 
+officials in its books and records in a manner that failed to accurately and fairly reflect the 
+provision of things of value to foreign officials. 
+ 
+Qualcomm 
+ 
+5. Qualcomm Incorporated is a Delaware corporation headquartered in San Diego, 
+California.  Qualcomm designs and sells wireless telecommunication products.  The company 
+also earns royalties from licensing its patented technologies.  Qualcomm’s common stock trades 
+on the Nasdaq Global Select Market under the symbol “QCOM” and is registered with the 
+Commission pursuant to Section 12(b) of the Exchange Act.   
+ 
+                                                 
+1  The findings herein are made pursuant to Respondent’s Offer of Settlement and are not 
+binding on any other person or entity in this or any other proceeding. 
+ 
+ 
+3 
+ 
+Background 
+ 
+6. Qualcomm is a multinational corporation that does business throughout the world.  
+By Qualcomm’s fiscal year 2010, international handset manufacturers and other Qualcomm 
+customers and licensees comprised approximately 95% of the company’s consolidated total 
+revenue.  42% of 2012 revenue came from Chinese handset manufacturers and other Qualcomm 
+customers and licensees in China. 
+ 
+7. Qualcomm develops and patents wireless communications technologies, including 
+technologies that are incorporated into one or more of the following standards:  Code Division 
+Multiple Access (“CDMA”), Wideband CDMA (“WCDMA”) and Long Term Evolution 
+(“LTE”).   Mobile phone manufacturers make handsets that operate on networks based on 
+Qualcomm technologies.  Those handsets sometimes incorporate Qualcomm’s chips.  Qualcomm 
+also licenses its patented technologies to mobile phone manufacturers. 
+ 
+8. Qualcomm was among the first companies to patent and commercialize CDMA 
+technology for wireless communications.  As the leading patent holder for CDMA and WCDMA 
+technologies, Qualcomm earns substantial royalties from its CDMA patent portfolio.   
+   
+9. In the early 2000’s, in many countries, competing digital wireless 
+communications technologies, particularly Global System for Mobile Communications (“GSM”) 
+“single mode” technology, were more widely deployed than CDMA technology.   Qualcomm 
+generally did not sell GSM chips or earn royalty revenue from the sale by manufacturers of 
+single-mode handsets using GSM technology.  Therefore, as Qualcomm’s public filings 
+explained, growth in the company’s revenue and presence in the market depended on the 
+“commercial deployment of third generation (3G) wireless communications equipment, products 
+and services based on [Qualcomm’s] CDMA technology.”  
+ 
+10. As fourth generation (“4G”) technology developed, Qualcomm’s public filings 
+warned investors that the company’s licensing program for certain non-CDMA technologies, 
+which may be adopted in 4G products, was “less established,” and therefore, “might not be as 
+successful in generating licensing income as [the company’s] CDMA licensing program.”  
+Qualcomm also disclosed in its public filings that the company’s business depended on 
+customers, licensees, and wireless network operators using Qualcomm-developed technologies 
+and “develop[ing] products and services with value-added features to drive selling prices as well 
+as consumer demand for new 3G and 3G/4G devices.”    
+ 
+11. The executive vice president and president of Qualcomm’s Global Business 
+Operations (the “EVP”) coordinated government relationships and worked closely with the 
+company’s international management teams to develop strategies for the adoption of Qualcomm-
+developed technology in key international markets with particular emphasis on the Asia Pacific 
+Region, including China.  
+ 
+12. Not only was China the single largest business opportunity for Qualcomm, but 
+Chinese operator decisions regarding technology had implications for operators in other regions.  
+As such, Qualcomm’s management was focused on the successful adoption and deployment of 
+ 
+ 
+4 
+ 
+Qualcomm-developed technology in China, and they hired the EVP to assist Qualcomm’s 
+expansion in China.  The EVP was “instrumental in driving CDMA adoption and growth in 
+China and South East Asia.” 
+ 
+13. In 2002, the wireless market in China represented a significant growth 
+opportunity for Qualcomm.  Conversely, Qualcomm identified an inability to succeed in the 
+China market as a risk to its business.   
+ 
+14. While a state-owned telecommunications operator (“SOE 1”) had launched a 2G 
+CDMA network in 2002, Qualcomm nonetheless believed that its business would be harmed 
+should the telecommunications company or the Chinese government later make technology 
+deployment decisions that impeded the expansion of CDMA technologies in China. 
+ 
+15. From 2002 until 2008, however, Qualcomm did not know which state-owned 
+enterprise would be granted a license to adopt and deploy more advanced technology in China.  
+Accordingly, Qualcomm sought to persuade executives at two telecom companies, SOE 1 and 
+another Chinese state-owned telecommunications company (“SOE 2”), to adopt Qualcomm-
+developed technology and expedite deployment of the more advanced networks once the licenses 
+were issued. 
+ 
+16. In May 2008, China announced the restructuring of its telecommunications 
+industry and created three SOEs, which each obtained a different technology.  In January 2009, 
+China issued the licenses.  One telecom company, SOE 2, was awarded one license and in April 
+2009, it launched a version of Qualcomm’s CDMA technology.  Another telecom company, SOE 
+1, was awarded a license for WCDMA technology and subsequently deployed a network using 
+that technology.  Customers using these networks began using mobile devices with Qualcomm-
+developed technology, resulting in Qualcomm obtaining billions in revenue from the sale of 
+chips and licenses to cell phone manufacturers. 
+ 
+Qualcomm Provided Things of Value to Foreign Officials Who Were Considering Whether 
+to Adopt Qualcomm-Developed Technology 
+17. From at least 2002 until 2012, Qualcomm provided things of value to try to 
+influence: (1) foreign officials from a Chinese government agency (“Agency”) to make 
+regulatory decisions that would expand the use of Qualcomm-developed technology in China; 
+and (2) executives at SOE 1 and SOE 2 to adopt Qualcomm-developed technology and expedite 
+deployment of their CDMA and WCDMA networks once the licenses were issued, thereby 
+increasing Qualcomm’s revenue from the use of this technology.   
+ 
+18. Qualcomm urged the two telecom companies to rapidly deploy their respective 
+networks, which would spur faster growth in the use of Qualcomm-developed technology by 
+Chinese mobile subscribers, thus increasing Qualcomm’s revenue from licensing and the sale of 
+chips.  Similarly, even after one telecom company (SOE 2) was awarded a CDMA license, 
+Qualcomm worked to convince it to upgrade its network to the next generation of CDMA 
+technology.  Had that occurred, Qualcomm believed the upgrade would extend the life and 
+continued usage of Qualcomm’s CDMA technology in China.   
+ 
+ 
+ 
+5 
+ 
+19. Qualcomm also worked to try to influence the two telecom companies to use the 
+company’s products and services such as its application platform and push-to-talk service, with 
+the goal of increasing and perpetuating use of the technologies.   
+ 
+Qualcomm Hired Relatives of Chinese Officials 
+20. Qualcomm provided or offered full-time employment and paid internships to 
+family members and other referrals of foreign officials at SOE 1, SOE 2 and Agency – often at 
+the request of these foreign officials.  Qualcomm referred to some of these individuals as “must 
+place” or “special” hires.     
+ 
+21. Qualcomm offered employment to certain foreign officials’ family members and 
+referrals despite concerns, in some cases, that the individuals did not satisfy Qualcomm’s hiring 
+standards.  Certain hires also had previously failed to obtain employment with Qualcomm 
+through the standard hiring process.  And in some cases, new positions were created for these 
+hires. 
+    
+22. Qualcomm provided or offered full-time employment and paid internships to 
+family members and other referrals of foreign officials with the purpose of trying to influence 
+those officials to take actions that would assist Qualcomm in obtaining or retaining business in 
+China.  
+ 
+23. In one case, the Deputy General Manager of a subsidiary of SOE 2 asked 
+Qualcomm employees in 2010 to find an internship at Qualcomm for her daughter.  As one 
+Qualcomm employee noted, “We received a request from the GM of [the telecom company’s 
+subsidiary] to help find an internship position for her daughter (currently studying in the U.S.) 
+within QC.  I discussed this with [high level official] and determined that it would be important 
+for us to support given our cooperation with [the subsidiary].”  Qualcomm employees understood 
+that the daughter’s “parents are [SOE 2 subsidiary] Dept. GM level and gave us great help for 
+Q.C. new business development.”  Because “[the regional branch] is our strategic partner in 
+China and plays an important role in leading all [the telecom company] adopting Qualcomm's 
+technologies,” Qualcomm employees believed that the internship “would be important for us to 
+support given our cooperation with [the subsidiary].”  Specifically, the internship “would be 
+good because we are doing quite a bit with [the subsidiary], e.g., QChat and Rev. B.” 
+   
+24. In another case, between 2006 and 2010, Qualcomm provided the son of an 
+executive responsible for network planning, construction, and maintenance at SOE 1, with:  
+(1) support from a $75,000 research grant to an American university where he was studying, 
+allowing him to retain his position in a PhD program and renew his student visa; (2) a 
+Qualcomm internship; (3) subsequent permanent employment despite interviewers concluding 
+that he did not meet Qualcomm’s hiring standards for the position; and (4) a business trip to 
+China followed by leave to visit his parents over the Chinese New Year, despite other employees 
+expressing concern regarding his qualifications for the assignment.  The EVP also personally 
+provided this employee with a $70,000 loan to buy a home.   
+ 
+25. In fact, the initial interview decision was “No hire” because the son of the telecom 
+company executive was not “a skills match,” didn’t “meet the minimum requirements for 
+ 
+ 
+6 
+ 
+moving forward with an offer,” and among those who interviewed him, “there was an agreement 
+that he would be a drain (not even neutral) on teams he would join.”  Despite these assessments a 
+director in Human Resources advocated for the son’s hire at the direction of EVP, summarizing, 
+“I know this is a pain, but I think we’re operating under a different paradigm here than a normal 
+“hire”/”no hire” decision tree.  We’re telling this kid (and in effect, [the telecom company]) that 
+we don’t want to waste time or extend any extra effort in this favor [the telecom company] has 
+asked of Qualcomm, and then turn around and ask the same person we just rejected to do us a 
+special favor.”   
+ 
+26. Qualcomm also offered employment to at least one individual at the request of 
+high-level Agency executives.  An intern hired by Qualcomm in 2010 was referred by a director 
+general of the Agency.  An HR employee described the intern as “a MUST PLACE since he was 
+refererd [sic] by [the director general of the Agency] and has influence in China as per [the high 
+level official].”  When asked “How cirtical [sic] is the hiring of the [director general’s referral] 
+for Qualcomm’s business?”, the high level official replied, “[Q]uite important from a customer 
+relationship perspective.” 
+ 
+27. FCPA compliance, however, was not considered in Qualcomm’s hiring process.  
+Indeed, for years, most Qualcomm employees who worked in Human Resources did not receive 
+FCPA training.  As a result, when Qualcomm offered paid internships or full-time employment 
+to family members or referrals of Chinese foreign officials, it did not evaluate or attempt to 
+mitigate the potential FCPA risks associated with such hires. 
+ 
+Qualcomm Provided Frequent Meals, Gifts and Entertainment to Foreign Officials 
+28. From at least 2002, Qualcomm, EVP and other Qualcomm employees provided 
+meals, gifts and entertainment to foreign officials and their family members in order to try to 
+influence these foreign officials to adopt and retain Qualcomm-developed technology.   
+ 
+29. Many gifts – airplane tickets for children of government officials, event tickets for 
+spouses of foreign officials and luxury goods– had no valid business purpose.  Similarly, 
+Qualcomm paid for sightseeing for spouses and children of foreign officials and arranged golf 
+outings. 
+   
+30. Qualcomm repeatedly provided certain foreign officials at telecom companies and 
+the Agency with gifts, travel and entertainment.  In certain cases, Qualcomm also provided the 
+family members of these foreign officials with employment at Qualcomm.  
+ 
+31. Qualcomm also offered foreign officials hospitality packages to world-class 
+sporting events.  These foreign officials included employees of government-controlled 
+communications companies that were customers of Qualcomm, and sometimes their spouses.  
+The Qualcomm employees involved in planning hospitality events for foreign officials had not 
+received FCPA training.  In addition, Qualcomm lacked processes for vetting hospitality event 
+invitations and for determining whether events had an adequate business component.   
+ 
+ 
+ 
+ 
+ 
+7 
+ 
+Qualcomm Failed to Devise and Maintain Adequate Internal Controls 
+ 
+32. Qualcomm failed to implement a system of internal accounting controls that was 
+sufficient to provide reasonable assurances that transactions were executed and access to assets 
+was permitted in accordance with management’s authorization, and that transactions were 
+recorded as necessary to permit the preparation of financial statements in conformity with 
+generally accepted accounting principles.  
+ 
+33. These failures were widespread and involved Qualcomm’s headquarters in San 
+Diego and its international subsidiaries.  These internal controls weaknesses were intensified by 
+the absence of someone whose full-time responsibility was to act as a company-wide chief 
+compliance officer and the absence of an FCPA compliance officer in China.   
+ 
+34. Qualcomm employees directly offered various benefits to foreign officials who 
+were making decisions regarding the use of Qualcomm-developed technology without an 
+adequate process of oversight to determine whether the offers were intended to induce the 
+foreign officials to provide a benefit to the company.    
+ 
+35. For example, Qualcomm offered at least 15 foreign officials lavish hospitality 
+packages worth approximately $95,000 per couple for the 2008 Beijing Olympics.  Then, in mid 
+to late-July 2008, a member of Qualcomm’s finance department raised FCPA issues related to 
+the Olympics with Qualcomm counsel.   In August 2008, just days before the Olympics began, 
+Qualcomm rescinded the five hospitality invitations that had been accepted due to Qualcomm’s 
+FCPA-related concerns.  The disinvited guests were from three Chinese state-owned enterprises.   
+ 
+36. Neither Qualcomm’s executive management team nor its local management in 
+China adequately identified the potential FCPA risk in offering the lavish Olympics hospitality 
+packages to employees at SOEs at which Qualcomm was soliciting and conducting business, 
+until July 2008.     
+ 
+37. Moreover, Qualcomm’s internal audit reports found that employees repeatedly 
+failed to request pre-approvals prior to providing things of value to foreign officials and failed to 
+record when things of value had been provided to foreign officials.   These failures violated 
+Qualcomm’s FCPA policy. 
+ 
+38. Qualcomm further failed to provide regular substantive training or information to 
+employees of its subsidiaries regarding the requirements of the FCPA.   
+ 
+39. In addition, several important business functions such as human resources and 
+hospitality planning were not considered in Qualcomm’s FCPA compliance program. 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+8 
+ 
+Qualcomm Failed to Maintain Accurate Books and Records 
+ 
+40. Qualcomm, directly and through its subsidiaries, violated Exchange Act Section 
+13(b )(2)(A) when it provided things of value and engaged in transactions that caused the 
+company to fail to make and keep books, records, and accounts, which, in reasonable detail 
+accurately and fairly reflected the transactions and disposition of assets of the company.   
+ 
+41. Qualcomm provided things of value for the purpose of obtaining or retaining 
+business yet recorded these transactions in a generic and non-descript manner that obscured their 
+purpose.  Many things of value consisted of questionable inducements to further Qualcomm’s 
+business interests.  For example, travel and hospitality events offered or provided to foreign 
+officials were booked as generic sales and marketing or industry relations expenses.   
+ 
+42. In addition, meals, gifts and entertainment were repeatedly noted as missing from 
+Qualcomm’s gift logs.  Throughout this time period, there were also incorrect inputs into 
+Qualcomm’s expense report system because employees stated that nothing of value had been 
+provided to a foreign official or failed to obtain the proper approvals in advance of the 
+expenditure.  Year after year these gift log and expense report deficiencies were raised in internal 
+audit reports. 
+ 
+Legal Standards and FCPA 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 regulation thereunder, and upon any other person who 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 of the Exchange Act prohibits any issuer with a class of securities 
+registered pursuant to Section 12 of the Exchange Act, or any officer, director, employee, or 
+agent acting on behalf of such issuer, in order to obtain or retain business, from corruptly giving 
+or authorizing the giving of, anything of value to any foreign official for the purposes of 
+influencing the official or inducing the official to act in violation of his or her lawful duties, or to 
+secure any improper advantage, or to induce a foreign official to use his influence with a foreign 
+governmental instrumentality to influence any act or decision of such government or 
+instrumentality.  [15 U.S.C. §78dd-1.] 
+ 
+45. 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).] 
+ 
+46. 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 
+ 
+ 
+9 
+ 
+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).] 
+ 
+47. As described above, Qualcomm violated Section 30A of the Exchange Act by 
+providing employment and internships to relatives of foreign officials in order to assist 
+Qualcomm in retaining and obtaining business.  Qualcomm also violated Section 13(b)(2)(B) of 
+the Exchange Act by failing to devise and maintain a sufficient system of internal accounting 
+controls to prevent the provision of travel, gifts, and entertainment to foreign officials without 
+prior pre-approval and to ensure all things of value given to foreign officials were properly 
+recorded.   As a result of this same conduct, Qualcomm failed to make and keep accurate books 
+and records in violation of 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 Qualcomm’s Offer.  
+Accordingly, it is hereby ORDERED that:  
+A. Pursuant to Section 21C of the Exchange Act, Respondent Qualcomm cease and 
+desist from committing or causing any violations and any future violations of Sections 30A, 
+13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act;  
+B. Respondent shall, within 10 days of the entry of this Order, pay a civil money 
+penalty in the amount of $7,500,000 to the Securities and Exchange Commission for transfer to 
+the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3).  If 
+timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717.   
+Payment must be made in one of the following ways:  
+(1) Respondent may transmit payment electronically to the Commission, 
+which will provide detailed ACH transfer/Fedwire instructions upon 
+request;  
+(2) Respondent may make direct payment from a bank account via Pay.gov 
+through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or  
+(3) Respondent may pay by certified check, bank cashier’s check, or United 
+States postal money order, made payable to the Securities and Exchange 
+Commission and hand-delivered or mailed to:  
+Enterprise Services Center  
+Accounts Receivable Branch  
+HQ Bldg., Room 181, AMZ-341  
+6500 South MacArthur Boulevard  
+Oklahoma City, OK 73169  
+ 
+ 
+10 
+ 
+Payments by check or money order must be accompanied by a cover letter identifying 
+Qualcomm 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 Finola H. Manvelian, Assistant 
+Regional Director, Division of Enforcement, Securities and Exchange Commission, 444 S. 
+Flower Street, Suite 900, Los Angeles, CA 90071.  
+C. Respondent shall report to the Commission staff periodically, at no less than nine-
+month intervals during a two-year term, the status of its remediation and implementation of 
+compliance measures.  During this two-year period, 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 inaccurate books and records have been maintained, Respondent shall 
+promptly report such conduct to the Commission staff.  During this two-year period, Respondent 
+shall: (1) conduct an initial review and submit an initial report, and (2) conduct and prepare at 
+least two follow-up reviews and reports, as described below:  
+(1) Respondent shall submit to the Commission staff a written report within 
+180 calendar days of the entry of this Order setting forth a complete 
+description of its Foreign Corrupt Practices Act (“FCPA”) and anti-
+corruption related remediation efforts to date, its proposals reasonably 
+designed to improve the policies and procedures of Respondent for 
+ensuring compliance with the FCPA and other applicable anti-corruption 
+laws, and the parameters of the subsequent reviews (the “Initial Report”).  
+The Initial Report shall be transmitted to Finola H. Manvelian, Assistant 
+Director, Division of Enforcement, United States Securities and Exchange 
+Commission, 444 S. Flower Street, Suite 900, Los Angeles, CA 90071.  
+Respondent shall also provide a copy of the Initial Report to its external 
+auditors.  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 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 Report”).  
+In the Follow-up Report, Respondent shall also provide the Commission 
+staff with its assessment of its FCPA compliance policies and procedures.   
+(3) The Follow-up Report shall be completed by no later than 270 days after 
+the Initial Report.  The second Follow-up Report shall be completed no 
+later than 270 days after the completion of the first Follow-up Report.  
+Each Follow-up Report shall be transmitted to Finola H. Manvelian at the 
+address listed above.  Respondent shall also provide a copy of each 
+Follow-up Report to its external auditors.  Respondent may extend the 
+time period for issuance of the Follow-up Report with prior written 
+approval of the Commission staff.  
+ 
+ 
+11 
+ 
+(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.  
+(5) During this two-year period of review, Respondent shall provide its 
+external auditors with its annual internal audit plan and reports of the 
+results of internal audit procedures and its assessment of its FCPA 
+compliance policies and procedures.  
+(6) During this two-year period of review, Respondent shall provide the 
+Commission staff with any written reports or recommendations provided 
+by Respondent’s external auditors in response to Respondent’s annual 
+internal audit plan, reports of the results of internal audit procedures, and 
+its assessment of its FCPA compliance policies and procedures.  
+By the Commission.  
+ 
+ 
+Brent J. Fields  
+Secretary  

raw/aaer/2016/AAER-3752.txt

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+UNITED STATES OF AMERICA 
+Before the 
+SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES ACT OF 1933 
+Release No. 10053 / March 9, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3752 / March 9, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17162 
+ 
+ 
+ 
+In the Matter of 
+ 
+WESTLANDS WATER 
+DISTRICT, THOMAS W. 
+BIRMINGHAM, and 
+LOUIE DAVID CIAPPONI 
+ 
+Respondents. 
+ 
+           
+ 
+ 
+ 
+ORDER INSTITUTING CEASE-AND-
+DESIST PROCEEDINGS PURSUANT TO 
+SECTION 8A OF THE SECURITIES ACT 
+OF 1933, MAKING FINDINGS, AND 
+IMPOSING A CEASE-AND-DESIST 
+ORDER         
+ 
+I. 
+ 
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that 
+cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the 
+Securities Act of 1933 (“Securities Act”), against Westlands Water District (“Westlands”), 
+Thomas W. Birmingham, and Louie David Ciapponi (collectively “Respondents”). 
+ 
+II. 
+ 
+In anticipation of the institution of these proceedings, Respondents have submitted an 
+Offer of Settlement (the “Offers”) which the Commission has determined to accept.  Solely for 
+the purpose of these proceedings and any other proceedings brought by or on behalf of the 
+Commission, or to which the Commission is a party, and without admitting or denying the 
+findings herein, except as to the Commission’s jurisdiction over them and the subject matter of 
+these proceedings, which are admitted, and except as provided herein in Section V, Respondents 
+consent to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 
+8A of the Securities Act of 1933, Making Findings, and Imposing a Cease-and-Desist Order 
+(“Order”), as set forth below. 
+ 
+ 
+ 
+2 
+ 
+III. 
+ 
+ On the basis of this Order and Respondents’ Offer, the Commission finds1 that: 
+ 
+Summary 
+ 
+1. This matter involves misrepresentations and omissions by Westlands in the 
+Official Statement for its October 2012 offering of $77 million in Refunding Revenue Bonds, 
+Series 2012A (the “2012 Bonds”).  The Official Statement for the 2012 Bonds was misleading in 
+its treatment of one key metric for Fiscal Year 2010: Westlands’ debt service coverage ratio.  
+The debt service coverage ratio is important to investors because it signals whether an issuer has 
+sufficient ability to meet its debt service obligations.  In prior bond offerings, Westlands had 
+covenanted to fix and collect water rates at least sufficient to generate net revenues equal to at 
+least 125% of its debt service payments for that year.  Failure by Westlands to meet that 1.25 
+debt service coverage ratio could be a technical default on its bonds which could lead to 
+undesirable outcomes, including higher interest rates on future bonds, ratings downgrades, and 
+an inability to sell bonds in the following fiscal year. 
+ 
+2. The Official Statement for the 2012 Bonds contained a table representing that 
+Westlands had met or exceeded the required debt service coverage ratio for each of the prior five 
+years.2  For fiscal year 2010, however, the revenue and coverage ratio reported in the table were 
+misleading because Westlands failed to disclose: (1) that it had engaged in extraordinary 
+accounting transactions in 2010 solely to recognize additional revenue for purposes of 
+calculating the debt service coverage ratio without raising rates on customers, and (2) the impact 
+of a 2012 prior period adjustment to account for expenses that would have decreased revenue in 
+2010 and negatively affected the ratio.   
+ 
+3. In the latter half of fiscal year 2010, Westlands staff informed Birmingham and 
+Ciapponi that, because of reductions in water supply, Westlands would not generate sufficient 
+revenue to achieve a 1.25 debt service coverage ratio.  At Ciapponi’s direction, Westlands staff 
+consulted with its independent auditor about accounting transactions that could be implemented 
+to avoid raising water rates in order to meet a 1.25 debt service coverage ratio.  Subsequently, 
+Westlands staff, including Birmingham and Ciapponi, advised Westlands’ Finance and 
+Administration Committee that it recommend to Westlands’ Board of Directors (the “Board”) to 
+approve two accounting transactions to recognize additional revenue.  These transactions and 
+their effect on revenue and the debt service coverage ratio were not disclosed in the Official 
+Statement for the 2012 Bonds.  Separately, in 2012, Westlands adjusted the accounting for 
+certain expenses.  Had these expenses been recorded in 2010, the 2010 debt service coverage 
+ratio would have been negatively affected.  While this prior period adjustment was disclosed in 
+the Official Statement for the 2012 Bonds, its impact on the 2010 debt service coverage ratio was 
+not disclosed.  If the effect of the 2010 and 2012 accounting transactions on the debt service 
+                                                 
+1  The findings herein are made pursuant to Respondents’ Offer of Settlement and are not binding on any 
+other person or entity in this or any other proceeding. 
+ 
+2 Westland’s fiscal year ends on February 28. Unless otherwise specified in this Order, references to specific years 
+are to fiscal years.     
+3 
+ 
+coverage ratio had been disclosed, Westlands’ coverage ratio for 2010 would have been 0.11, 
+rather than the 1.25 which was reported in the Official Statement. 
+4. As a result of the conduct described herein, Westlands violated Section 17(a)(2) 
+of the Securities Act and Birmingham and Ciapponi caused Westlands’ violation.  
+ 
+Respondents 
+ 
+5. Westlands Water District is headquartered in Fresno, California and is the 
+largest agricultural water district in California.  Westlands is a public agency of the State of 
+California, originally formed in 1952 for the primary purpose of providing irrigation water to 
+customers within the district.  Its customers are approximately 700 agricultural land owners and 
+water users and approximately 200 municipal and industrial land owners and water users.  
+Westlands’ Board is elected by land owners in the district, and as a result, Westlands is managed 
+by representatives of its customers.  For 2014, Westlands had operating revenues in excess of 
+$120 million. 
+ 
+6. Thomas W. Birmingham, age 60, of Sacramento, California, has served as the 
+General Manager of Westlands, the highest executive level position, from October 2000 through 
+the present.  He is a member of the State Bar of California and also served as Westlands’ General 
+Counsel through May 2010 and was reappointed General Counsel in September 2015.     
+   
+7. Louie David Ciapponi age 64, of Fresno, California, was the Assistant General 
+Manager of Westlands from June 1995 to June 2012.  Since June 2012 Ciapponi has been 
+employed as the General Manager of a neighboring water district that had previously been 
+annexed by Westlands.  While employed at the other water district, Ciapponi continued to 
+perform many of the same functions for Westlands that he had previously performed.  He is also 
+presently serving as Westlands’ Secretary, a position he has held since 1995, and was Westlands’ 
+Treasurer from 1995 to December 16, 2015.     
+ 
+Facts 
+ 
+Westlands’ Rate Covenant 
+ 
+8. In most years, Westlands purchases the majority of the water it sells to its 
+customers from the United States Bureau of Reclamation (“USBR”) and is required to pay a 
+share of USBR’s capital costs and operations and maintenance expenses.  In drought years such 
+as 2010, the USBR often reduces the quantity of water it makes available to Westlands, forcing 
+Westlands to purchase water from other, more expensive, sources.  Westlands charges its 
+customers for the cost of water it sells and collects additional fees both for its own operational 
+expenses and the share of the USBR expenses it pays.   
+ 
+9. In prior debt offerings, Westlands had covenanted, to the fullest extent permitted 
+by law, to fix and prescribe, and collect customers’ water rates and charges at least sufficient 
+during each fiscal year to yield net revenues equal to 125% of the debt service payable in that 
+fiscal year.  The purpose of this covenant is to assure investors and others, including ratings 
+agencies, that Westlands will have sufficient ability to meet its debt service obligations on the 
+4 
+ 
+bonds.  Westlands has significant incentive to maintain the 1.25 ratio because a failure to do so 
+could preclude Westlands from issuing bonds in the following fiscal year.  Failure to maintain 
+the ratio could also result in higher borrowing costs in future debt offerings and could negatively 
+affect Westlands’ debt ratings.  
+  
+10. The Official Statement for the 2012 Bonds included a table reporting the debt 
+service coverage ratio for fiscal years 2008 through 2012.  The table contains, among other 
+operating data, columns showing five years of summary income statement information and the 
+ratio for each year, derived from Westlands’ audited financial statements, which reflects that 
+Westlands maintained a debt service ratio of exactly 1.25 for 2010.  The bond sale transaction 
+closed on October 25, 2012.   
+ 
+Extraordinary Accounting Transactions in Fiscal Year 2010 to 
+Increase the Debt Service Coverage Ratio 
+ 
+11. In October 2009, Ciapponi learned that the projected full year revenue for fiscal 
+year 2010 would be approximately $10 million short of what was required to maintain the 1.25 
+debt service coverage ratio.  Westlands’ fiscal year ends February 28, so it had very little time to 
+rectify the revenue shortfall for fiscal year 2010 in order to maintain the 1.25 ratio for that year.   
+ 
+12. In order to meet the ratio, Westlands could have collected additional revenue by 
+raising the water rates or other charges on its customers.  This would have meant increasing 
+water rates and land charges by about 11.6%.  Westlands decided not to do so because 
+management, including Birmingham and Ciapponi, wanted to minimize the costs on Westlands’ 
+customers.  Instead, Westlands decided to reclassify certain assets as revenue.  Ciapponi 
+instructed Westlands staff to meet with Westlands’ independent auditor to discuss this potential 
+alternative to raising water rates.  A memo prepared by Westlands employees and sent to 
+Westlands’ auditor in November 2009 described the proposal to “reclassify cash reserves or 
+retained earnings” to record additional revenue “in lieu of collecting current revenue while 
+maintaining the required debt coverage ratio.”  Westlands staff met with the auditor in January 
+2010.  The auditor informed the Westlands staff that he believed the suggested transactions were 
+permissible and subsequently issued an unqualified opinion on Westlands’ 2010 audited 
+financial statements.  The auditor was not asked whether, or how, disclosure of the transactions 
+should be made in the Official Statement.  These reclassification transactions would not increase 
+cash collections and were merely accounting transactions done for the sole purpose of 
+maintaining the ratio.   
+ 
+13. Westlands staff, through Birmingham, as General Manager/General Counsel, and 
+Ciapponi, as Assistant General Manager, presented a memorandum to Westlands’ Finance and 
+Administration Committee describing the various accounting transactions that were proposed to 
+achieve a 1.25 debt service coverage ratio.  The Finance and Administration Committee decided, 
+based on the recommendation of staff, including Birmingham and Ciapponi, to recommend to 
+the Westlands Board that it approve the reclassification transaction in lieu of increasing rates and 
+charges that would be offset by credits.  Subsequently, the Westlands Board approved the 
+Finance and Administration Committee’s recommendation.  
+ 
+5 
+ 
+14. Some of the reclassified assets came from “payable” accounts consisting of 
+amounts that were collected from customers in previous periods but for which revenue was never 
+recorded in the financial statements.  The original intent of these accounts was to collect and 
+retain funds to be used for the payment of certain expenses of Westlands and USBR.  In the 
+event the funds were not needed in the current fiscal year, they were retained by Westlands until 
+they were needed for the stated purpose or otherwise dispensed at the direction of Westlands’ 
+Board.  Westlands decided to reclassify $8.3 million from these accounts to revenue for 2010.  
+Westlands had never previously reclassified funds from these accounts in a similar manner.   
+ 
+15. In addition, Westlands decided to record $1.46 million of revenue in 2010 by 
+means of a “return of equity” to landowners in the district.  The “equity” came from a reserve 
+fund originally established to ensure debt service payments in future years, related to a 1999 debt 
+issue and had been funded through a rate component of customer charges collected between 
+1999 and 2002.   Together, the two sets of transactions would result in $9.8 million in additional 
+revenue being recorded, solely to meet the debt service ratio covenant.  Without the transactions, 
+Westlands would have reported a debt service coverage ratio of .63.   
+ 
+16. At the public Board meeting at which the transactions were discussed, 
+Birmingham and Ciapponi recommended that the Board approve the transactions.  They told the 
+Board that Westlands needed additional revenue to achieve a 1.25 debt ratio and the Board could 
+either increase rates and charges or approve the transactions.  When one Board member, who 
+was also a Westlands customer, began to question whether rates and charges in an area in which 
+he owned land would be raised as a result of having to meet the covenant, Birmingham joked 
+that they were engaging in “a little Enron accounting.”  Birmingham went on to state: “We’re not 
+collecting any more money from the rate payers, nor are we paying any more money than we 
+would otherwise pay under that the . . . um . . . to pay off the debt.  All we’re doing is we’re 
+taking money and saying we are reclassifying it from an account payable to income.  And I’m 
+told by Mr. Ciapponi that that satisfies – and he’s vetted it – that that satisfies our debt coverage 
+with the bonds.”   
+ 
+17. The Board voted to approve the transactions, which were recorded as part of the 
+year end closing process for fiscal year 2010.  Other than customers who were present at the 
+Board meeting, Westlands’ customers were not made aware that their “equity” had been returned 
+to them.  The benefit of these transactions to Westlands and its customers was twofold.  First, 
+Westlands avoided reporting a debt service coverage ratio of 0.63 for 2010 and any potential 
+negative consequences associated with failing to meet its covenant under prior bond issuances.  
+Second, Westlands was able to meet the debt service coverage ratio without raising its 
+customers’ water rates.     
+ 
+The 2012 Prior Period Adjustment 
+ 
+18. Two years later, and separate from the transactions described above, Westlands 
+changed the way it accounted for advance operations and maintenance payments made to the 
+USBR in 2010 and 2011, classifying them as expenses instead of their original capitalization.  
+Had these expenses been recorded in 2010, Westlands debt service coverage ratio would have 
+been even lower unless Westlands had raised rates and land charges or lowered expenses in 
+6 
+ 
+2010.  In 2012, when it changed the method by which it accounted for these payments, 
+Westlands recorded a prior period adjustment for the fiscal year 2010 expenses, but in 
+accordance with Generally Accepted Accounting Principles did not restate net revenue for that 
+year.  If the payments initially had been recorded as expenses in 2010, net revenue would have 
+decreased and Westlands’ debt service coverage ratio for 2010 would have been 0.73 rather than 
+1.25 (excluding the impact of the 2010 accounting transactions described above). 
+ 
+19. Westlands disclosed this prior period adjustment in a note to its audited financial 
+statements for fiscal year 2012, which were appended to the Official Statement for the 2012 
+Bonds.  However, Westlands did not correct the coverage ratios reported in the Historic 
+Operating Results table for 2010 to account for the adjustment.  
+ 
+20. Westlands did not consider in 2012 whether the debt service coverage ratio 
+reported for 2010 should have been revised as a result of the prior period adjustment.  Ciapponi 
+understood that, if the payments made to the USBR in 2010 had been treated in 2010 as an 
+expense, the net revenue for that year would have been reduced, but he did not consider whether 
+it would have affected the 2010 debt service ratio.  Similarly, Birmingham was aware of the 
+adjustment but he did not consider its effect on the 2010 debt service ratio.   
+ 
+The Official Statement for the 2012 Bonds Contained False and 
+Misleading Statements Concerning the 2010 Debt Service Coverage Ratio 
+ 
+21. The Official Statement for the 2012 Bonds was false and misleading because it 
+represented that Westlands’ debt service coverage ratio for 2010 was 1.25 and, therefore, that 
+Westland had complied with its covenants to fix water rates at levels reasonably expected to 
+yield a debt service coverage ratio of 1.25.  Westlands did not disclose that the ratio was met 
+only because of the extraordinary transactions undertaken in 2010 to create additional purported 
+revenue, nor did it disclose the effect the 2012 prior period adjustment would have had on the 
+debt service coverage ratio for 2010.  Had Westlands disclosed in the Official Statement the 
+combined effect of both the 2010 transactions and the 2012 prior period adjustment, it would 
+have reported its debt service coverage ratio for 2010 as 0.11– less than 10% of what was 
+required.  In addition, the failure to disclose the nature of the 2010 and 2012 transactions in the 
+Official Statement masked the fact that Westlands had experienced a significant drop in net 
+revenue in 2010.     
+ 
+22. The dramatic drop in Westlands’ 2010 net revenue, its negative effect on the debt 
+service coverage ratio for that year, and the effect of the 2012 prior period adjustment on the 
+2010 debt service coverage ratio, would have been material to investors in the 2012 Bonds.   
+ 
+Birmingham and Ciapponi Certified the Accuracy of the 
+Official Statement on Behalf of Westlands 
+ 
+23. Both Birmingham and Ciapponi were involved in the issuance of the 2012 Bonds 
+and the Official Statement.  On behalf of Westlands, both Birmingham and Ciapponi signed the 
+2012 Bond Purchase Contract with the underwriter.  As part of that contract, they certified to the 
+underwriter that the Preliminary Official Statement and the Official Statement “contain no 
+7 
+ 
+misstatement of any material fact and do not omit any statement necessary to make the 
+statements contained therein, in light of the circumstances in which such statements were made, 
+not misleading.”  Birmingham also made a similar representation in the Closing Certificate he 
+signed on behalf of Westlands. 
+ 
+24. Birmingham received drafts of the Official Statement for the 2012 Bonds.  He 
+was aware of the extraordinary 2010 transactions Westlands used to record revenue solely to 
+achieve a 1.25 debt service coverage ratio without raising rates or other charges, but did not take 
+any steps to disclose their effect on the 2010 debt service coverage ratio reported in the Official 
+Statement.  Similarly, despite being aware that the 2012 prior period adjustment affected 
+Westland’s net revenue for 2010, Birmingham did not consider whether the 2010 debt service 
+coverage ratio reported in the Official Statement should have been revised. 
+ 
+25. Ciapponi reviewed each draft of the Official Statement as well as the final 
+version.  He was aware of the extraordinary 2010 transactions Westlands used to record revenue 
+in order to meet the debt service coverage ratio, but did not take any steps to disclose their effect 
+on the 2010 debt service coverage ratio which was reported in the Official Statement.  Similarly, 
+despite being aware that the 2012 prior period adjustment affected Westland’s net revenue for 
+2010, he did not consider whether the 2010 debt service coverage ratio reported in the Official 
+Statement should have been revised. 
+ 
+Legal Discussion 
+ 
+Respondents’ Violations 
+ 
+26. Section 17(a)(2) of the Securities Act makes it unlawful “in the offer or sale of 
+any securities . . . directly or indirectly . . . to obtain money or property by means of any untrue 
+statement of a material fact or any omission to state a material fact necessary in order to make 
+the statements made, in light of the circumstances under which they were made, not misleading.”  
+15 U.S.C. § 77q(a)(2) (2012).  Negligence is sufficient to establish a violation of Section 
+17(a)(2) and no finding of scienter is required.  See Aaron v. SEC, 446 U.S. 680, 696-97 (1980).  
+The Commission has held that the “knew or should have known” standard is appropriate to 
+establish negligence.  See KPMG, LLP v. SEC, 289 F.3d 109, 120 (D.C. Cir. 2002).  A 
+misrepresentation or omission is material if there is a substantial likelihood that a reasonable 
+investor would consider it important in making an investment decision.  See Basic Inc. v. 
+Levinson, 485 U.S. 224, 231-32 (1988). 
+ 
+27. The Commission may institute cease-and-desist proceedings against any person 
+held to be a cause of violations of the federal securities laws due to acts or omissions such person 
+knew or should have known would contribute to the violation. See Valicenti Advisory Servs., 
+Inc., Inv. Advisors Act Rel. No. 1774, 1998 SEC LEXIS 2497, at *16, n.11 (Nov. 18, 1998), 53 
+S.E.C. 1033, 1040 n.11 (Nov. 18, 1998), aff’d, Valicenti Advisory Servs., Inc. v. SEC, 198 F.3d 
+62 (2d Cir. 1999).  Negligence is sufficient to establish a violation for causing the primary 
+violation.  See KPMG Peat Marwick L.L.P., Exchange Act Rel. No. 43862, 2001 SEC LEXIS 
+98, at *102 (Jan. 19, 2001), 54 S.E.C. 1135, 1185, aff’d, 289 F.3d 109 (D.C. Cir. 2002). 
+ 
+8 
+ 
+28. Birmingham and Ciapponi each knew, or should have known, that Westlands’ 
+revenue and debt service coverage ratio for 2010 as reported in the Official Statement for the 
+2012 Bonds were misrepresented as a result of the extraordinary transactions recorded in 2010.  
+They were also negligent for failing to consider the effect of the 2012 prior period adjustment on 
+the revenue and the debt service coverage ratio calculation that was reported in the Official 
+Statement for the 2012 Bonds.  The negligent conduct of Birmingham and Ciapponi is imputed 
+to Westlands. 
+ 
+29. As a result of the conduct described herein, Westlands violated Section 17(a)(2) 
+of the Securities Act and Birmingham and Ciapponi caused Westlands’ violations. 
+ 
+Cooperation and Remedial Efforts 
+ 
+30. In determining to accept Respondents’ offers, the Commission considered the 
+Respondents’ cooperation and prompt remedial actions, including the development of written 
+financial disclosures policies, and staff training related to Westlands’ debt offerings.     
+ 
+IV. 
+ 
+In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
+agreed to in Respondents’ Offers.  
+ 
+Accordingly, it is hereby ORDERED that: 
+ 
+A. Pursuant to Section 8A of the Securities Act, Respondents cease and desist from 
+committing or causing any violations and any future violations of Section 17(a)(2) of the 
+Securities Act. 
+ 
+B. Within ten (10) days of the entry of this Order, Westlands shall pay a civil money 
+penalty in the amount of $125,000 and Birmingham shall pay a civil money penalty in the 
+amount of $50,000 to the Securities and Exchange Commission for transfer to the general fund 
+of the United States Treasury, subject to Exchange Act Section 21F(g)(3).  If timely payment is 
+not made, additional interest shall accrue pursuant to 31 U.S.C. §3717.  Ciapponi shall 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).  Payment shall be made by Ciapponi in the following installments:  $10,000 due ten 
+(10) days from the date of the Order, and $10,000 due twelve (12) months from the date of the 
+Order.  If any payment from Ciapponi is not made by the date the payment is required by this 
+Order, the entire outstanding balance of his civil penalty, plus any additional interest accrued 
+pursuant to 31 U.S.C. § 3717, shall be due and payable immediately, without further application.  
+Payment by the Respondents 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; 
+ 
+9 
+ 
+(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 
+Westlands, Birmingham, or Ciapponi, respectively, 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 LeeAnn Ghazil Gaunt, Chief, Municipal Securities and Public Pensions Unit, 
+Securities and Exchange Commission, 33 Arch Street, 23rd Floor, Boston, MA 02110-1424. 
+ 
+ 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, 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. 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+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, that the findings in the Order are true and 
+admitted by Respondents Birmingham and Ciapponi, and further, any debt for disgorgement, 
+prejudgment interest, civil penalty or other amounts due by Respondents Birmingham and 
+Ciapponi under the Order or any other judgment, order, consent order, decree or settlement 
+agreement entered in connection with this proceeding, is a debt for the violation by Respondents 
+Birmingham and Ciapponi 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 

raw/aaer/2016/AAER-3753.txt

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+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77342 / March 10, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3753 / March 10, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17163 
+ 
+ 
+In the Matter of 
+ 
+Joseph R. Allred, 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 cease-
+and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities 
+Exchange Act of 1934 (“Exchange Act”) against Joseph R. Allred (“Respondent” or “Allred”).   
+ 
+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 proceeding concerns failures by Magnum Hunter Resources Corporation 
+(“MHR” or “the Company”) and its management to properly implement, maintain, and evaluate 
+internal control over financial reporting (“ICFR”) for the fiscal year-ended December 31, 2011 and 
+to maintain ICFR sufficient to keep pace with MHR’s growth from at least the fiscal year-ended 
+December 31, 2011 through the quarter-ended September 30, 2013.  MHR’s failures resulted in 
+part from Ronald D. Ormand (“Ormand”) and David S. Krueger (“Krueger”) improperly 
+evaluating the severity of identified control deficiencies.   
+2. This proceeding also concerns Sarbanes-Oxley Act of 2002 (“SOX”) consulting 
+services provided by Allred.  Allred advised MHR management that MHR did not have material 
+weaknesses in its ICFR.  Allred did not have an adequate basis for this assessment.  This, at least in 
+part, caused the violations by MHR, Ormand, and Krueger. 
+B. RESPONDENT AND RELATED ENTITIES AND INDIVIDUALS 
+i. Respondent 
+3. Allred is a resident of Arlington, Texas and is a partner at a PCAOB-registered 
+public accounting firm.   Allred was responsible for the firm’s engagement that provided SOX 
+consulting and internal auditing services to MHR from 2009 through 2012.   These services 
+included assisting MHR with documenting, evaluating, testing, and improving accounting and 
+reporting processes. 
+ii. Other Relevant Entities and Individuals 
+4. MHR is a Delaware corporation headquartered in Irving, Texas that operates as an 
+independent oil and gas company engaged in the exploration and production of oil and gas in the 
+United States.  At all relevant times, MHR’s stock was registered with the Commission pursuant to 
+Section 12(b) of the Exchange Act and traded on the New York Stock Exchange (“NYSE”).  At all 
+relevant times, MHR 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.  On December 15, 
+2015, MHR filed a Form 8-K disclosing that the Company and certain subsidiaries had filed 
+voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. 
+5. Ormand is a resident of Houston, Texas and was MHR’s Chief Financial Officer 
+(“CFO”) from May 2009 through July 2013. 
+                                                 
+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. Krueger is a resident of Flower Mound, Texas and was MHR’s Chief Accounting 
+Officer (“CAO”) from October 2009 through October 2012.  He was previously licensed as a CPA 
+in the states of Arkansas and Oklahoma. 
+7. Wayne Gray, CPA (“Gray”) is a resident of Plano, Texas and a former partner at 
+a PCAOB-registered public accounting firm.  Gray was the engagement partner responsible for 
+providing MHR’s external auditing services for the December 31, 2009 through June 30, 2012 
+reporting periods.  Gray is a CPA licensed in the state of Texas.    
+C. FACTS 
+i. Statutory requirements regarding ICFR  
+8. Section 13(b)(2)(B) of the Exchange Act makes public companies responsible for 
+devising and maintaining a system of internal accounting controls sufficient to provide reasonable 
+assurance that transactions are recorded as necessary to permit preparation of financial statements 
+in conformity with GAAP.  See 15 U.S.C. §78m(b)(2)(B). 
+9. Exchange Act Rule 13a-15(a) requires issuers, including MHR, to maintain ICFR.2  
+See 17 C.F.R. 240.13a-15(a).  Rule 13a-15(f) defines ICFR as:  
+[A] process designed by, or under the supervision of, the issuer’s principal 
+executive and principal financial officers, or persons performing similar functions, 
+and effected by the issuer’s board of directors, management and other personnel, to 
+provide reasonable assurance regarding the reliability of financial reporting and the 
+preparation of financial statements for external purposes in accordance with 
+generally accepted accounting principles[.]  17 C.F.R. 240.13a-15(f). 
+10. Exchange Act Rule 13a-15(c) requires management—together with the 
+participation of principal executive and principal financial officers (or persons performing similar 
+functions)—to evaluate the effectiveness of ICFR as of the end of each fiscal year.  See 17 C.F.R. 
+240.13a-15(c).  Under Rule 13a-15(c), management may satisfy its obligations by conducting an 
+evaluation in accordance with interpretive guidance issued by the Commission in Release 
+No. 34-55929, Commission Guidance Regarding Management’s Report on Internal Control Over 
+Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, (the 
+“2007 Guidance”). 
+11. Item 308 of Regulation S-K requires management to provide an annual report that 
+contains its assessment of the effectiveness of ICFR and any material weakness in ICFR.   Under 
+Item 308, “[m]anagement is not permitted to conclude that the registrant’s [ICFR] is effective if 
+there are one or more material weaknesses in the registrant’s [ICFR].”  17 C.F.R. 229.308.   
+                                                 
+2 Rule 13a-15(c) applies to issuers whose securities are registered under Section 12 of the 
+Exchange Act and who are required either to file annual reports under Section 13(a) or 15(d) of 
+the Exchange Act for the prior fiscal year or filed an annual report for the prior fiscal year. 
+ 4 
+12. Item 308 of Regulation S-K further instructs that the registrant “must maintain 
+evidential matter, including documentation, to provide reasonable support for management’s 
+assessment of the effectiveness of the registrant’s [ICFR].”  The 2007 Guidance similarly states 
+that “[m]anagement is responsible for maintaining evidential matter, including documentation to 
+provide reasonable support for its assessment.”     
+13. Rule 1-02(a)(4) of Regulation S-X  defines categories of ICFR deficiencies based 
+on the severity, as follows: 
+  A “material weakness” is a “deficiency, or a combination of deficiencies, in [ICFR] 
+such that there is a reasonable possibility that a material misstatement of the company’s 
+annual or interim financial statements will not be prevented or detected on a timely 
+basis.”  See 17 C.F.R. 210.1-02(a)(4) (emphasis added).  A misstatement is reasonably 
+possible if the chance of a misstatement is more than remote but less than likely.  See 
+2007 Guidance at 34-35, n. 47 (citing Financial Accounting Standards Board Statement 
+No. 5, Accounting for Contingencies3).   
+ A “significant deficiency” is a “deficiency, or a combination of deficiencies, in [ICFR] 
+that is less severe than a material weakness, yet important enough to merit attention by 
+those responsible for oversight of the registrant’s financial reporting.”  Id. 
+ 
+14. The “severity of a deficiency in ICFR does not depend on whether a misstatement 
+actually has occurred but rather on whether there is a reasonable possibility that the company’s 
+ICFR will fail to prevent or detect a misstatement on a timely basis.”4  See 2007 Guidance at 35 
+(emphasis added). 
+15. Item 308(a)(3) of Regulation S-K requires public companies such as MHR to 
+annually provide a report of management that discloses material weaknesses that have been 
+identified by management.  They are not required to publicly disclose significant deficiencies.  
+16. Exchange Act Rule 13a-14 requires that every Form 10-Q and 10-K include 
+certifications signed by each principal executive and principal financial officer (or persons 
+performing similar functions).  See 17 C.F.R. 240.13a-14.  The certifying officers must confirm 
+that the Form 10-Q or 10-K does not contain any untrue statement of a material fact or omit to state 
+                                                 
+3 FASB Statement No. 5 is available at 
+http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220126761&acceptedDis
+claimer=true.  It defines “reasonably possible” as: “The chance of the future event or events 
+occurring is more than remote but less than likely.”  FASB No. 5 at 4.  It defines “remote” as: 
+“The chance of the future event or events occurring is slight.”  Id. 
+ 
+4 See FR-77, Commission Guidance Regarding Management’s Report on Internal Control Over 
+Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (June 
+27, 2007) (“Commission Guidance”), available at http://www.sec.gov/rules/interp/2007/33-
+8810.pdf. 
+ 
+ 5 
+a material fact necessary to make the statements made, in light of the circumstances under which 
+such statements were made, not misleading.  Id.  Ormand certified MHR’s 2011 Form 10-K and 
+March 31, 2012 and June 30, 2012 Forms 10-Q. 
+17. As detailed further below, MHR engaged Allred's firm to assist its management 
+with the documentation, testing, and evaluation of the company’s ICFR in 2010, 2011, and 2012.  
+Notwithstanding MHR’s reliance on the firm's services, MHR’s management—including Ormand 
+and Krueger—were ultimately responsible for its conclusions about the effectiveness of MHR’s 
+ICFR. 
+ii. MHR’s Rapid Growth and Strained Accounting Resources 
+18. MHR’s rapid growth strained its accounting resources.  For example, MHR grew 
+from $6 million in revenues in 2009 to $23 million in 2010, largely as the result of an $82 million 
+acquisition in February 2010.  In connection with the issuance of the external auditor’s report on 
+MHR’s 2010 year-end audit results, Gray informed Ormand, Krueger, and MHR’s Audit 
+Committee in February 2011 that MHR’s accounting department was experiencing “manpower 
+issues” and lacked sufficient personnel to complete all required tasks on a timely basis.   
+19. Between December 2010 and April 2011, MHR acquired another $70 million in oil 
+and gas properties and leasehold mineral interests.  MHR also completed two other acquisitions in 
+April and May 2011 for an aggregate purchase price of approximately $565 million.  In 2011, 
+MHR booked over $100 million in revenues—largely as a result of these acquisitions.  This rapid 
+growth created a significant burden on MHR’s accounting department.  For example, beginning in 
+November 2011 MHR failed to complete its standard monthly close process and began formally 
+closing its books on a quarterly basis with only sporadic monthly closes in 2012.   
+iii. MHR’s ICFR assessment as of December 31, 2011 
+a. Allred identified MHR’s insufficient accounting staffing as a control deficiency 
+as of December 31, 2011. 
+20. Allred led consulting engagements to document and test MHR’s ICFR.  In February 
+2012, his firm issued a written report on MHR’s ICFR to certain MHR managers—including 
+Ormand and Krueger—and MHR’s Audit Committee.  The report identified problems in MHR’s 
+accounting department, including that the “accounting and financial reporting team has 
+experienced significant delays in preparing financial statements and reports.”  As a result, Allred's 
+team could not complete its testing activities within the time period originally scheduled.  The 
+report further stated that two balance sheet account reconciliations for the month ending October 
+2011 were not reviewed and approved in a timely manner and that management review of the 
+consolidated October 2011 financial statements had not been formally documented.  
+21. As of December 31, 2011, the report identified control deficiencies within MHR’s 
+accounting function, including: (a) instances in which reconciliations were not prepared, reviewed, 
+or approved on a timely basis; (b) failures to document the completion of required monthly 
+management reviews; and (c) significant delays in preparing financial statements and reports due 
+to “inadequate and inappropriately aligned staffing.”  The report stated: 
+ 6 
+[T]he potential for error in such a compressed work environment presents 
+substantial risk.  With complex financial and reporting structures there are few 
+individuals within the team with the capacity to perform many tasks and there is 
+little time for senior rep orting personnel to review, analyze, and evaluate because 
+they are performing transaction level reporting tasks.  (emphasis added) 
+22. The report concluded, without explanation, that MHR’s staffing deficiency 
+represented only a significant deficiency—rather than a material weakness.  The report did not 
+explain how a deficiency that created a “substantial risk” of a financial statement error did not rise 
+to the level of a material weakness, defined as a deficiency in ICFR that creates a reasonable 
+possibility of a material misstatement not being prevented or detected on a timely basis. 
+23. Krueger and Ormand accepted the assessment that MHR’s insufficient accounting 
+staffing represented a significant deficiency.  Both Krueger and Ormand also relied on the absence 
+of an actual identified material error in MHR’s financial statements as evidence that a material 
+weakness did not exist as of December 31, 2011.  Neither Krueger nor Ormand prepared any 
+documentary evidence to supplement the documentation created by Allred's team.  Consequently, 
+the only documentation that supports MHR management’s assessment of the effectiveness of 
+MHR’s ICFR as of December 31, 2011 is the documentation created by Allred's team and 
+provided to MHR management.  
+24. Because MHR management concluded that the control deficiency only rose to the 
+level of a significant deficiency, rather than a material weakness, MHR did not publicly disclose 
+the deficiency but instead stated that its ICFR was effective. 
+ 
+b. Gray Misapplied the Applicable Standard When Determining the Severity of 
+MHR’s Control Deficiency as of December 31, 2011. 
+25. Gray failed to conduct the 2011 audit of MHR’s ICFR in accordance with PCAOB 
+Auditing Standards No. 3, Audit Documentation (“AS3”), and No. 5, An Audit of Internal Control 
+Over Financial Reporting That Is Integrated with An Audit of Financial Statements (“AS5”) and 
+improperly approved the issuance of the external auditor’s audit report containing an unqualified 
+opinion on MHR’s ICFR as of December 31, 2011. 
+26. In February 2012, a year after first raising concerns over MHR’s accounting 
+“manpower issues,” Gray reported to MHR’s Audit Committee a “[d]elay in closing the books due 
+to [the] Company manpower shortage relative to [the] volume of financial activity.”  This resulted 
+in “[n]umerous top-side adjustments” creating significant audit inefficiencies. 
+27. Gray, as engagement partner, further reported that: 
+We believe there is not adequate internal control over financial reporting due to 
+inadequate and inappropriately aligned staffing.  This factor increases the 
+possibility of a material error occurring and being undetected and reduces the 
+Company’s ability to file its 10-K on time. 
+ 7 
+28. Despite assessing that there was “not adequate internal control over financial 
+reporting due to inadequate and inappropriately aligned staffing,” Gray concluded that this control 
+deficiency rose to the level of a significant deficiency—rather than a material weakness.  The audit 
+work papers failed to adequately document the basis for this conclusion.  They also failed to 
+explain how the fact that MHR did “not [have] adequate internal control over financial reporting” 
+was not indicative of a material weakness, defined as weakness that creates a reasonable possibility 
+(i.e., “more than remote but less than likely”) of a material error not being detected or corrected on 
+a timely basis. 
+29. When reporting audit results on the effectiveness of MHR’s ICFR as of 
+December 31, 2011 to MHR’s Audit Committee, Gray identified MHR’s “inadequate and 
+inappropriately aligned staffing” as a significant deficiency rather than as a material 
+weakness. 
+30. Gray determined that MHR’s inadequate and inappropriately aligned accounting 
+staff did not constitute a material weakness because, among other things: (i) the audit work did not 
+identify material errors for the reporting period, and (ii) he understood that MHR had recently 
+hired additional accounting staff and that the existing staff, while overworked, was competent.   
+31. However, this was a misapplication of the applicable standards.  As the engagement 
+partner who led the audit of the effectiveness of MHR’s ICFR, Gray improperly applied the 
+definitions of “material weakness” and “significant deficiency” codified in Rule 1-02(a)(4) of 
+Regulation S-X and Appendix A of AS 5.  The severity of a deficiency does not depend on 
+whether an error actually occurred.  AS 5, ¶ 64. 
+32. Notwithstanding the systemic importance of an entity-level control, the written 
+analysis was deficient for two reasons.  First, it failed to apply the appropriate standard for defining 
+a material weakness.  Second, it failed to evaluate the severity of MHR’s control deficiency in 
+accordance with AS 5 because it did not adequately consider: (a) the misstatement that might result 
+from having insufficient accounting staff; (b) MHR’s ability to prepare accurate financial 
+statements based on the possible future consequences of the deficiency; (c) the amounts and 
+transactions exposed to the deficiency; or (d) the volume of activity exposed to the deficiency that 
+occurred in the current period or that is expected in future periods.  AS 5, ¶¶ 62-70. 
+33. Gray also failed to adequately document the basis for his conclusion.  Under AS 3, 
+“[a]udit documentation should be prepared in sufficient detail to provide a clear understanding of 
+its purpose, source, and the conclusions reached.”  AS 3, ¶ 4.  “The auditor must document the 
+procedures performed, evidence obtained, and conclusions reached with respect to relevant 
+financial statement assertions.”  AS 3, ¶ 6. “Audit documentation must clearly demonstrate that the 
+work was in fact performed.”  AS 3, ¶ 6.   
+34. The only written audit documentation assessing the severity of MHR’s accounting 
+staffing deficiency was a summary spreadsheet purportedly identifying all MHR control 
+deficiencies for the 2011 reporting period.  It documented the conclusion that MHR’s control 
+deficiency did not rise above a significant deficiency for three main reasons: (i) MHR hired a 
+controller and several senior level accountants during the latter part of 2011; (ii) MHR was in the 
+ 8 
+process of integrating two major acquisitions completed in the second quarter of 2011 and the 
+delay in the close process was mostly due to integration across entities; and (iii) individual analysis 
+of two identified audit adjustments did not support a conclusion of a more severe control 
+deficiency. 
+35. In doing so, Gray failed to evaluate MHR’s deficiencies in accordance with AS 5.   
+Auditors “must 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 weaknesses as of 
+the date of management’s assessment.”  AS 5, ¶ 62 (emphasis in original).      
+c. MHR’s Management Retained Ultimate Responsibility for Evaluating the 
+Severity of Any Control Deficiencies. 
+ 
+36. MHR disclosed in its 2011 Form 10-K that:  
+Under the supervision and with the participation of our management, including our 
+Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness 
+of our internal controls over financial reporting as of the end of the period covered 
+by this report based on the framework in “Internal Control – Integrated 
+Framework” iss ued by the Committee of Sponsoring Organizations of the 
+Treadway Commission.  Based on that assessment, our Chief Executive Officer and 
+Chief Financial Officer concluded that our internal controls over financial reporting 
+were effective as of December 31, 2011 to provide reasonable assurance regarding 
+the reliability of our financial reporting and the preparation of our financial 
+statements for external purposes in accordance with U.S. generally accepted 
+accounting principles. 
+See MHR Fiscal Year 2011 Form 10-K at p. F-53. 
+37. When determining whether a deficiency constitutes a material weakness, 
+management should consider all relevant information,5 including information provided by outside 
+parties.  While MHR management retained ultimate responsibility for assessing MHR’s ICFR, 
+including evaluating the severity of any deficiencies in ICFR,6 the information provided by Allred 
+and Gray was relevant to its assessment.  In addition, MHR’s management was responsible for 
+maintaining documentation to support its assessment.7 
+38. Ormand and Krueger had knowledge of the stress placed on MHR’s accounting 
+department as a result of its rapid growth.  Nonetheless, they did not sufficiently consider Allred’s 
+or Gray’s findings in analyzing the severity of the control deficiencies, or the appropriateness of 
+Allred’s and Gray’s conclusions in light of all other information which they were aware.  
+                                                 
+5 2007 Guidance at 37. 
+ 
+6 17 CFR 240.13a-15(c). 
+ 
+7 Instruction No. 2 to Item 308 of Regulation S-K. 
+ 9 
+Additionally, as discussed further below, MHR failed to maintain required evidential matter—
+including documentation—providing reasonable support for its assessment. 
+d. MHR’s Documentation Indicated That Krueger Failed to Review MHR’s Q3 
+2011 Form 10-Q on a Timely Basis.  
+39. One of the consequences of MHR’s staffing deficiency resulted in Krueger signing 
+off on MHR’s third quarter 2011 Form 10-Q five days after the Form 10-Q was filed with the 
+Commission.  Because Krueger was the CAO—and highest ranking officer with an accounting 
+background—responsible for reviewing MHR’s periodic reports prior to filing them with the 
+Commission, MHR had no compensating control8 in its ICFR. 
+e. MHR Failed to Adequately Document its Assessment of ICFR. 
+40. Item 308 of Regulation S-K requires and the 2007 Guidance states that 
+management must maintain documentation to provide reasonable support for its assessment of the 
+effectiveness of the company’s ICFR.   
+41. However, in its year-end 2011 assessment, MHR failed to generate or maintain 
+documentation supporting its basis for determining the severity of its accounting staff deficiency.  
+It thus did not adequately document its basis for concluding that the deficiency was a significant 
+deficiency—rather than a material weakness.  This was true even though MHR management, and 
+Ormand and Krueger specifically, had been informed that: (a) there was a “substantial risk” of an 
+error (by Allred); and (b) “there is not adequate internal control over financial reporting” (by 
+Gray). 
+42. The control deficiency caused by MHR’s inadequate accounting staffing was 
+particularly important because it was an entity-level control.  Because it was an important control 
+that could affect other controls throughout the company, it needed to be fully understood and 
+defined in order to determine the nature, extent, and severity of the deficiencies. 
+f. MHR Management Misapplied the Appropriate Definition When Determining 
+the Severity of MHR’s Control Deficiency as of December 31, 2011. 
+43. Ormand and Krueger failed to apply the appropriate standard when determining the 
+severity of MHR’s internal control deficiency.  As detailed above, while actual errors may inform 
+assessments of control deficiencies, the presence of an actual error is not a prerequisite to 
+concluding that a material weakness exists.  Rather, management is to consider whether there is a 
+reasonable possibility that a material misstatement will not be timely detected or prevented.  In 
+addition, the effectiveness of a company’s ICFR is assessed at a specific point in time—as of the 
+end of the fiscal reporting period.  Planned or anticipated remedial efforts are irrelevant to the 
+analysis. 
+                                                 
+8 “Compensating controls are controls that serve to accomplish the objective of another control 
+that did not function properly, helping to reduce risk to an acceptable level.”  2007 Guidance at 
+n. 49. 
+ 10 
+44. Ormand and Krueger improperly assessed the severity of the control deficiency 
+caused by MHR’s “inadequate and inappropriately aligned staffing” as of December 31, 2011.  
+MHR management should have assessed whether a reasonable possibility existed that a material 
+misstatement of the company’s financial statements would not be prevented or detected on a timely 
+basis. 
+iv. MHR’s Disclosure of the Existence of Material Weaknesses 
+a. MHR Restates its June 30, 2012 Form 10-Q and Discloses Material 
+Weaknesses. 
+45. On November 14, 2012, MHR filed an amended Form 10-Q restating its June 30, 
+2012 financial statements to correct a material error related to stock-based compensation and 
+certain other errors.  MHR disclosed that management concluded that material weaknesses existed 
+as of June 30, 2012 related to (i) a lack of sufficient, qualified personnel to design and manage an 
+effective control environment; (ii) MHR’s period-end financial reporting process; and (iii) controls 
+over calculation and review of share-based compensation expense.  MHR also disclosed 
+management’s plans to remediate and improve the company’s ICFR and disclosure controls and 
+procedures. 
+46. Before restating, MHR’s Audit Committee met on October 19, 2012 to understand 
+how the company had materially understated option based compensation expense in the second 
+quarter.  Ormand reported that the person responsible for reviewing the calculation signed off 
+without reviewing it.  Also at that meeting, Gray “restated that the root cause [of the error] was 
+inadequate and inappropriately aligned staffing of the accounting department.” 
+b. MHR’s Disclosed Material Weaknesses in its September 30, 2012 Form 10-Q. 
+47. On November 13, 2012, MHR’s Audit Committee met and approved the 
+company’s Form 10-Q for the third quarter-ended September 30, 2012.  That filing disclosed the 
+same three material weaknesses existed at September 30, 2012 that had been disclosed in MHR’s 
+amended June 30, 2012 Form 10-Q. 
+c. MHR Delinquently Files its 2012 Form 10-K and Discloses Material 
+Weaknesses. 
+48. MHR delinquently filed its 2012 Form 10-K on June 14, 2013.  In it, MHR 
+disclosed fourteen material weaknesses as of December 31, 2012, including that “[i]n certain areas 
+the Company did not have sufficient personnel with an appropriate level of knowledge, experience 
+and training commensurate with the growth of the Company's corporate structure and financial 
+reporting requirements” and not upgrading “resources around internal audit, tax, financial reporting 
+and certain accounting areas.” 
+49. MHR’s internal analysis of the material weaknesses posed by its understaffed 
+accounting department, as disclosed in its 2012 Form 10-K, recognized that the “significant 
+deficiency identified at year-end 2011 does not appear[] to be remediated.  Personnel do not appear 
+to have the competence and training necessary for their assigned level of responsibility.”   
+ 11 
+v. MHR Remediates Inadequate and Inappropriately Aligned Staffing in the 
+Third Quarter 2013 
+50. On November 8, 2013, MHR filed its Form 10-Q for the quarter-ended September 
+30, 2013.  While concluding that the Company’s ICFR was not effective as of September 30, 2013, 
+management concluded that the material weakness that existed at quarter-end concerning 
+accounting staff inadequacies had subsequently been remediated.  
+D. VIOLATIONS  
+i. Allred Caused Ormand’s and Krueger’s Violations of Rule 13a-15(c) of the 
+Exchange Act. 
+ 
+51. As a result of the conduct described above, Allred caused Ormand and Krueger 
+to violate Rule 13a-15(c) of the Exchange Act, which requires an issuer’s management to evaluate, 
+with the participation of the principal executive and principal financial officers (or persons 
+performing similar functions) the effectiveness of the issuer’s ICFR as of the end of each fiscal 
+year.   
+ 
+ii. Allred Caused MHR to Violate Sections 13(a) of the Exchange Act and Rules 
+13a-1and 13a-15(a) thereunder. 
+ 
+52. As a result of the conduct described above, Allred caused MHR to violate 
+Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, which require issuers with classes 
+of securities registered pursuant to Section 12 registrants to file periodic reports with the 
+Commission and Rule 13a-15(a) which requires issuers to maintain ICFR.   
+ 
+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 21C of the Exchange Act, it is hereby ORDERED that: 
+ 
+ A. Respondent shall cease and desist from committing or causing any violations of and 
+any future violations of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-15(a) and (c) 
+thereunder. 
+ 
+B. Respondent shall, within 14 days of the entry of this Order, pay a civil money 
+penalty in the amount of $15,000 to the Securities and Exchange Commission for transfer to the 
+general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely 
+payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717.   
+ 
+Payment must be made in one of the following ways:   
+ 
+ 12 
+(1) Respondent may transmit payment electronically to the Commission, which 
+will provide detailed ACH transfer/Fedwire instructions upon request;  
+ 
+(2) Respondent may make direct payment from a bank account via Pay.gov 
+through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or  
+ 
+(3) Respondent may pay by certified check, bank cashier’s check, or United 
+States postal money order, made payable to the Securities and Exchange 
+Commission and hand-delivered or mailed to:  
+ 
+Enterprise Services Center 
+Accounts Receivable Branch 
+HQ Bldg., Room 181, AMZ-341 
+6500 South MacArthur Boulevard 
+Oklahoma City, OK 73169 
+ 
+Payments by check or money order must be accompanied by a cover letter identifying 
+Allred as a Respondent in these proceedings, and the file number of these proceedings; a copy of 
+the cover letter and check or money order must be sent to David L. Peavler, Division of 
+Enforcement, Securities and Exchange Commission, 801 Cherry Street, Suite 1900, Fort Worth, 
+Texas 76102.   
+ 
+ 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. 
+ 
+V. 
+ 
+It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section 
+523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by 
+Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other 
+amounts due by Respondent under this Order or any other judgment, order, consent order, decree 
+or settlement agreement entered in connection with this proceeding, is a debt for the violation by 
+ 13 
+Respondent of the federal securities laws or any regulation or order issued under such laws, as set 
+forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). 
+ 
+ By the Commission. 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 
+ 
+ 
+ 
+ 

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+ 
+ 
+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77343 / March 10, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3754 / March 10, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17164 
+ 
+ 
+ 
+ 
+In the Matter of 
+ 
+Wayne Gray, CPA,  
+ 
+Respondent. 
+ 
+ 
+ 
+ 
+ORDER INSTITUTING PUBLIC 
+ADMINISTRATIVE AND CEASE- 
+ AND-DESIST PROCEEDINGS 
+PURSUANT TO SECTIONS 4C AND 21C 
+OF THE SECURITIES EXCHANGE ACT 
+OF 1934 AND RULE 102(e) OF THE 
+COMMISSION’S RULES OF PRACTICE, 
+MAKING FINDINGS, AND IMPOSING 
+REMEDIAL SANCTIONS AND A CEASE-
+AND-DESIST ORDER 
+   
+ 
+I. 
+ 
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that public 
+administrative and cease-and-desist proceedings be, and hereby are, instituted against Wayne Gray, 
+CPA (“Respondent” or “Gray”) pursuant to Sections 4C1 and 21C of the Securities 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 thereunder. 
+ 
+2 
+ 
+of 1934 (“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, Respondent has submitted an Offer 
+of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 
+purpose of these proceedings and any other proceedings brought by or on behalf of the 
+Commission, or to which the Commission is a party, and without admitting or denying the findings  
+herein, except as to the Commission’s jurisdiction over him and the subject matter of these 
+proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public 
+Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the 
+Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making 
+Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth 
+below. 
+ 
+III. 
+ 
+ On the basis of this Order and Respondent’s Offer, the Commission finds3 that:  
+ 
+A. SUMMARY 
+1. This proceeding concerns failures by Magnum Hunter Resources Corporation 
+(“MHR” or “the Company”) and its management to properly implement, maintain, and evaluate 
+internal control over financial reporting (“ICFR”) for the fiscal year-ended December 31, 2011 and 
+to maintain ICFR sufficient to keep pace with MHR’s growth from at least the fiscal year-ended 
+December 31, 2011 through the quarter-ended September 30, 2013.  MHR’s failures resulted in 
+part from Ronald D. Ormand (“Ormand”) and David S. Krueger (“Krueger”) improperly 
+evaluating the severity of identified control deficiencies.   
+                                                 
+2  Rule 102(e)(1)(ii) provides, in pertinent part, that: 
+ 
+ The Commission may . . . deny, temporarily or permanently, the privilege of 
+appearing or practicing before it . . . to any person who is found . . . to have 
+engaged in unethical or improper professional conduct. 
+ 
+ Rule 102(e)(1)(iii) provides, in pertinent part, that: 
+ 
+ The Commission may . . . deny, temporarily or permanently, the privilege of 
+appearing or practicing before it . . . to any person who is found…to have 
+willfully violated, or willfully aided and abetted the violation of any provision of 
+the Federal securities laws or the rules and regulations thereunder. 
+ 
+3   The findings herein are made pursuant to Respondent's Offer of Settlement and are not 
+binding on any other person or entity in this or any other proceeding.   
+3 
+ 
+2. This proceeding also concerns the improper professional conduct by Gray.  With 
+Gray as the engagement partner, an audit report expressing an unqualified opinion on MHR’s 
+ICFR as of December 31, 2011 was issued that incorrectly stated that the audit was conducted in 
+accordance with Public Company Accounting Oversight Board (“PCAOB”) standards.  This, at 
+least in part, caused MHR’s violations. 
+B. RESPONDENT AND RELATED ENTITIES AND INDIVIDUALS 
+i. Respondent 
+3. Gray is a resident of Plano, Texas and a former partner at a PCAOB-registered 
+public accounting firm.  Gray was the engagement partner responsible for providing MHR’s 
+external auditing services for the December 31, 2009 through June 30, 2012 reporting periods.  
+Gray is a CPA licensed in the state of Texas. 
+ii. Other Relevant Entities and Individuals 
+4. MHR is a Delaware corporation headquartered in Irving, Texas that operates as an 
+independent oil and gas company engaged in the exploration and production of oil and gas in the 
+United States.  At all relevant times, MHR’s stock was registered with the Commission pursuant to 
+Section 12(b) of the Exchange Act and traded on the New York Stock Exchange (“NYSE”).  At all 
+relevant times, MHR 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.  On December 15, 
+2015, MHR filed a Form 8-K disclosing that the Company and certain subsidiaries had filed 
+voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. 
+5. Ormand is a resident of Houston, Texas and was MHR’s Chief Financial Officer 
+(“CFO”) from May 2009 through July 2013. 
+6. Krueger is a resident of Flower Mound, Texas and was MHR’s Chief Accounting 
+Officer (“CAO”) from October 2009 through October 2012.  He was previously licensed as a CPA 
+in the states of Arkansas and Oklahoma. 
+7. Joseph Allred, CPA (“Allred”) is a resident of Arlington, Texas and is a partner at 
+a PCAOB-registered public accounting firm.   Allred was responsible for the firm’s engagement 
+that provided Sarbanes-Oxley Act of 2002 (“SOX”) consulting and internal auditing services to 
+MHR from 2009 through 2012.  These services included assisting MHR with documenting, 
+evaluating, testing, and improving accounting and reporting processes.   
+C. FACTS 
+i. Statutory requirements regarding ICFR  
+8. Section 13(b)(2)(B) of the Exchange Act makes public companies responsible for 
+devising and maintaining a system of internal accounting controls sufficient to provide reasonable 
+4 
+ 
+assurance that transactions are recorded as necessary to permit preparation of financial statements 
+in conformity with GAAP.  See 15 U.S.C. §78m(b)(2)(B). 
+9. Exchange Act Rule 13a-15(a) requires issuers, including MHR, to maintain ICFR.4  
+See 17 C.F.R. 240.13a-15(a).  Rule 13a-15(f) defines ICFR as:  
+[A] process designed by, or under the supervision of, the issuer’s principal 
+executive and principal financial officers, or persons performing similar functions, 
+and effected by the issuer’s board of directors, management and other personnel, to 
+provide reasonable assurance regarding the reliability of financial reporting and the 
+preparation of financial statements for externa l purposes in accordance with 
+generally accepted accounting principles[.]  17 C.F.R. 240.13a-15(f). 
+10. Exchange Act Rule 13a-15(c) requires management—together with the 
+participation of principal executive and principal financial officers (or persons performing similar 
+functions)—to evaluate the effectiveness of ICFR as of the end of each fiscal year.  See 17 C.F.R. 
+240.13a-15(c).  Under Rule 13a-15(c), management may satisfy its obligations by conducting an 
+evaluation in accordance with interpretive guidance issued by the Commission in Release 
+No. 34-55929, Commission Guidance Regarding Management’s Report on Internal Control Over 
+Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, (the 
+“2007 Guidance”). 
+11. Item 308 of Regulation S-K requires management to provide an annual report that 
+contains its assessment of the effectiveness of ICFR and any material weakness in ICFR.   Under 
+Item 308, “[m]anagement is not permitted to conclude that the registrant’s [ICFR] is effective if 
+there are one or more material weaknesses in the registrant’s [ICFR].”  17 C.F.R. 229.308.   
+12. Item 308 of Regulation S-K further instructs that the registrant “must maintain 
+evidential matter, including documentation, to provide reasonable support for management’s 
+assessment of the effectiveness of the registrant’s [ICFR].”  The 2007 Guidance similarly states 
+that “[m]anagement is responsible for maintaining evidential matter, including documentation to 
+provide reasonable support for its assessment.”     
+13. Rule 1-02(a)(4) of Regulation S-X defines categories of ICFR deficiencies based on 
+the severity, as follows: 
+  A “material weakness” is a “deficiency, or a combination of deficiencies, in [ICFR] 
+such that there is a reasonable possibility that a material misstatement of the company’s 
+annual or interim financial statements will not be prevented or detected on a timely 
+basis.”  See 17 C.F.R. 210.1-02(a)(4) (emphasis added).  A misstatement is reasonably 
+possible if the chance of a misstatement is more than remote but less than likely.  See 
+                                                 
+4 Rule 13a-15(c) applies to issuers whose securities are registered under Section 12 of the 
+Exchange Act and who are required either to file annual reports under Section 13(a) or 15(d) of 
+the Exchange Act for the prior fiscal year or filed an annual report for the prior fiscal year. 
+5 
+ 
+2007 Guidance at 34-35, n. 47 (citing Financial Accounting Standards Board Statement 
+No. 5, Accounting for Contingencies5).  
+ A “significant deficiency” is a “deficiency, or a combination of deficiencies, in [ICFR] 
+that is less severe than a material weakness, yet important enough to merit attention by 
+those responsible for oversight of the registrant’s financial reporting.”  Id. 
+ 
+14. The “severity of a deficiency in ICFR does not depend on whether a misstatement 
+actually has occurred but rather on whether there is a reasonable possibility that the company’s 
+ICFR will fail to prevent or detect a misstatement on a timely basis.”6  See 2007 Guidance at 35 
+(emphasis added). 
+15. Item 308(a)(3) of Regulation S-K requires public companies such as MHR to 
+annually provide a report of management that discloses material weaknesses that have been 
+identified by management.  They are not required to publicly disclose significant deficiencies.  
+16. Exchange Act Rule 13a-14 requires that every Form 10-Q and 10-K include 
+certifications signed by each principal executive and principal financial officer (or persons 
+performing similar functions).  See 17 C.F.R. 240.13a-14.  The certifying officers must confirm 
+that the Form 10-Q or 10-K 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.  Id.  Ormand certified MHR’s 2011 Form 10-K and 
+March 31, 2012 and June 30, 2012 Forms 10-Q. 
+17. As detailed further below, MHR engaged Allred's firm to assist its management 
+with the documentation, testing, and evaluation of the company’s ICFR in 2010, 2011, and 2012.  
+Notwithstanding MHR’s reliance on the firm's services, MHR’s management—including Ormand 
+and Krueger—were ultimately responsible for its conclusions about the effectiveness of MHR’s 
+ICFR. 
+                                                 
+5 FASB Statement No. 5 is available at 
+http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220126761&acceptedDis
+claimer=true.  It defines “reasonably possible” as: “The chance of the future event or events 
+occurring is more than remote but less than likely.”  FASB No. 5 at 4.  It defines “remote” as: 
+“The chance of the future event or events occurring is slight.”  Id. 
+ 
+6 See FR-77, Commission Guidance Regarding Management’s Report on Internal Control Over 
+Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (June 
+27, 2007) (“Commission Guidance”), available at http://www.sec.gov/rules/interp/2007/33-
+8810.pdf. 
+ 
+6 
+ 
+ii. MHR’s Rapid Growth and Strained Accounting Resources 
+18. MHR’s rapid growth strained its accounting resources.  For example, MHR grew 
+from $6 million in revenues in 2009 to $23 million in 2010, largely as the result of an $82 million 
+acquisition in February 2010.  In connection with the issuance of the external auditor’s report on 
+MHR’s 2010 year-end audit results, Gray informed Ormand, Krueger, and MHR’s Audit 
+Committee in February 2011 that MHR’s accounting department was experiencing “manpower 
+issues” and lacked sufficient personnel to complete all required tasks on a timely basis.   
+19. Between December 2010 and April 2011, MHR acquired another $70 million in oil 
+and gas properties and leasehold mineral interests.  MHR also completed two other acquisitions in 
+April and May 2011 for an aggregate purchase price of approximately $565 million.  In 2011, 
+MHR booked over $100 million in revenues—largely as a result of these acquisitions.  This rapid 
+growth created a significant burden on MHR’s accounting department.  For example, beginning in 
+November 2011 MHR failed to complete its standard monthly close process and began formally 
+closing its books on a quarterly basis with only sporadic monthly closes in 2012.   
+iii. MHR’s ICFR assessment as of December 31, 2011 
+a. Allred identified MHR’s insufficient accounting staffing as a control deficiency 
+as of December 31, 2011. 
+20. Allred led consulting engagements to document and test MHR’s ICFR.  In February 
+2012, his firm issued a written report on MHR’s ICFR to certain MHR managers—including 
+Ormand and Krueger—and MHR’s Audit Committee.  The report identified problems in MHR’s 
+accounting department, including that the “accounting and financial reporting team has 
+experienced significant delays in preparing financial statements and reports.”  As a result, Allred's 
+team could not complete its testing activities within the time period originally scheduled.  The 
+report further stated that two balance sheet account reconciliations for the month ending October 
+2011 were not reviewed and approved in a timely manner and that management review of the 
+consolidated October 2011 financial statements had not been formally documented.  
+21. As of December 31, 2011, the report identified control deficiencies within MHR��s 
+accounting function, including: (a) instances in which reconciliations were not prepared, reviewed, 
+or approved on a timely basis; (b) failures to document the completion of required monthly 
+management reviews; and (c) significant delays in preparing financial statements and reports due 
+to “inadequate and inappropriately aligned staffing.”  The report stated: 
+[T]he potential for error in such a compressed work environment presents 
+substantial risk.  With complex financial and reporting structures there are few 
+individuals within the team with the capacity to perform many tasks and there is 
+little time for senior reporting personnel to review, analyze, and evaluate because 
+they are performing transaction level reporting tasks.  (emphasis added) 
+22. The report concluded, without explanation, that MHR’s staffing deficiency 
+represented only a significant deficiency—rather than a material weakness.  The report did not 
+7 
+ 
+explain how a deficiency that created a “substantial risk” of a financial statement error did not rise 
+to the level of a material weakness, defined as a deficiency in ICFR that creates a reasonable 
+possibility of a material misstatement not being prevented or detected on a timely basis. 
+23. Krueger and Ormand accepted the assessment that MHR’s insufficient accounting 
+staffing represented a significant deficiency.  Both Krueger and Ormand also relied on the absence 
+of an actual identified material error in MHR’s financial statements as evidence that a material 
+weakness did not exist as of December 31, 2011.  Neither Krueger nor Ormand prepared any 
+documentary evidence to supplement the documentation created by Allred's team.  Consequently, 
+the only documentation that supports MHR management’s assessment of the effectiveness of 
+MHR’s ICFR as of December 31, 2011 is the documentation created by Allred's team and 
+provided to MHR management.  
+24. Because MHR management concluded that the control deficiency only rose to the 
+level of a significant deficiency, rather than a material weakness, MHR did not publicly disclose 
+the deficiency but instead stated that its ICFR was effective. 
+ 
+b. Gray Misapplied the Applicable Standard When Determining the Severity of 
+MHR’s Control Deficiency as of December 31, 2011. 
+25. Gray failed to conduct the 2011 audit of MHR’s ICFR in accordance with PCAOB 
+Auditing Standards No. 3, Audit Documentation (“AS3”), and No. 5, An Audit of Internal Control 
+Over Financial Reporting That Is Integrated with An Audit of Financial Statements (“AS5”) and 
+improperly approved the issuance of the external auditor’s audit report containing an unqualified 
+opinion on MHR’s ICFR as of December 31, 2011. 
+26. In February 2012, a year after first raising concerns over MHR’s accounting 
+“manpower issues,” Gray reported to MHR’s Audit Committee a “[d]elay in closing the books due 
+to [the] Company manpower shortage relative to [the] volume of financial activity.”  This resulted 
+in “[n]umerous top-side adjustments” creating significant audit inefficiencies. 
+27. Gray, as engagement partner, further reported that: 
+We believe there is not adequate internal control over financial reporting due to 
+inadequate and inappropriately aligned staffing.  This factor increases the 
+possibility of a material error occurring and being undetected a nd reduces the 
+Company’s ability to file its 10-K on time. 
+28. Despite assessing that there was “not adequate internal control over financial 
+reporting due to inadequate and inappropriately aligned staffing,” Gray concluded that this control 
+deficiency rose to the level of a significant deficiency—rather than a material weakness.  The audit 
+work papers failed to adequately document the basis for this conclusion.  They also failed to 
+explain how the fact that MHR did “not [have] adequate internal control over financial reporting” 
+was not indicative of a material weakness, defined as weakness that creates a reasonable possibility 
+8 
+ 
+(i.e., “more than remote but less than likely”) of a material error not being detected or corrected on 
+a timely basis. 
+29. When reporting audit results on the effectiveness of MHR’s ICFR as of 
+December 31, 2011 to MHR’s Audit Committee, Gray identified MHR’s “inadequate and 
+inappropriately aligned staffing” as a significant deficiency rather than as a material weakness. 
+30. Gray determined that MHR’s inadequate and inappropriately aligned accounting 
+staff did not constitute a material weakness because, among other things: (i) the audit work did not 
+identify material errors for the reporting period, and (ii) he understood that MHR had recently 
+hired additional accounting staff and that the existing staff, while overworked, was competent.   
+31. However, this was a misapplication of the applicable standards.  As the engagement 
+partner who led the audit of the effectiveness of MHR’s ICFR, Gray improperly applied the 
+definitions of “material weakness” and “significant deficiency” codified in Rule 1-02(a)(4) of 
+Regulation S-X and Appendix A of AS 5.  The severity of a deficiency does not depend on 
+whether an error actually occurred.  AS 5, ¶ 64.  
+32. Notwithstanding the systemic importance of an entity-level control, the written 
+analysis was deficient for two reasons.  First, it failed to apply the appropriate standard for defining 
+a material weakness.  Second, it failed to evaluate the severity of MHR’s control deficiency in 
+accordance with AS 5 because it did not adequately consider: (a) the misstatement that might result 
+from having insufficient accounting staff; (b) MHR’s ability to prepare accurate financial 
+statements based on the possible future consequences of the deficiency; (c) the amounts and 
+transactions exposed to the deficiency; or (d) the volume of activity exposed to the deficiency that 
+occurred in the current period or that is expected in future periods.  AS 5, ¶¶ 62-70. 
+33. Gray also failed to adequately document the basis for his conclusion.  Under AS 3, 
+“[a]udit documentation should be prepared in sufficient detail to provide a clear understanding of 
+its purpose, source, and the conclusions reached.”  AS 3, ¶ 4.  “The auditor must document the 
+procedures performed, evidence obtained, and conclusions reached with respect to relevant 
+financial statement assertions.”  AS 3, ¶ 6. “Audit documentation must clearly demonstrate that the 
+work was in fact performed.”  AS 3, ¶ 6.   
+34. The only written audit documentation assessing the severity of MHR’s accounting 
+staffing deficiency was a summary spreadsheet purportedly identifying all MHR control 
+deficiencies for the 2011 reporting period.  It documented the conclusion that MHR’s control 
+deficiency did not rise above a significant deficiency for three main reasons: (i) MHR hired a 
+controller and several senior level accountants during the latter part of 2011; (ii) MHR was in the 
+process of integrating two major acquisitions completed in the second quarter of 2011 and the 
+delay in the close process was mostly due to integration across entities; and (iii) individual analysis 
+of two identified audit adjustments did not support a conclusion of a more severe control 
+deficiency. 
+9 
+ 
+35. In doing so, Gray failed to evaluate MHR’s deficiencies in accordance with AS 5.   
+Auditors “must 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 weaknesses as of 
+the date of management’s assessment.”  AS 5, ¶ 62 (emphasis in original).      
+c. MHR’s Management Retained Ultimate Responsibility for Evaluating the 
+Severity of Any Control Deficiencies. 
+ 
+36. MHR disclosed in its 2011 Form 10-K that:  
+Under the supervision and with the participation of our management, including our 
+Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness 
+of our internal controls over financial reporting as of the end of the period covered 
+by this report based on the framework in “Internal Control – Integrated 
+Framework” issued by the Committee of Sponsoring Organizations of the 
+Treadway Commission.  Based on that assessment, our Chief Executive Officer and 
+Chief Financial Officer concluded that our internal controls over financial reporting 
+were effective as of December 31, 2011 to provide reasonable assurance regarding 
+the reliability of our financial reporting and the preparation of our financial 
+statements for external purposes in accordance with U.S. generally accepted  
+accounting principles. 
+See MHR Fiscal Year 2011 Form 10-K at p. F-53. 
+37. When determining whether a deficiency constitutes a material weakness, 
+management should consider all relevant information,7 including information provided by outside 
+parties.  While MHR management retained ultimate responsibility for assessing MHR’s ICFR, 
+including evaluating the severity of any deficiencies in ICFR,8 the information provided by Allred 
+and Gray was relevant to its assessment.  In addition, MHR’s management was responsible for 
+maintaining documentation to support its assessment.9 
+38. Ormand and Krueger had knowledge of the stress placed on MHR’s accounting 
+department as a result of its rapid growth.  Nonetheless, they did not sufficiently consider Allred’s 
+or Gray’s findings in analyzing the severity of the control deficiencies, or the appropriateness of 
+Allred’s and Gray’s conclusions in light of all other information which they were aware.  
+Additionally, as discussed further below, MHR failed to maintain required evidential matter—
+including documentation—providing reasonable support for its assessment. 
+                                                 
+7 2007 Guidance at 37. 
+ 
+8 17 CFR 240.13a-15(c). 
+ 
+9 Instruction No. 2 to Item 308 of Regulation S-K. 
+10 
+ 
+d. MHR’s Documentation Indicated That Krueger Failed to Review MHR’s Q3 
+2011 Form 10-Q on a Timely Basis.  
+39. One of the consequences of MHR’s staffing deficiency resulted in Krueger signing 
+off on MHR’s third quarter 2011 Form 10-Q five days after the Form 10-Q was filed with the 
+Commission.  Because Krueger was the CAO—and highest ranking officer with an accounting 
+background—responsible for reviewing MHR’s periodic reports prior to filing them with the 
+Commission, MHR had no compensating control10 in its ICFR. 
+e. MHR Failed to Adequately Document its Assessment of ICFR. 
+40. Item 308 of Regulation S-K requires and the 2007 Guidance states that 
+management must maintain documentation to provide reasonable support for its assessment of the 
+effectiveness of the company’s ICFR.   
+41. However, in its year-end 2011 assessment, MHR failed to generate or maintain 
+documentation supporting its basis for determining the severity of its accounting staff deficiency.  
+It thus did not adequately document its basis for concluding that the deficiency was a significant 
+deficiency—rather than a material weakness.  This was true even though MHR management, and 
+Ormand and Krueger specifically, had been informed that: (a) there was a “substantial risk” of an 
+error (by Allred); and (b) “there is not adequate internal control over financial reporting” (by 
+Gray). 
+42. The control deficiency caused by MHR’s inadequate accounting staffing was 
+particularly important because it was an entity-level control.  Because it was an important control 
+that could affect other controls throughout the company, it needed to be fully understood and 
+defined in order to determine the nature, extent, and severity of the deficiencies. 
+f. MHR Management Misapplied the Appropriate Definition When Determining 
+the Severity of MHR’s Control Deficiency as of December 31, 2011. 
+43. Ormand and Krueger failed to apply the appropriate standard when determining the 
+severity of MHR’s internal control deficiency.  As detailed above, while actual errors may inform 
+assessments of control deficiencies, the presence of an actual error is not a prerequisite to 
+concluding that a material weakness exists.  Rather, management is to consider whether there is a 
+reasonable possibility that a material misstatement will not be timely detected or prevented.  In 
+addition, the effectiveness of a company’s ICFR is assessed at a specific point in time—as of the 
+end of the fiscal reporting period.  Planned or anticipated remedial efforts are irrelevant to the 
+analysis. 
+44. Ormand and Krueger improperly assessed the severity of the control deficiency 
+caused by MHR’s “inadequate and inappropriately aligned staffing” as of December 31, 2011.  
+                                                 
+10 “Compensating controls are controls that serve to accomplish the objective of another control 
+that did not function properly, helping to reduce risk to an acceptable level.”  2007 Guidance at 
+n. 49. 
+11 
+ 
+MHR management should have assessed whether a reasonable possibility existed that a material 
+misstatement of the company’s financial statements would not be prevented or detected on a timely 
+basis. 
+iv. MHR’s Disclosure of the Existence of Material Weaknesses 
+a. MHR Restates its June 30, 2012 Form 10-Q and Discloses Material 
+Weaknesses. 
+45. On November 14, 2012, MHR filed an amended Form 10-Q restating its June 30, 
+2012 financial statements to correct a material error related to stock-based compensation and 
+certain other errors.  MHR disclosed that management concluded that material weaknesses existed 
+as of June 30, 2012 related to (i) a lack of sufficient, qualified personnel to design and manage an 
+effective control environment; (ii) MHR’s period-end financial reporting process; and (iii) controls 
+over calculation and review of share-based compensation expense.  MHR also disclosed 
+management’s plans to remediate and improve the company’s ICFR and disclosure controls and 
+procedures. 
+46. Before restating, MHR’s Audit Committee met on October 19, 2012 to understand 
+how the company had materially understated option based compensation expense in the second 
+quarter.  Ormand reported that the person responsible for reviewing the calculation signed off 
+without reviewing it.  Also at that meeting, Gray “restated that the root cause [of the error] was 
+inadequate and inappropriately aligned staffing of the accounting department.” 
+b. MHR’s Disclosed Material Weaknesses in its September 30, 2012 Form 10-Q. 
+47. On November 13, 2012, MHR’s Audit Committee met and approved the 
+company’s Form 10-Q for the third quarter-ended September 30, 2012.  That filing disclosed the 
+same three material weaknesses existed at September 30, 2012 that had been disclosed in MHR’s 
+amended June 30, 2012 Form 10-Q. 
+c. MHR Delinquently Files its 2012 Form 10-K and Discloses Material 
+Weaknesses. 
+48. MHR delinquently filed its 2012 Form 10-K on June 14, 2013.  In it, MHR 
+disclosed fourteen material weaknesses as of December 31, 2012, including that “[i]n certain areas 
+the Company did not have sufficient personnel with an appropriate level of knowledge, experience 
+and training commensurate with the growth of the Company's corporate structure and financial 
+reporting requirements” and not upgrading “resources around internal audit, tax, financial reporting 
+and certain accounting areas.” 
+49. MHR’s internal analysis of the material weaknesses posed by its understaffed 
+accounting department, as disclosed in its 2012 Form 10-K, recognized that the “significant 
+deficiency identified at year-end 2011 does not appear[] to be remediated.  Personnel do not appear 
+to have the competence and training necessary for their assigned level of responsibility.”   
+12 
+ 
+v. MHR Remediates Inadequate and Inappropriately Aligned Staffing in the 
+Third Quarter 2013 
+50. On November 8, 2013, MHR filed its Form 10-Q for the quarter-ended September 
+30, 2013.  While concluding that the Company’s ICFR was not effective as of September 30, 2013, 
+management concluded that the material weakness that existed at quarter-end concerning 
+accounting staff inadequacies had subsequently been remediated.  
+D. VIOLATIONS  
+i. Gray Willfully Aided and Abetted Violations of Rule 2-02(b)(1) of Regulation 
+S-X; Caused MHR’s Violations of Section 13(a) of the Exchange Act and Rule 
+13a-1 thereunder; and Engaged in Improper Professional Conduct Subject to the 
+Commission’s Rules of Practice 102(e)(1)(ii) and (iii). 
+ 
+51. Gray engaged in improper professional conduct by failing to conduct the 2011 audit 
+of MHR’s ICFR in accordance with PCAOB Standards.  First, Gray failed to properly evaluate 
+identified deficiencies using the appropriate standard of a material weakness as defined in Rule 1-
+02(a)(4) of Regulation S-X and AS 5.  Second, Gray failed to document the basis of his conclusion 
+in a manner consistent with AS 3. 
+52. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state whether 
+the audit was made in accordance with PCAOB Standards.  Gray willfully aided and abetted 
+violations of Rule 2-02(b)(1) of Regulation S-X by approving the issuance of an audit report 
+expressing an unqualified opinion on MHR’s ICFR which inaccurately stated that MHR’s audit 
+was conducted in accordance with PCAOB Standards.   
+53. As a result of the conduct described above, Gray caused MHR’s violations of 
+Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, which require issuers with classes 
+of securities registered pursuant to Section 12 to file periodic and other reports with the 
+Commission.  
+  
+54. As a result of the conduct described above, Gray engaged in improper professional 
+conduct subject to the Commission’s Rules of Practice 102(e)(1)(ii).  Gray’s willful aiding and 
+abetting violation of Rule 2-02(b)(1) of Regulation S-X also constitutes conduct subject to the 
+Commission’s Rules of Practice 102(e)(1)(iii). 
+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: 
+ 
+13 
+ 
+ A. Gray shall cease and desist from committing or causing any violations and any 
+future violations of Rule 2-02(b)(1) of Regulation S-X, Section 13(a) of the Exchange Act and Rule 
+13a-1 promulgated thereunder. 
+ 
+ B. Gray is denied the privilege of appearing or practicing before the Commission as an 
+accountant.   
+ 
+ C. After one year from the date of this order, Respondent may request that the 
+Commission consider his reinstatement by submitting an application (attention: Office of the 
+Chief Accountant) to resume appearing or practicing before the Commission as: 
+      
+       1. a preparer or reviewer, or a person responsible for the preparation or 
+review, of any public company’s financial statements that are filed with 
+the Commission.  Such an application must satisfy the Commission that 
+Respondent’s work in his practice before the Commission will be 
+reviewed either by the independent audit committee of the public company 
+for which he works or in some other acceptable manner, as long as he 
+practices before the Commission in this capacity; and/or 
+ 
+  2.    an independent accountant.  Such an application must satisfy the 
+Commission that: 
+      
+           (a) Respondent, or the public accounting firm with which he is 
+associated, is registered with the PCAOB in accordance with the 
+Sarbanes-Oxley Act of 2002, and such registration continues to be 
+effective; 
+ 
+   (b) Respondent, or the registered public accounting firm with which he 
+is associated, has been inspected by the PCAOB and that 
+inspection did not identify any criticisms of or potential defects in 
+the respondent’s or the firm’s quality control system that would 
+indicate that the respondent will not receive appropriate 
+supervision; 
+   (c) Respondent has resolved all disciplinary issues with the PCAOB, 
+and has complied with all terms and conditions of any sanctions 
+imposed by the PCAOB (other than reinstatement by the 
+Commission); and 
+   (d) Respondent acknowledges his responsibility, as long as 
+Respondent appears or practices before the Commission as an 
+independent accountant, to comply with all requirements of the 
+Commission and the PCAOB, including, but not limited to, all 
+requirements relating to registration, inspections, concurring 
+partner reviews and quality control standards.   
+14 
+ 
+ 
+D. The Commission will consider an application by Respondent to resume appearing 
+or practicing before the Commission provided that his state CPA license is current and he has 
+resolved all other disciplinary issues with the applicable state boards of accountancy.  However, if 
+state licensure is dependent on reinstatement by the Commission, the Commission will consider an 
+application on its other merits.  The Commission’s review may include consideration of, in 
+addition to the matters referenced above, any other matters relating to Respondent’s character, 
+integrity, professional conduct, or qualifications to appear or practice before the Commission. 
+ 
+  
+ By the Commission. 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 
+ 
+ 
+ 

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+ 
+ 
+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77344 / March 10, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3755 / March 10, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17165 
+ 
+ 
+ 
+ 
+In the Matter of 
+ 
+David S. Krueger, CPA,  
+ 
+Respondent. 
+ 
+ 
+ 
+ 
+ORDER INSTITUTING PUBLIC 
+ADMINISTRATIVE AND CEASE- 
+ AND-DESIST PROCEEDINGS 
+PURSUANT TO SECTIONS 4C AND 21C 
+OF THE SECURITIES EXCHANGE ACT 
+OF 1934 AND RULE 102(e) OF THE 
+COMMISSION’S RULES OF PRACTICE, 
+MAKING FINDINGS, AND IMPOSING 
+REMEDIAL SANCTIONS AND A CEASE-
+AND-DESIST ORDER 
+   
+ 
+I. 
+ 
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that public 
+administrative and cease-and-desist proceedings be, and hereby are, instituted against David S. 
+Krueger, CPA (“Respondent” or “Krueger”) pursuant to Sections 4C1 and 21C of the Securities 
+                                                 
+1  Section 4C provides, in relevant part, that:  
+ 
+ The Commission may censure any person, or deny, temporarily or permanently, 
+to any person the privilege of appearing or practicing before the Commission in 
+any way, if that person is found . . . (1) not to possess the requisite qualifications 
+to represent others . . . (2) to be lacking in character or integrity, or to have 
+engaged in unethical or improper professional conduct; or (3) to have willfully 
+violated, or willfully aided and abetted the violation of, any provision of the 
+securities laws or the rules and regulations thereunder. 
+ 
+2 
+ 
+Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of 
+Practice.2 
+ 
+II. 
+ 
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
+of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 
+purpose of these proceedings and any other proceedings brought by or on behalf of the 
+Commission, or to which the Commission is a party, and without admitting or denying the findings  
+herein, except as to the Commission’s jurisdiction over him and the subject matter of these 
+proceedings, which are admitted, 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. This proceeding concerns failures by Magnum Hunter Resources Corporation 
+(“MHR” or “the Company”) and its management to properly implement, maintain, and evaluate 
+internal control over financial reporting (“ICFR”) for the fiscal year-ended December 31, 2011 and 
+to maintain ICFR sufficient to keep pace with MHR’s growth from at least the fiscal year-ended 
+December 31, 2011 through the quarter-ended September 30, 2013.  MHR’s failures resulted in 
+part from Ronald D. Ormand (“Ormand”) and David S. Krueger (“Krueger”) improperly 
+evaluating the severity of identified control deficiencies.   
+                                                 
+2  Rule 102(e)(1)(iii) provides, in pertinent part, that: 
+ 
+ The Commission may . . . deny, temporarily or permanently, the privilege of 
+appearing or practicing before it . . . to any person who is found…to have 
+willfully violated, or willfully aided and abetted the violation of any provision of 
+the Federal securities laws or the rules and regulations thereunder. 
+ 
+3   The findings herein are made pursuant to Respondent's Offer of Settlement and are not 
+binding on any other person or entity in this or any other proceeding.   
+3 
+ 
+B. RESPONDENT AND RELATED ENTITIES AND INDIVIDUALS 
+i. Respondent 
+2. Krueger is a resident of Flower Mound, Texas and was MHR’s Chief Accounting 
+Officer (“CAO”) from October 2009 through October 2012.  He was previously licensed as a CPA 
+in the states of Arkansas and Oklahoma.   
+ii. Other Relevant Entities and Individuals 
+3. MHR is a Delaware corporation headquartered in Irving, Texas that operates as an 
+independent oil and gas company engaged in the exploration and production of oil and gas in the 
+United States.  At all relevant times, MHR’s stock was registered with the Commission pursuant to 
+Section 12(b) of the Exchange Act and traded on the New York Stock Exchange (“NYSE”).  At all 
+relevant times, MHR 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.  On December 15, 
+2015, MHR filed a Form 8-K disclosing that the Company and certain subsidiaries had filed 
+voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. 
+4. Ormand is a resident of Houston, Texas and was MHR’s Chief Financial Officer 
+(“CFO”) from May 2009 through July 2013. 
+5. Wayne Gray, CPA (“Gray”) is a resident of Plano, Texas and a former partner at 
+a PCAOB-registered public accounting firm.  Gray was the engagement partner responsible for 
+providing MHR’s external auditing services for the December 31, 2009 through June 30, 2012 
+reporting periods.  Gray is a CPA licensed in the state of Texas. 
+6. Joseph Allred, CPA (“Allred”) is a resident of Arlington, Texas and is a partner at 
+a PCAOB-registered public accounting firm.   Allred was responsible for the firm’s engagement 
+that provided Sarbanes-Oxley Act of 2002 (“SOX”) consulting and internal auditing services to 
+MHR from 2009 through 2012.  These services included assisting MHR with documenting, 
+evaluating, testing, and improving accounting and reporting processes.    
+C. FACTS 
+i. Statutory requirements regarding ICFR  
+7. Section 13(b)(2)(B) of the Exchange Act makes public companies responsible for 
+devising and maintaining a system of internal accounting controls sufficient to provide reasonable 
+assurance that transactions are recorded as necessary to permit preparation of financial statements 
+in conformity with GAAP.  See 15 U.S.C. §78m(b)(2)(B). 
+4 
+ 
+8. Exchange Act Rule 13a-15(a) requires issuers, including MHR, to maintain ICFR.4  
+See 17 C.F.R. 240.13a-15(a).  Rule 13a-15(f) defines ICFR as:  
+[A] process designed by, or under the supervision of, the issuer’s principal 
+executive and principal financial officers, or persons performing similar functions, 
+and effected by the issuer’s board of directors, management and other personnel, to 
+provide reasonable assurance regarding the reliability of financial reporting and the 
+preparation of financial statements for external purposes in accordance with 
+generally accepted accounting principles[.]  17 C.F.R. 240.13a-15(f). 
+9. Exchange Act Rule 13a-15(c) requires management—together with the 
+participation of principal executive and principal financial officers (or persons performing similar 
+functions)—to evaluate the effectiveness of ICFR as of the end of each fiscal year.  See 17 C.F.R. 
+240.13a-15(c).  Under Rule 13a-15(c), management may satisfy its obligations by conducting an 
+evaluation in accordance with interpretive guidance issued by the Commission in Release 
+No. 34-55929, Commission Guidance Regarding Management’s Report on Internal Control Over 
+Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, (the 
+“2007 Guidance”). 
+10. Item 308 of Regulation S-K requires management to provide an annual report that 
+contains its assessment of the effectiveness of ICFR and any material weakness in ICFR.   Under 
+Item 308, “[m]anagement is not permitted to conclude that the registrant’s [ICFR] is effective if 
+there are one or more material weaknesses in the registrant’s [ICFR].”  17 C.F.R. 229.308.   
+11. Item 308 of Regulation S-K further instructs that the registrant “must maintain 
+evidential matter, including documentation, to provide reasonable support for management’s 
+assessment of the effectiveness of the registrant’s [ICFR].”  The 2007 Guidance similarly states 
+that “[m]anagement is responsible for maintaining evidential matter, including documentation to 
+provide reasonable support for its assessment.”     
+12. Rule 1-02(a)(4) of Regulation S-X  defines categories of ICFR deficiencies based 
+on the severity, as follows: 
+ A “material weakness” is a “deficiency, or a combination of deficiencies, in [ICFR] 
+such that there is a reasonable possibility that a material misstatement of the company’s 
+annual or interim financial statements will not be prevented or detected on a timely 
+basis.”  See 17 C.F.R. 210.1-02(a)(4) (emphasis added).  A misstatement is reasonably 
+possible if the chance of a misstatement is more than remote but less than likely.  See 
+                                                 
+4 Rule 13a-15(c) applies to issuers whose securities are registered under Section 12 of the 
+Exchange Act and who are required either to file annual reports under Section 13(a) or 15(d) of 
+the Exchange Act for the prior fiscal year or filed an annual report for the prior fiscal year. 
+5 
+ 
+2007 Guidance at 34-35, n. 47 (citing Financial Accounting Standards Board Statement 
+No. 5, Accounting for Contingencies5).   
+ A “significant deficiency” is a “deficiency, or a combination of deficiencies, in [ICFR] 
+that is less severe than a material weakness, yet important enough to merit attention by 
+those responsible for oversight of the registrant’s financial reporting.”  Id. 
+ 
+13. The “severity of a deficiency in ICFR does not depend on whether a misstatement 
+actually has occurred but rather on whether there is a reasonable possibility that the company’s 
+ICFR will fail to prevent or detect a misstatement on a timely basis.”6  See 2007 Guidance at 35 
+(emphasis added). 
+14. Item 308(a)(3) of Regulation S-K requires public companies such as MHR to 
+annually provide a report of management that discloses material weaknesses that have been 
+identified by management.  They are not required to publicly disclose significant deficiencies.  
+15. Exchange Act Rule 13a-14 requires that every Form 10-Q and 10-K include 
+certifications signed by each principal executive and principal financial officer (or persons 
+performing similar functions).  See 17 C.F.R. 240.13a-14.  The certifying officers must confirm 
+that the Form 10-Q or 10-K 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.  Id.  Ormand certified MHR’s 2011 Form 10-K and 
+March 31, 2012 and June 30, 2012 Forms 10-Q. 
+16. As detailed further below, MHR engaged Allred's firm to assist its management 
+with the documentation, testing, and evaluation of the company’s ICFR in 2010, 2011, and 2012.  
+Notwithstanding MHR’s reliance on the firm's services, MHR’s management—including Ormand 
+and Krueger—were ultimately responsible for its conclusions about the effectiveness of MHR’s 
+ICFR. 
+                                                 
+5 FASB Statement No. 5 is available at 
+http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220126761&acceptedDis
+claimer=true.  It defines “reasonably possible” as: “The chance of the future event or events 
+occurring is more than remote but less than likely.”  FASB No. 5 at 4.  It defines “remote” as: 
+“The chance of the future event or events occurring is slight.”  Id. 
+ 
+6 See FR-77, Commission Guidance Regarding Management’s Report on Internal Control Over 
+Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (June 
+27, 2007) (“Commission Guidance”), available at http://www.sec.gov/rules/interp/2007/33-
+8810.pdf. 
+ 
+6 
+ 
+ii. MHR’s Rapid Growth and Strained Accounting Resources 
+17. MHR’s rapid growth strained its accounting resources.  For example, MHR grew 
+from $6 million in revenues in 2009 to $23 million in 2010, largely as the result of an $82 million 
+acquisition in February 2010.  In connection with the issuance of the external auditor’s report on 
+MHR’s 2010 year-end audit results, Gray informed Ormand, Krueger, and MHR’s Audit 
+Committee in February 2011 that MHR’s accounting department was experiencing “manpower 
+issues” and lacked sufficient personnel to complete all required tasks on a timely basis.   
+18. Between December 2010 and April 2011, MHR acquired another $70 million in oil 
+and gas properties and leasehold mineral interests.  MHR also completed two other acquisitions in 
+April and May 2011 for an aggregate purchase price of approximately $565 million.  In 2011, 
+MHR booked over $100 million in revenues—largely as a result of these acquisitions.  This rapid 
+growth created a significant burden on MHR’s accounting department.  For example, beginning in 
+November 2011 MHR failed to complete its standard monthly close process and began formally 
+closing its books on a quarterly basis with only sporadic monthly closes in 2012.   
+iii. MHR’s ICFR assessment as of December 31, 2011 
+a. Allred identified MHR’s insufficient accounting staffing as a control deficiency 
+as of December 31, 2011. 
+19. Allred led consulting engagements to document and test MHR’s ICFR.  In February 
+2012, his firm issued a written report on MHR’s ICFR to certain MHR managers—including 
+Ormand and Krueger—and MHR’s Audit Committee.  The report identified problems in MHR’s 
+accounting department, including that the “accounting and financial reporting team has 
+experienced significant delays in preparing financial statements and reports.”  As a result, Allred's 
+team could not complete its testing activities within the time period originally scheduled.  The 
+report further stated that two balance sheet account reconciliations for the month ending October 
+2011 were not reviewed and approved in a timely manner and that management review of the 
+consolidated October 2011 financial statements had not been formally documented.  
+20. As of December 31, 2011, the report identified control deficiencies within MHR’s 
+accounting function, including: (a) instances in which reconciliations were not prepared, reviewed, 
+or approved on a timely basis; (b) failures to document the completion of required monthly 
+management reviews; and (c) significant delays in preparing financial statements and reports due 
+to “inadequate and inappropriately aligned staffing.”  The report stated: 
+[T]he potential for error in such a compressed work environment presents 
+substantial risk.  With complex financial and reporting structures there are few 
+individuals within the team  with the capacity to perform many tasks and there is 
+little time for senior reporting personnel to review, analyze, and evaluate because 
+they are performing transaction level reporting tasks.  (emphasis added) 
+21. The report concluded, without explanation, that MHR’s staffing deficiency 
+represented only a significant deficiency—rather than a material weakness.  The report did not 
+7 
+ 
+explain how a deficiency that created a “substantial risk” of a financial statement error did not rise 
+to the level of a material weakness, defined as a deficiency in ICFR that creates a reasonable 
+possibility of a material misstatement not being prevented or detected on a timely basis. 
+22. Krueger and Ormand accepted the assessment that MHR’s insufficient accounting 
+staffing represented a significant deficiency.  Both Krueger and Ormand also relied on the absence 
+of an actual identified material error in MHR’s financial statements as evidence that a material 
+weakness did not exist as of December 31, 2011.  Neither Krueger nor Ormand prepared any 
+documentary evidence to supplement the documentation created by Allred's team.  Consequently, 
+the only documentation that supports MHR management’s assessment of the effectiveness of 
+MHR’s ICFR as of December 31, 2011 is the documentation created by Allred's team and 
+provided to MHR management.  
+23. Because MHR management concluded that the control deficiency only rose to the 
+level of a significant deficiency, rather than a material weakness, MHR did not publicly disclose 
+the deficiency but instead stated that its ICFR was effective. 
+ 
+b. Gray Misapplied the Applicable Standard When Determining the Severity of 
+MHR’s Control Deficiency as of December 31, 2011. 
+24. Gray failed to conduct the 2011 audit of MHR’s ICFR in accordance with PCAOB 
+Auditing Standards No. 3, Audit Documentation (“AS3”), and No. 5, An Audit of Internal Control 
+Over Financial Reporting That Is Integrated with An Audit of Financial Statements (“AS5”) and 
+improperly approved the issuance of the external auditor’s audit report containing an unqualified 
+opinion on MHR’s ICFR as of December 31, 2011. 
+25. In February 2012, a year after first raising concerns over MHR’s accounting 
+“manpower issues,” Gray reported to MHR’s Audit Committee a “[d]elay in closing the books due 
+to [the] Company manpower shortage relative to [the] volume of financial activity.”  This resulted 
+in “[n]umerous top-side adjustments” creating significant audit inefficiencies. 
+26. Gray, as engagement partner, further reported that: 
+We believe there is not adequate internal  control over financial reporting due to 
+inadequate and inappropriately aligned staffing.  This factor increases the 
+possibility of a material error occurring and being undetected and reduces the 
+Company’s ability to file its 10-K on time. 
+27. Despite assessing that there was “not adequate internal control over financial 
+reporting due to inadequate and inappropriately aligned staffing,” Gray concluded that this control 
+deficiency rose to the level of a significant deficiency—rather than a material weakness.  The audit 
+work papers failed to adequately document the basis for this conclusion.  They also failed to 
+explain how the fact that MHR did “not [have] adequate internal control over financial reporting” 
+was not indicative of a material weakness, defined as weakness that creates a reasonable possibility 
+8 
+ 
+(i.e., “more than remote but less than likely”) of a material error not being detected or corrected on 
+a timely basis. 
+28. When reporting audit results on the effectiveness of MHR’s ICFR as of 
+December 31, 2011 to MHR’s Audit Committee, Gray identified MHR’s “inadequate and 
+inappropriately aligned staffing” as a significant deficiency rather than as a material weakness. 
+29. Gray determined that MHR’s inadequate and inappropriately aligned accounting 
+staff did not constitute a material weakness because, among other things: (i) the audit work did not 
+identify material errors for the reporting period, and (ii) he understood that MHR had recently 
+hired additional accounting staff and that the existing staff, while overworked, was competent.   
+30. However, this was a misapplication of the applicable standards.  As the engagement 
+partner who led the audit of the effectiveness of MHR’s ICFR, Gray improperly applied the 
+definitions of “material weakness” and “significant deficiency” codified in Rule 1-02(a)(4) of 
+Regulation S-X and Appendix A of AS 5.  The severity of a deficiency does not depend on 
+whether an error actually occurred.  AS 5, ¶ 64. 
+31. Notwithstanding the systemic importance of an entity-level control, the written 
+analysis was deficient for two reasons.  First, it failed to apply the appropriate standard for defining 
+a material weakness.  Second, it failed to evaluate the severity of MHR’s control deficiency in 
+accordance with AS 5 because it did not adequately consider: (a) the misstatement that might result 
+from having insufficient accounting staff; (b) MHR’s ability to prepare accurate financial 
+statements based on the possible future consequences of the deficiency; (c) the amounts and 
+transactions exposed to the deficiency; or (d) the volume of activity exposed to the deficiency that 
+occurred in the current period or that is expected in future periods.  AS 5, ¶¶ 62-70. 
+32. Gray also failed to adequately document the basis for his conclusion.  Under AS 3, 
+“[a]udit documentation should be prepared in sufficient detail to provide a clear understanding of 
+its purpose, source, and the conclusions reached.”  AS 3, ¶ 4.  “The auditor must document the 
+procedures performed, evidence obtained, and conclusions reached with respect to relevant 
+financial statement assertions.”  AS 3, ¶ 6. “Audit documentation must clearly demonstrate that the 
+work was in fact performed.”  AS 3, ¶ 6.   
+33. The only written audit documentation assessing the severity of MHR’s accounting 
+staffing deficiency was a summary spreadsheet purportedly identifying all MHR control 
+deficiencies for the 2011 reporting period.  It documented the conclusion that MHR’s control 
+deficiency did not rise above a significant deficiency for three main reasons: (i) MHR hired a 
+controller and several senior level accountants during the latter part of 2011; (ii) MHR was in the 
+process of integrating two major acquisitions completed in the second quarter of 2011 and the 
+delay in the close process was mostly due to integration across entities; and (iii) individual analysis 
+of two identified audit adjustments did not support a conclusion of a more severe control 
+deficiency. 
+9 
+ 
+34. In doing so, Gray failed to evaluate MHR’s deficiencies in accordance with AS 5.   
+Auditors “must 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 weaknesses as of 
+the date of management’s assessment.”  AS 5, ¶ 62 (emphasis in original).      
+c. MHR’s Management Retained Ultimate Responsibility for Evaluating the 
+Severity of Any Control Deficiencies. 
+ 
+35. MHR disclosed in its 2011 Form 10-K that:  
+Under the supervision and with the participation of our management, including our 
+Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness 
+of our internal controls over financial reporting as of the end of the period covered 
+by this report based on the framework in “Internal Control – Integrated 
+Framework” issued by the Committee of Sponso ring Organizations of the 
+Treadway Commission.  Based on that assessment, our Chief Executive Officer and 
+Chief Financial Officer concluded that our internal controls over financial reporting 
+were effective as of December 31, 2011 to provide reasonable assurance regarding 
+the reliability of our financial reporting and the preparation of our financial 
+statements for external purposes in accordance with U.S. generally accepted 
+accounting principles. 
+See MHR Fiscal Year 2011 Form 10-K at p. F-53. 
+36. When determining whether a deficiency constitutes a material weakness, 
+management should consider all relevant information,7 including information provided by outside 
+parties.  While MHR management retained ultimate responsibility for assessing MHR’s ICFR, 
+including evaluating the severity of any deficiencies in ICFR,8 the information provided by Allred 
+and Gray was relevant to its assessment  In addition, MHR’s management was responsible for 
+maintaining documentation to support its assessment.9 
+37. Ormand and Krueger had knowledge of the stress placed on MHR’s accounting 
+department as a result of its rapid growth.  Nonetheless, they did not sufficiently consider Allred’s 
+or Gray’s findings in analyzing the severity of the control deficiencies, or the appropriateness of 
+Allred’s and Gray’s conclusions in light of all other information which they were aware.  
+Additionally, as discussed further below, MHR failed to maintain required evidential matter—
+including documentation—providing reasonable support for its assessment. 
+                                                 
+7 2007 Guidance at 37. 
+ 
+8 17 CFR 240.13a-15(c). 
+ 
+9 Instruction No. 2 to Item 308 of Regulation S-K. 
+10 
+ 
+d. MHR’s Documentation Indicated That Krueger Failed to Review MHR’s Q3 
+2011 Form 10-Q on a Timely Basis.  
+38. One of the consequences of MHR’s staffing deficiency resulted in Krueger signing 
+off on MHR’s third quarter 2011 Form 10-Q five days after the Form 10-Q was filed with the 
+Commission.  Because Krueger was the CAO—and highest ranking officer with an accounting 
+background—responsible for reviewing MHR’s periodic reports prior to filing them with the 
+Commission, MHR had no compensating control10 in its ICFR. 
+e. MHR Failed to Adequately Document its Assessment of ICFR. 
+39. Item 308 of Regulation S-K requires and the 2007 Guidance states that 
+management must maintain documentation to provide reasonable support for its assessment of the 
+effectiveness of the company’s ICFR.   
+40. However, in its year-end 2011 assessment, MHR failed to generate or maintain 
+documentation supporting its basis for determining the severity of its accounting staff deficiency.  
+It thus did not adequately document its basis for concluding that the deficiency was a significant 
+deficiency—rather than a material weakness.  This was true even though MHR management, and 
+Ormand and Krueger specifically, had been informed that: (a) there was a “substantial risk” of an 
+error (by Allred); and (b) “there is not adequate internal control over financial reporting” (by 
+Gray). 
+41. The control deficiency caused by MHR’s inadequate accounting staffing was 
+particularly important because it was an entity-level control.  Because it was an important control 
+that could affect other controls throughout the company, it needed to be fully understood and 
+defined in order to determine the nature, extent, and severity of the deficiencies. 
+f. MHR Management Misapplied the Appropriate Definition When Determining 
+the Severity of MHR’s Control Deficiency as of December 31, 2011. 
+42. Ormand and Krueger failed to apply the appropriate standard when determining the 
+severity of MHR’s internal control deficiency.  As detailed above, while actual errors may inform 
+assessments of control deficiencies, the presence of an actual error is not a prerequisite to 
+concluding that a material weakness exists.  Rather, management is to consider whether there is a 
+reasonable possibility that a material misstatement will not be timely detected or prevented.  In 
+addition, the effectiveness of a company’s ICFR is assessed at a specific point in time—as of the 
+end of the fiscal reporting period.  Planned or anticipated remedial efforts are irrelevant to the 
+analysis. 
+43. Ormand and Krueger improperly assessed the severity of the control deficiency 
+caused by MHR’s “inadequate and inappropriately aligned staffing” as of December 31, 2011.  
+                                                 
+10 “Compensating controls are controls that serve to accomplish the objective of another control 
+that did not function properly, helping to reduce risk to an acceptable level.”  2007 Guidance at 
+n. 49. 
+11 
+ 
+MHR management should have assessed whether a reasonable possibility existed that a material 
+misstatement of the company’s financial statements would not be prevented or detected on a timely 
+basis. 
+iv. MHR’s Disclosure of the Existence of Material Weaknesses 
+a. MHR Restates its June 30, 2012 Form 10-Q and Discloses Material 
+Weaknesses. 
+44. On November 14, 2012, MHR filed an amended Form 10-Q restating its June 30, 
+2012 financial statements to correct a material error related to stock-based compensation and 
+certain other errors.  MHR disclosed that management concluded that material weaknesses existed 
+as of June 30, 2012 related to (i) a lack of sufficient, qualified personnel to design and manage an 
+effective control environment; (ii) MHR’s period-end financial reporting process; and (iii) controls 
+over calculation and review of share-based compensation expense.  MHR also disclosed 
+management’s plans to remediate and improve the company’s ICFR and disclosure controls and 
+procedures. 
+45. Before restating, MHR’s Audit Committee met on October 19, 2012 to understand 
+how the company had materially understated option based compensation expense in the second 
+quarter.  Ormand reported that the person responsible for reviewing the calculation signed off 
+without reviewing it.  Also at that meeting, Gray “restated that the root cause [of the error] was 
+inadequate and inappropriately aligned staffing of the accounting department.” 
+b. MHR’s Disclosed Material Weaknesses in its September 30, 2012 Form 10-Q. 
+46. On November 13, 2012, MHR’s Audit Committee met and approved the 
+company’s Form 10-Q for the third quarter-ended September 30, 2012.  That filing disclosed the 
+same three material weaknesses existed at September 30, 2012 that had been disclosed in MHR’s 
+amended June 30, 2012 Form 10-Q. 
+c. MHR Delinquently Files its 2012 Form 10-K and Discloses Material 
+Weaknesses. 
+47. MHR delinquently filed its 2012 Form 10-K on June 14, 2013.  In it, MHR 
+disclosed fourteen material weaknesses as of December 31, 2012, including that “[i]n certain areas 
+the Company did not have sufficient personnel with an appropriate level of knowledge, experience 
+and training commensurate with the growth of the Company's corporate structure and financial 
+reporting requirements” and not upgrading “resources around internal audit, tax, financial reporting 
+and certain accounting areas.” 
+ 
+48. MHR’s internal analysis of the material weaknesses posed by its understaffed 
+accounting department, as disclosed in its 2012 Form 10-K, recognized that the “significant 
+12 
+ 
+deficiency identified at year-end 2011 does not appear[] to be remediated.  Personnel do not appear 
+to have the competence and training necessary for their assigned level of responsibility.”   
+v. MHR Remediates Inadequate and Inappropriately Aligned Staffing in the 
+Third Quarter 2013 
+49. On November 8, 2013, MHR filed its Form 10-Q for the quarter-ended September 
+30, 2013.  While concluding that the Company’s ICFR was not effective as of September 30, 2013, 
+management concluded that the material weakness that existed at quarter-end concerning 
+accounting staff inadequacies had subsequently been remediated.   
+D. VIOLATIONS  
+i. Krueger Willfully Violated Rule 13a-15(c) of the Exchange Act. 
+ 
+50. As a result of the conduct described above, Krueger willfully violated Rule 13a-
+15(c) of the Exchange Act, which requires an issuer’s management to evaluate, with the 
+participation of the principal executive and principal financial officers (or persons performing 
+similar functions) the effectiveness of the issuer’s ICFR as of the end of each fiscal year.  
+Krueger’s willful violation of Rule 13a-15(c) constitutes conduct subject to the Commission’s Rule 
+of Practice 102(e)(1)(iii). 
+ 
+ii. Krueger Caused MHR to Violate Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) 
+of the Exchange Act and Rules 13a-1, 13a-13, and 13a-15(a) thereunder. 
+ 
+51. As a result of the conduct described above, Krueger caused MHR to violate Section 
+13(b)(2)(A) of the Exchange Act, which requires Section 12 registrants to make and keep books, 
+records, and accounts, which in reasonable detail, accurately and fairly reflect the transactions and 
+dispositions of the assets of the issuer, and Section 13(b)(2)(B) of the Exchange Act, which 
+requires Section 12 registrants to devise and maintain a system of sufficient internal accounting 
+controls. 
+52. As a result of the conduct described above, Krueger caused MHR to violate Section 
+13(a) of the Exchange Act and Rules 13a-1 and 13a-13, thereunder, which require issuers with 
+classes of securities registered pursuant to Section 12 registrants to file periodic and other reports 
+with the Commission and Rule 13a-15(a) which requires issuers to maintain ICFR. 
+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: 
+ 
+13 
+ 
+ A. Krueger shall cease and desist from committing or causing any violations and any 
+future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 
+13a-1, 13a-13, 13a-15(a), and 13a-15(c)  promulgated thereunder. 
+ 
+ B. Krueger is denied the privilege of appearing or practicing before the Commission as 
+an accountant. 
+ 
+ C. After one year from the date of this order, Respondent may request that the 
+Commission consider his reinstatement by submitting an application (attention: Office of the 
+Chief Accountant) to resume appearing or practicing before the Commission as: 
+      
+       1. a preparer or reviewer, or a person responsible for the preparation or 
+review, of any public company’s financial statements that are filed with 
+the Commission.  Such an application must satisfy the Commission that 
+Respondent’s work in his practice before the Commission will be 
+reviewed either by the independent audit committee of the public company 
+for which he works or in some other acceptable manner, as long as he 
+practices before the Commission in this capacity; and/or 
+ 
+  2.    an independent accountant.  Such an application must satisfy the 
+Commission that: 
+      
+           (a) Respondent, or the public accounting firm with which he is 
+associated, is registered with the PCAOB in accordance with the 
+Sarbanes-Oxley Act of 2002, and such registration continues to be 
+effective; 
+ 
+   (b) Respondent, or the registered public accounting firm with which he 
+is associated, has been inspected by the PCAOB and that 
+inspection did not identify any criticisms of or potential defects in 
+the respondent’s or the firm’s quality control system that would 
+indicate that the respondent will not receive appropriate 
+supervision; 
+   (c) Respondent has resolved all disciplinary issues with the PCAOB, 
+and has complied with all terms and conditions of any sanctions 
+imposed by the PCAOB (other than reinstatement by the 
+Commission); and 
+ 
+   (d) Respondent acknowledges his responsibility, as long as 
+Respondent appears or practices before the Commission as an 
+independent accountant, to comply with all requirements of the 
+Commission and the PCAOB, including, but not limited to, all 
+requirements relating to registration, inspections, concurring 
+partner reviews and quality control standards.   
+14 
+ 
+ 
+D. The Commission will consider an application by Respondent to resume appearing 
+or practicing before the Commission provided that his state CPA license is current and he has 
+resolved all other disciplinary issues with the applicable state boards of accountancy.  However, 
+if state licensure is dependent on reinstatement by the Commission, the Commission will 
+consider an application on its other merits.  The Commission’s review may include consideration 
+of, in addition to the matters referenced above, any other matters relating to Respondent’s 
+character, integrity, professional conduct, or qualifications to appear or practice before the 
+Commission. 
+ 
+  
+ By the Commission. 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 
+ 
+ 
+ 

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+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77346 / March 10, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3757 / March 10, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No.  3-17167 
+ 
+ 
+In the Matter of 
+ 
+Ronald D. Ormand  
+ 
+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 Ronald D. Ormand (“Respondent” or “Ormand”).   
+ 
+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: 
+ 
+ A. SUMMARY 
+1. This proceeding concerns failures by Magnum Hunter Resources Corporation 
+(“MHR” or “the Company”) and its management to properly implement, maintain, and evaluate 
+internal control over financial reporting (“ICFR”) for the fiscal year-ended December 31, 2011 and 
+to maintain ICFR sufficient to keep pace with MHR’s growth from at least the fiscal year-ended 
+December 31, 2011 through the quarter-ended September 30, 2013.  MHR’s failures resulted in 
+part from Ronald D. Ormand (“Ormand”) and David S. Krueger (“Krueger”) improperly 
+evaluating the severity of identified control deficiencies.    
+B. RESPONDENT AND RELATED ENTITIES AND INDIVIDUALS 
+i. Respondent 
+2. Ormand is a resident of Houston, Texas and was MHR’s Chief Financial Officer 
+(“CFO”) from May 2009 through July 2013.   
+ii. Other Relevant Entities and Individuals 
+3. MHR is a Delaware corporation headquartered in Irving, Texas that operates as an 
+independent oil and gas company engaged in the exploration and production of oil and gas in the 
+United States.  At all relevant times, MHR’s stock was registered with the Commission pursuant to 
+Section 12(b) of the Exchange Act and traded on the New York Stock Exchange (“NYSE”).  At all 
+relevant times, MHR 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.  On December 15, 
+2015, MHR filed a Form 8-K disclosing that the Company and certain subsidiaries had filed 
+voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. 
+4. Krueger is a resident of Flower Mound, Texas and was MHR’s Chief Accounting 
+Officer (“CAO”) from October 2009 through October 2012.  He was previously licensed as a CPA 
+in the states of Arkansas and Oklahoma. 
+5. Wayne Gray, CPA (“Gray”) is a resident of Plano, Texas and a former partner at 
+a PCAOB-registered public accounting firm.  Gray was the engagement partner responsible for 
+providing MHR’s external auditing services for the December 31, 2009 through June 30, 2012 
+reporting periods.  Gray is a CPA licensed in the state of Texas. 
+6. Joseph Allred, CPA (“Allred”) is a resident of Arlington, Texas and is a partner at 
+a PCAOB-registered public accounting firm.   Allred was responsible for the firm’s engagement 
+                                                 
+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 
+that provided Sarbanes-Oxley Act of 2002 (“SOX”) consulting and internal auditing services to 
+MHR from 2009 through 2012.  These services included assisting MHR with documenting, 
+evaluating, testing, and improving accounting and reporting processes.    
+C. FACTS 
+i. Statutory requirements regarding ICFR  
+7. Section 13(b)(2)(B) of the Exchange Act makes public companies responsible for 
+devising and maintaining a system of internal accounting controls sufficient to provide reasonable 
+assurance that transactions are recorded as necessary to permit preparation of financial statements 
+in conformity with GAAP.  See 15 U.S.C. §78m(b)(2)(B). 
+8. Exchange Act Rule 13a-15(a) requires issuers, including MHR, to maintain ICFR.2  
+See 17 C.F.R. 240.13a-15(a).  Rule 13a-15(f) defines ICFR as:  
+[A] process designed by, or under the supervision of, the issuer’s principal 
+executive and principal financial officers, or persons performing similar functions, 
+and effected by the issuer’s board of directors, management and other personnel, to 
+provide reasonable assurance regarding the reliability of financial reporting and the 
+preparation of financial statements for external purposes in accordance with 
+generally accepted accounting principles[.]  17 C.F.R. 240.13a-15(f). 
+9. Exchange Act Rule 13a-15(c) requires management—together with the 
+participation of principal executive and principal financial officers (or persons performing similar 
+functions)—to evaluate the effectiveness of ICFR as of the end of each fiscal year.  See 17 C.F.R. 
+240.13a-15(c).  Under Rule 13a-15(c), management may satisfy its obligations by conducting an 
+evaluation in accordance with interpretive guidance issued by the Commission in Release 
+No. 34-55929, Commission Guidance Regarding Management’s Report on Internal Control Over 
+Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, (the 
+“2007 Guidance”). 
+10. Item 308 of Regulation S-K requires management to provide an annual report that 
+contains its assessment of the effectiveness of ICFR and any material weakness in ICFR.   Under 
+Item 308, “[m]anagement is not permitted to conclude that the registrant’s [ICFR] is effective if 
+there are one or more material weaknesses in the registrant’s [ICFR].”  17 C.F.R. 229.308.   
+11. Item 308 of Regulation S-K further instructs that the registrant “must maintain 
+evidential matter, including documentation, to provide reasonable support for management’s 
+assessment of the effectiveness of the registrant’s [ICFR].”  The 2007 Guidance similarly states 
+that “[m]anagement is responsible for maintaining evidential matter, including documentation to 
+provide reasonable support for its assessment.”      
+                                                 
+2 Rule 13a-15(c) applies to issuers whose securities are registered under Section 12 of the 
+Exchange Act and who are required either to file annual reports under Section 13(a) or 15(d) of 
+the Exchange Act for the prior fiscal year or filed an annual report for the prior fiscal year. 
+ 4 
+12. Rule 1-02(a)(4) of Regulation S-X  defines categories of ICFR deficiencies based 
+on the severity, as follows: 
+  A “material weakness” is a “deficiency, or a combination of deficiencies, in [ICFR] 
+such that there is a reasonable possibility that a material misstatement of the company’s 
+annual or interim financial statements will not be prevented or detected on a timely 
+basis.”  See 17 C.F.R. 210.1-02(a)(4) (emphasis added).  A misstatement is reasonably 
+possible if the chance of a misstatement is more than remote but less than likely.  See 
+2007 Guidance at 34-35, n. 47 (citing Financial Accounting Standards Board Statement 
+No. 5, Accounting for Contingencies3).   
+ A “significant deficiency” is a “deficiency, or a combination of deficiencies, in [ICFR] 
+that is less severe than a material weakness, yet important enough to merit attention by 
+those responsible for oversight of the registrant’s financial reporting.”  Id. 
+ 
+13. The “severity of a deficiency in ICFR does not depend on whether a misstatement 
+actually has occurred but rather on whether there is a reasonable possibility that the company’s 
+ICFR will fail to prevent or detect a misstatement on a timely basis.”4  See 2007 Guidance at 35 
+(emphasis added). 
+14. Item 308(a)(3) of Regulation S-K requires public companies such as MHR to 
+annually provide a report of management that discloses material weaknesses that have been 
+identified by management.  They are not required to publicly disclose significant deficiencies.  
+15. Exchange Act Rule 13a-14 requires that every Form 10-Q and 10-K include 
+certifications signed by each principal executive and principal financial officer (or persons 
+performing similar functions).  See 17 C.F.R. 240.13a-14.  The certifying officers must confirm 
+that the Form 10-Q or 10-K 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.  Id.  Ormand certified MHR’s 2011 Form 10-K and 
+March 31, 2012 and June 30, 2012 Forms 10-Q. 
+16. As detailed further below, MHR engaged Allred's firm to assist its management 
+with the documentation, testing, and evaluation of the company’s ICFR in 2010, 2011, and 2012.  
+                                                 
+3 FASB Statement No. 5 is available at 
+http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220126761&acceptedDis
+claimer=true.  It defines “reasonably possible” as: “The chance of the future event or events 
+occurring is more than remote but less than likely.”  FASB No. 5 at 4.  It defines “remote” as: 
+“The chance of the future event or events occurring is slight.”  Id. 
+ 
+4 See FR-77, Commission Guidance Regarding Management’s Report on Internal Control Over 
+Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (June 
+27, 2007) (“Commission Guidance”), available at http://www.sec.gov/rules/interp/2007/33-
+8810.pdf. 
+ 
+ 5 
+Notwithstanding MHR’s reliance on the firm's services, MHR’s management—including Ormand 
+and Krueger—were ultimately responsible for its conclusions about the effectiveness of MHR’s 
+ICFR. 
+ii. MHR’s Rapid Growth and Strained Accounting Resources 
+17. MHR’s rapid growth strained its accounting resources.  For example, MHR grew 
+from $6 million in revenues in 2009 to $23 million in 2010, largely as the result of an $82 million 
+acquisition in February 2010.  In connection with the issuance of the external auditor’s report on 
+MHR’s 2010 year-end audit results, Gray informed Ormand, Krueger, and MHR’s Audit 
+Committee in February 2011 that MHR’s accounting department was experiencing “manpower 
+issues” and lacked sufficient personnel to complete all required tasks on a timely basis.   
+18. Between December 2010 and April 2011, MHR acquired another $70 million in oil 
+and gas properties and leasehold mineral interests.  MHR also completed two other acquisitions in 
+April and May 2011 for an aggregate purchase price of approximately $565 million.  In 2011, 
+MHR booked over $100 million in revenues—largely as a result of these acquisitions.  This rapid 
+growth created a significant burden on MHR’s accounting department.  For example, beginning in 
+November 2011 MHR failed to complete its standard monthly close process and began formally 
+closing its books on a quarterly basis with only sporadic monthly closes in 2012.   
+iii. MHR’s ICFR assessment as of December 31, 2011 
+a. Allred identified MHR’s insufficient accounting staffing as a control deficiency 
+as of December 31, 2011. 
+19. Allred led consulting engagements to document and test MHR’s ICFR.  In February 
+2012, his firm issued a written report on MHR’s ICFR to certain MHR managers—including 
+Ormand and Krueger—and MHR’s Audit Committee.  The report identified problems in MHR’s 
+accounting department, including that the “accounting and financial reporting team has 
+experienced significant delays in preparing financial statements and reports.”  As a result, Allred's 
+team could not complete its testing activities within the time period originally scheduled.  The 
+report further stated that two balance sheet account reconciliations for the month ending October 
+2011 were not reviewed and approved in a timely manner and that management review of the 
+consolidated October 2011 financial statements had not been formally documented.  
+20. As of December 31, 2011, the report identified control deficiencies within MHR’s 
+accounting function, including: (a) instances in which reconciliations were not prepared, reviewed, 
+or approved on a timely basis; (b) failures to document the completion of required monthly 
+management reviews; and (c) significant delays in preparing financial statements and reports due 
+to “inadequate and inappropriately aligned staffing.”  The report stated: 
+[T]he potential for error in such a compressed work environment presents 
+substantial risk.  With complex financial and reporting structures there are few 
+individuals within the team with the capacity to perform many tasks and there is 
+little time for senior reporting personnel to review, analyze, and evaluate because 
+they are performing transaction level reporting tasks.  (emphasis added) 
+ 6 
+21. The report concluded, without explanation, that MHR’s staffing deficiency 
+represented only a significant deficiency—rather than a material weakness.  The report did not 
+explain how a deficiency that created a “substantial risk” of a financial statement error did not rise 
+to the level of a material weakness, defined as a deficiency in ICFR that creates a reasonable 
+possibility of a material misstatement not being prevented or detected on a timely basis. 
+22. Krueger and Ormand accepted the assessment that MHR’s insufficient accounting 
+staffing represented a significant deficiency.  Both Krueger and Ormand also relied on the absence 
+of an actual identified material error in MHR’s financial statements as evidence that a material 
+weakness did not exist as of December 31, 2011.  Neither Krueger nor Ormand prepared any 
+documentary evidence to supplement the documentation created by Allred's team.  Consequently, 
+the only documentation that supports MHR management’s assessment of the effectiveness of 
+MHR’s ICFR as of December 31, 2011 is the documentation created by Allred's team and 
+provided to MHR management.  
+23. Because MHR management concluded that the control deficiency only rose to the 
+level of a significant deficiency, rather than a material weakness, MHR did not publicly disclose 
+the deficiency but instead stated that its ICFR was effective. 
+ 
+b. Gray Misapplied the Applicable Standard When Determining the Severity of 
+MHR’s Control Deficiency as of December 31, 2011. 
+24. Gray failed to conduct the 2011 audit of MHR’s ICFR in accordance with PCAOB 
+Auditing Standards No. 3, Audit Documentation (“AS3”), and No. 5, An Audit of Internal Control 
+Over Financial Reporting That Is Integrated with An Audit of Financial Statements (“AS5”) and 
+improperly approved the issuance of the external auditor’s audit report containing an unqualified 
+opinion on MHR’s ICFR as of December 31, 2011. 
+25. In February 2012, a year after first raising concerns over MHR’s accounting 
+“manpower issues,” Gray reported to MHR’s Audit Committee a “[d]elay in closing the books due 
+to [the] Company manpower shortage relative to [the] volume of financial activity.”  This resulted 
+in “[n]umerous top-side adjustments” creating significant audit inefficiencies. 
+26. Gray, as engagement partner, further reported that: 
+We believe there is not adequate internal control over financial reporting due to 
+inadequate and inappropriately aligned staffing.  This factor increases the 
+possibility of a material error occurring and being undetected and red uces the 
+Company’s ability to file its 10-K on time. 
+27. Despite assessing that there was “not adequate internal control over financial 
+reporting due to inadequate and inappropriately aligned staffing,” Gray concluded that this control 
+deficiency rose to the level of a significant deficiency—rather than a material weakness.  The audit 
+work papers failed to adequately document the basis for this conclusion.  They also failed to 
+explain how the fact that MHR did “not [have] adequate internal control over financial reporting” 
+was not indicative of a material weakness, defined as weakness that creates a reasonable possibility 
+ 7 
+(i.e., “more than remote but less than likely”) of a material error not being detected or corrected on 
+a timely basis. 
+28. When reporting audit results on the effectiveness of MHR’s ICFR as of 
+December 31, 2011 to MHR’s Audit Committee, Gray identified MHR’s “inadequate and 
+inappropriately aligned staffing” as a significant deficiency rather than as a material 
+weakness. 
+29. Gray determined that MHR’s inadequate and inappropriately aligned accounting 
+staff did not constitute a material weakness because, among other things: (i) the audit work did not 
+identify material errors for the reporting period, and (ii) he understood that MHR had recently 
+hired additional accounting staff and that the existing staff, while overworked, was competent.   
+30. However, this was a misapplication of the applicable standards.  As the engagement 
+partner who led the audit of the effectiveness of MHR’s ICFR, Gray improperly applied the 
+definitions of “material weakness” and “significant deficiency” codified in Rule 1-02(a)(4) of 
+Regulation S-X and Appendix A of AS 5.  The severity of a deficiency does not depend on 
+whether an error actually occurred.  AS 5, ¶ 64. 
+31. Notwithstanding the systemic importance of an entity-level control, the written 
+analysis was deficient for two reasons.  First, it failed to apply the appropriate standard for defining 
+a material weakness.  Second, it failed to evaluate the severity of MHR’s control deficiency in 
+accordance with AS 5 because it did not adequately consider: (a) the misstatement that might result 
+from having insufficient accounting staff; (b) MHR’s ability to prepare accurate financial 
+statements based on the possible future consequences of the deficiency; (c) the amounts and 
+transactions exposed to the deficiency; or (d) the volume of activity exposed to the deficiency that 
+occurred in the current period or that is expected in future periods.  AS 5, ¶¶ 62-70. 
+32. Gray also failed to adequately document the basis for his conclusion.  Under AS 3, 
+“[a]udit documentation should be prepared in sufficient detail to provide a clear understanding of 
+its purpose, source, and the conclusions reached.”  AS 3, ¶ 4.  “The auditor must document the 
+procedures performed, evidence obtained, and conclusions reached with respect to relevant 
+financial statement assertions.”  AS 3, ¶ 6. “Audit documentation must clearly demonstrate that the 
+work was in fact performed.”  AS 3, ¶ 6.   
+33. The only written audit documentation assessing the severity of MHR’s accounting 
+staffing deficiency was a summary spreadsheet purportedly identifying all MHR control 
+deficiencies for the 2011 reporting period.  It documented the conclusion that MHR’s control 
+deficiency did not rise above a significant deficiency for three main reasons: (i) MHR hired a 
+controller and several senior level accountants during the latter part of 2011; (ii) MHR was in the 
+process of integrating two major acquisitions completed in the second quarter of 2011 and the 
+delay in the close process was mostly due to integration across entities; and (iii) individual analysis 
+of two identified audit adjustments did not support a conclusion of a more severe control 
+deficiency. 
+ 8 
+34. In doing so, Gray failed to evaluate MHR’s deficiencies in accordance with AS 5.   
+Auditors “must 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 weaknesses as of 
+the date of management’s assessment.”  AS 5, ¶ 62 (emphasis in original).      
+c. MHR’s Management Retained Ultimate Responsibility for Evaluating the 
+Severity of Any Control Deficiencies. 
+ 
+35. MHR disclosed in its 2011 Form 10-K that:  
+Under the supervision and with the participation of our management, including our 
+Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness 
+of our internal controls over financial reporting as of the end of the period covered 
+by this report based on the framework in “Internal Control – Integrated 
+Framework” issued by the Committee of Sponsoring Organizations of the 
+Treadway Commission.  Based on that assessment, our Chief Executive Officer and 
+Chief Financial Officer concluded that our internal controls over financial reporting 
+were effective as of December 31, 2011 to provide reasonable assurance regarding 
+the reliability of our financial reporting and the preparation of our financial 
+statements for external purposes in accordance with U.S. generally accepted 
+accounting principles. 
+See MHR Fiscal Year 2011 Form 10-K at p. F-53. 
+36. When determining whether a deficiency constitutes a material weakness, 
+management should consider all relevant information,5 including information provided by outside 
+parties.  While MHR management retained ultimate responsibility for assessing MHR’s ICFR, 
+including evaluating the severity of any deficiencies in ICFR,6 the information provided by Allred 
+and Gray was relevant to its assessment.  In addition, MHR’s management was responsible for 
+maintaining documentation to support its assessment.7 
+37. Ormand and Krueger had knowledge of the stress placed on MHR’s accounting 
+department as a result of its rapid growth.  Nonetheless, they did not sufficiently consider Allred’s 
+or Gray’s findings in analyzing the severity of the control deficiencies, or the appropriateness of 
+Allred’s and Gray’s conclusions in light of all other information which they were aware.  
+Additionally, as discussed further below, MHR failed to maintain required evidential matter—
+including documentation—providing reasonable support for its assessment. 
+                                                 
+5 2007 Guidance at 37. 
+ 
+6 17 CFR 240.13a-15(c). 
+ 
+7 Instruction No. 2 to Item 308 of Regulation S-K. 
+ 9 
+d. MHR’s Documentation Indicated That Krueger Failed to Review MHR’s Q3 
+2011 Form 10-Q on a Timely Basis.  
+38. One of the consequences of MHR’s staffing deficiency resulted in Krueger signing 
+off on MHR’s third quarter 2011 Form 10-Q five days after the Form 10-Q was filed with the 
+Commission.  Because Krueger was the CAO—and highest ranking officer with an accounting 
+background—responsible for reviewing MHR’s periodic reports prior to filing them with the 
+Commission, MHR had no compensating control8 in its ICFR. 
+e. MHR Failed to Adequately Document its Assessment of ICFR. 
+39. Item 308 of Regulation S-K requires and the 2007 Guidance states that 
+management must maintain documentation to provide reasonable support for its assessment of the 
+effectiveness of the company’s ICFR.   
+40. However, in its year-end 2011 assessment, MHR failed to generate or maintain 
+documentation supporting its basis for determining the severity of its accounting staff deficiency.  
+It thus did not adequately document its basis for concluding that the deficiency was a significant 
+deficiency—rather than a material weakness.  This was true even though MHR management, and 
+Ormand and Krueger specifically, had been informed that: (a) there was a “substantial risk” of an 
+error (by Allred); and (b) “there is not adequate internal control over financial reporting” (by 
+Gray). 
+41. The control deficiency caused by MHR’s inadequate accounting staffing was 
+particularly important because it was an entity-level control.  Because it was an important control 
+that could affect other controls throughout the company, it needed to be fully understood and 
+defined in order to determine the nature, extent, and severity of the deficiencies. 
+f. MHR Management Misapplied the Appropriate Definition When Determining 
+the Severity of MHR’s Control Deficiency as of December 31, 2011. 
+42. Ormand and Krueger failed to apply the appropriate standard when determining the 
+severity of MHR’s internal control deficiency.  As detailed above, while actual errors may inform 
+assessments of control deficiencies, the presence of an actual error is not a prerequisite to 
+concluding that a material weakness exists.  Rather, management is to consider whether there is a 
+reasonable possibility that a material misstatement will not be timely detected or prevented.  In 
+addition, the effectiveness of a company’s ICFR is assessed at a specific point in time—as of the 
+end of the fiscal reporting period.  Planned or anticipated remedial efforts are irrelevant to the 
+analysis. 
+43. Ormand and Krueger improperly assessed the severity of the control deficiency 
+caused by MHR’s “inadequate and inappropriately aligned staffing” as of December 31, 2011.  
+MHR management should have assessed whether a reasonable possibility existed that a material 
+                                                 
+8 “Compensating controls are controls that serve to accomplish the objective of another control 
+that did not function properly, helping to reduce risk to an acceptable level.”  2007 Guidance at 
+n. 49. 
+ 10 
+misstatement of the company’s financial statements would not be prevented or detected on a timely 
+basis. 
+iv. MHR’s Disclosure of the Existence of Material Weaknesses 
+a. MHR Restates its June 30, 2012 Form 10-Q and Discloses Material 
+Weaknesses. 
+44. On November 14, 2012, MHR filed an amended Form 10-Q restating its June 30, 
+2012 financial statements to correct a material error related to stock-based compensation and 
+certain other errors.  MHR disclosed that management concluded that material weaknesses existed 
+as of June 30, 2012 related to (i) a lack of sufficient, qualified personnel to design and manage an 
+effective control environment; (ii) MHR’s period-end financial reporting process; and (iii) controls 
+over calculation and review of share-based compensation expense.  MHR also disclosed 
+management’s plans to remediate and improve the company’s ICFR and disclosure controls and 
+procedures. 
+45. Before restating, MHR’s Audit Committee met on October 19, 2012 to understand 
+how the company had materially understated option based compensation expense in the second 
+quarter.  Ormand reported that the person responsible for reviewing the calculation signed off 
+without reviewing it.  Also at that meeting, Gray “restated that the root cause [of the error] was 
+inadequate and inappropriately aligned staffing of the accounting department.” 
+b. MHR’s Disclosed Material Weaknesses in its September 30, 2012 Form 10-Q. 
+46. On November 13, 2012, MHR’s Audit Committee met and approved the 
+company’s Form 10-Q for the third quarter-ended September 30, 2012.  That filing disclosed the 
+same three material weaknesses existed at September 30, 2012 that had been disclosed in MHR’s 
+amended June 30, 2012 Form 10-Q. 
+c. MHR Delinquently Files its 2012 Form 10-K and Discloses Material 
+Weaknesses. 
+47. MHR delinquently filed its 2012 Form 10-K on June 14, 2013.  In it, MHR 
+disclosed fourteen material weaknesses as of December 31, 2012, including that “[i]n certain areas 
+the Company did not have sufficient personnel with an appropriate level of knowledge, experience 
+and training commensurate with the growth of the Company's corporate structure and financial 
+reporting requirements” and not upgrading “resources around internal audit, tax, financial reporting 
+and certain accounting areas.” 
+48. MHR’s internal analysis of the material weaknesses posed by its understaffed 
+accounting department, as disclosed in its 2012 Form 10-K, recognized that the “significant 
+deficiency identified at year-end 2011 does not appear[] to be remediated.  Personnel do not appear 
+to have the competence and training necessary for their assigned level of responsibility.”   
+ 11 
+v. MHR Remediates Inadequate and Inappropriately Aligned Staffing in the 
+Third Quarter 2013 
+49. On November 8, 2013, MHR filed its Form 10-Q for the quarter-ended September 
+30, 2013.  While concluding that the Company’s ICFR was not effective as of September 30, 2013, 
+management concluded that the material weakness that existed at quarter-end concerning 
+accounting staff inadequacies had subsequently been remediated.   
+D. VIOLATIONS 
+i. Ormand Violated Rules 13a-14 and 13a-15(c) of the Exchange Act. 
+ 
+50. As a result of the conduct described above, Ormand violated Rule 13a-14 of the 
+Exchange Act, which requires an issuer’s principal financial officer to attest that the company’s 
+“report does not contain any untrue statement of a material fact,” and Rule 13a-15(c) of the 
+Exchange Act, which requires an issuer’s management to evaluate, with the participation of the 
+principal executive and principal financial officers (or persons performing similar functions) the 
+effectiveness of the issuer’s ICFR as of the end of each fiscal year. 
+ 
+ii. Ormand Caused MHR to Violate Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) 
+of the Exchange Act and Rules 13a-1, 13a-13, and 13a-15(a) thereunder. 
+ 
+51. As a result of the conduct described above, Ormand caused MHR to violate Section 
+13(b)(2)(A) of the Exchange Act, which requires Section 12 registrants to make and keep books, 
+records, and accounts, which in reasonable detail, accurately and fairly reflect the transactions and 
+dispositions of the assets of the issuer, and Section 13(b)(2)(B) of the Exchange Act, which 
+requires Section 12 registrants to devise and maintain a system of sufficient internal accounting 
+controls. 
+52. As a result of the conduct described above, Ormand caused MHR to violate Section 
+13(a) of the Exchange Act and Rules 13a-1 and 13a-13, thereunder, which require issuers with 
+classes of securities registered pursuant to Section 12 registrants to file periodic and other reports 
+with the Commission and Rule 13a-15(a) which requires issuers to maintain ICFR.    
+ 
+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 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 Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 
+13a-1, 13a-13, 13a-14, and 13a-15(a) and (c) thereunder. 
+ 12 
+ 
+B. Respondent shall, within 14 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.   
+ 
+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 
+Ormand as a Respondent in these proceedings, and the file number of these proceedings; a copy of 
+the cover letter and check or money order must be sent to David L. Peavler, Division of 
+Enforcement, Securities and Exchange Commission, 801 Cherry Street, Suite 1900, Fort Worth, 
+Texas 76102.   
+ 
+ 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. 
+ 
+ 13 
+ V. 
+ 
+It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section 
+523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by 
+Respondent, 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 
+ 
+ 
+ 
+ 

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+ 
+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES ACT OF 1933 
+Release No. 10055 / March 15, 2016 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77372 / March 15, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3758 / March 15, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17171 
+ 
+ 
+In the Matter of 
+ 
+MODUSLINK GLOBAL 
+ SOLUTIONS, INC. 
+JOSEPH C. LAWLER,  
+STEVEN G. CRANE, and 
+CATHERINE L. VENABLE  
+ 
+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 ModusLink Global Solutions, Inc. (“ModusLink”), Joseph C. Lawler, Steven G. 
+Crane, and Catherine L. Venable (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 Cease-and-Desist Proceedings, Pursuant to Section 8A of the 
+ 
+ 
+2 
+Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, 
+and Imposing a Cease-and-Desist Order (“Order”), as set forth below.   
+ 
+III. 
+ 
+ On the basis of this Order and Respondents’ Offers, the Commission finds1 that:  
+ 
+Summary 
+1. ModusLink is a Massachusetts-based company that provides supply chain and 
+logistics services to other companies.  In providing products and services to its clients, ModusLink 
+routinely purchased products and services from third-party vendors on behalf of its clients.  
+ModusLink also routinely obtained rebates from vendors.  In numerous instances, and without a 
+sufficient basis to conclude that it was entitled to do so, ModusLink kept rebates that should have 
+benefited certain ModusLink clients, which were contractually entitled to them under cost-plus and 
+pass-through contracts.  In some other instances, ModusLink marked-up the prices charged by the 
+vendors and billed the higher price to certain ModusLink clients, also in contravention of their 
+contracts.  ModusLink had no legal entitlement to these rebates and mark-ups and inappropriately 
+included these sums in computing and reporting its revenue and net income in its financial 
+statements filed with the Commission. 
+2. In June 2012, ModusLink announced its intent to restate certain financial 
+statements, which it did in January 2013, restating more than five years of inaccurate financial 
+statements that had appeared in the company’s periodic filings with the Commission.  The restated 
+financial statements reversed the revenue and net income ModusLink had inappropriately reported 
+from these rebates and mark-ups.  As a result of these practices, ModusLink misstated its net 
+income by up to 1038%, 23%, and 22% in certain years. 
+3. ModusLink’s financial misstatements resulted from failures to act reasonably at 
+every level in the company.  ModusLink’s management was made aware on multiple occasions 
+that certain rebates needed to be passed through to clients.  Although ModusLink’s management 
+directed subordinates to pursue rebates aggressively and set rebate targets for those subordinates to 
+hit, management failed to take appropriate steps to ensure rebates were passed on to clients when 
+required.  Simultaneously, ModusLink’s operations staff worked with vendors to implement covert 
+procedures to obtain rebates, and rebate information was kept secret from client-facing sales staff.  
+And when an internal whistleblower alerted the Internal Audit department and the company’s 
+Audit Committee, the resulting review was incomplete and ineffective.  In addition, staff sitting at 
+the intersection between operations and corporate staff responsible for financial reporting during 
+this time, including the CFO of the Supply Chain Business Unit, Catherine L. Venable, failed to 
+ensure that such rebates and mark-ups were accurately reflected in ModusLink’s books and 
+records. 
+                                                 
+1  The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding 
+on any other person or entity in this or any other proceeding. 
+ 
+ 
+3 
+4. ModusLink’s then-Chief Executive Officer, Joseph C. Lawler, and then-Chief 
+Financial Officer, Steven G. Crane, both received bonuses, incentive compensation, and/or 
+equity-based compensation during the 12-month periods following certain of the filings 
+ModusLink restated.  Neither Lawler nor Crane, however, has reimbursed any portion of this 
+compensation to ModusLink pursuant to Section 304(a) of the Sarbanes-Oxley Act of 2002. 
+Respondents 
+5. ModusLink Global Solutions, Inc., is a Delaware corporation with its corporate 
+headquarters in Waltham, Massachusetts.  Its common stock is registered pursuant to Section 12 of 
+the Exchange Act and traded on the NASDAQ under the symbol “MLNK.”  Before 2008, 
+ModusLink operated under the names CMGI, Inc. and CMG Information Services, Inc.  In its 
+Form 10-K filing for its fiscal year 2015 (filed October 14, 2015), ModusLink reported net revenue 
+of $561.7 million, an operating loss of $14.3 million, and a net loss of $18.4 million.  Nearly all of 
+ModusLink’s current officers and directors joined the company in the period since ModusLink 
+announced its intention to restate its financial statements in June 2012. 
+6. Joseph C. Lawler, age 65, lives in Skokie, IL.  From August 2004 to 2012, he was 
+ModusLink’s President and Chief Executive Officer.  Lawler was also a ModusLink director from 
+August 2004 to June 2012, and Chairman of the Board from August 2006 to November 2011.  
+7. Steven G. Crane, age 58, lives in Charleston, SC.  From April 2007 to 2014, he 
+was ModusLink’s Chief Financial Officer.  Crane was also ModusLink’s Treasurer from April 
+2007 to June 2008.  
+8. Catherine L. Venable, age 51, lives in Gold Canyon, AZ.  From 2008 to 2010, she 
+was ModusLink’s CFO of Global Operations and from 2010 to 2012, she was ModusLink’s CFO 
+of the Supply Chain Business Unit.  Venable was also the CFO of the Americas region from 2005-
+2007 and CFO of the Asia and Europe regions from 2007-2008.  Venable held a CPA license from 
+1989 to 2003.  
+ModusLink’s Business and Pricing Models 
+ 
+9. ModusLink provides “global supply chain business process management” primarily 
+to computer, electronics, and communications companies.  Its supply chain management business 
+manufactures, stores, and distributes for sale its clients’ products.  ModusLink operates in North 
+America, Europe, and Asia.   
+10. Often as part of its supply chain services, ModusLink buys components (such as 
+power cords or compact discs), raw materials (such as corrugated cardboard), or auxiliary services 
+(such as printing) on behalf of its clients.   
+11. ModusLink enters into contracts with clients that can employ one or more of three 
+models for pricing those components, materials, and/or  auxiliary services: 
+ 
+ 
+4 
+a. “Cost” or “Pass-through” model:  Costs incurred by ModusLink to purchase 
+components, materials, and/or  auxiliary services are passed through directly to the 
+client; 
+b. “Cost-Plus” model:  The client agrees to pay the costs incurred by ModusLink  to 
+purchase components, materials, and/or  auxiliary services, plus an agreed-to 
+percentage mark-up on those costs; 
+c.  “Fixed-Price” model:  ModusLink and its client negotiate a fixed unit price for the 
+supply chain services to be provided, where the level of costs incurred by 
+ModusLink does not determine the contractual price. 
+12. ModusLink’s biggest clients tended to have cost or cost-plus contracts, as those 
+clients had more bargaining power with ModusLink; smaller clients tended to have fixed-price 
+contracts.  At the time of its restatement, approximately 17% of ModusLink’s contracts were cost, 
+33% were cost-plus, and 50% were fixed price.    
+ 
+13. ModusLink’s business model – which included purchasing commodity materials in 
+bulk and charging its clients for the materials, as described above – resulted in high revenues 
+(approximately $1 billion annually), but low profit margins for ModusLink as a whole during the 
+five and one-half year restatement period (2007-2012).  During that period, ModusLink turned an 
+annual profit only twice ($37.7 million in 2007 and $0.5 million in 2008). 
+ModusLink’s Retention of Rebates and Cost Mark-Ups 
+14. Beginning no later than the mid-2000s and extending through the first half of 2012, 
+ModusLink negotiated for certain of its vendors to pay rebates to ModusLink on the components, 
+materials, and auxiliary services ModusLink bought from the vendors to fulfill its contracts with its 
+clients.  ModusLink used its size and purchasing power to arrange rebates with vendors whenever 
+possible. 
+15. Rebate amounts would generally be calculated per-unit (e.g., 10 cents or 10% off 
+per item) or based on ModusLink hitting certain volume criteria (in which cases the rebates were 
+sometimes termed “volume discounts”).  The rebates effectively lowered the actual price 
+ModusLink paid the vendors for the components, materials, and auxiliary services purchased, and 
+were accounted for as a reduction in ModusLink’s material costs (i.e., cost of goods sold).    
+16. Notwithstanding the fact that the rebates lowered ModusLink’s vendor costs, 
+ModusLink generally did not pass the cost savings through to its clients, including those with cost 
+and cost-plus contracts that required such savings to be passed on to the clients.  Instead, 
+ModusLink generally kept the rebate savings for itself and billed the clients at the original, pre-
+rebate (higher) price charged by vendors.   
+17. At times, ModusLink negotiated the rebate amount with a vendor at the same time 
+that it negotiated the original price for the product or service with the same vendor.  In these 
+instances, ModusLink directed the vendor to bill ModusLink at the original price – rather than the 
+ 
+ 
+5 
+“net” price, inclusive of the rebate.  The original (higher) price was used to bill ModusLink’s 
+clients. 
+18. For example, if ModusLink needed to provide a power cord for a client with a cost 
+contract, it might negotiate with a vendor to supply that power cord for $1 with a 10% rebate.  
+ModusLink would initially pay $1 to the vendor for each power cord and then bill the client for the 
+$1 paid to the vendor.  At a later point (generally at month-end or quarter-end), however, 
+ModusLink would receive 10 cents back from the vendor.  Despite ModusLink’s true cost of 90 
+cents, ModusLink generally did not pass back to its clients the 10 cents per power cord, but instead 
+kept the 10 cents for itself. 
+19. Rebates were a key element of profitability at ModusLink, often comprising a 
+substantial portion of the company’s net income for the quarter or year.  One executive referred to 
+rebates as “pure profit,” and they were considered part of ModusLink’s business model. 
+Notwithstanding their direct impact on ModusLink’s bottom line and their importance to 
+ModusLink’s business, however, ModusLink’s SEC filings did not identify or describe rebates in 
+any way before the SEC began an investigation into its rebate practices.  
+20. ModusLink also added profit to its bottom line by directly marking up vendor costs.   
+In some instances, however, mark-ups were added in contravention of certain clients’ cost or cost-
+plus contracts, which called for vendor costs to be either passed-through to clients with no mark-
+ups or with only agreed-upon mark-ups. 
+21. As described more fully below, ModusLink’s retention of vendor rebates and mark-
+ups in contravention of certain clients’ cost and cost-plus contracts resulted in ModusLink 
+retaining revenue and net income to which it was not entitled.  The following chart compares the 
+net income ModusLink originally reported in its Forms 10-K and 10-Q filed with the Commission 
+with the amounts that ModusLink restated in 2013 based on its improper rebate and mark-up 
+practices.  While ModusLink’s revenues were misstated by less than 1% in each period, its net 
+income was misstated exponentially more. 
+Impact of Improper Rebates and Mark-Ups on Net Income (in Millions) 
+  FY2007 FY2008 FY2009 FY2010 FY2011 Q1 2012 Q1 & Q2 
+2012 
+As Reported Net Income $49.4  $9.1  ($193.5) ($17.8) ($49.0) $1.2  ($11.4) 
+Rebate/Pricing Adjustment ($9.3) ($8.3) ($6.6) ($4.9) ($2.0) ($0.4) ($0.9) 
+Adjusted Net Income $40.1  $0.8  ($200.1) ($22.7) ($51.0) $0.8  ($12.3) 
+Misstatement Percentage 23% 1038% 3% 22% 4% 50% 7% 
+ 
+ ModusLink Failed to Ensure the Accurate Treatment of Rebates 
+22. ModusLink’s financial misstatements resulted from failures to act reasonably at 
+every level in the company.  Despite being aware that certain rebates could not be kept by 
+ModusLink, the company nevertheless aggressively – and covertly – pursued rebates from vendors 
+without regard to its contractual obligations to clients with cost and cost-plus contracts. 
+ 
+ 
+6 
+23. ModusLink personnel generally knew, at least as to ModusLink’s larger clients, 
+which had cost and cost-plus contracts and which did not.  Client pricing models – which were 
+critically important to whether ModusLink would turn a profit on a particular client’s business – 
+were reviewed when ModusLink considered both new business projects and existing business 
+projects. 
+24. ModusLink’s pursuit and retention of vendor rebates was also well known to, and 
+driven by, ModusLink’s management. Management put pressure on the operations staff to 
+aggressively pursue rebates as a way to reduce ModusLink’s costs and improve its profits.  As part 
+of the budget process, management set targets for the amount of rebates the business units were 
+expected to obtain. 
+25. Management would thereafter periodically receive reports on the company’s 
+success obtaining rebates and their effect on the company’s financial performance.   Rebates were 
+also regularly discussed in reports from ModusLink’s business units.  
+26. The possibility of obtaining new rebates was also periodically a factor when 
+ModusLink considered whether a new business project was expected to be sufficiently profitable to 
+undertake. 
+27. Management was informed on multiple occasions that the company could not keep 
+vendor rebates associated with clients on cost and cost-plus contracts, including in memos and 
+reports authored by or received by ModusLink’s managers.   
+28. Management was also apprised on multiple occasions that ModusLink was marking 
+up vendor costs on business associated with some of its biggest clients, including clients with 
+which ModusLink had cost or cost-plus contracts. 
+29. Notwithstanding management’s general knowledge of its clients’ contracts and 
+knowledge of the company’s pursuit of rebates and mark-ups, ModusLink did not have any 
+meaningful processes in place to ensure rebates and mark-ups were properly treated under its 
+different contract models.  ModusLink failed to direct the relevant parts of the company, including 
+its legal staff, operations staff, sales staff, and finance staff, to develop any procedures for the 
+proper treatment of rebates.   
+30. Ultimately, in connection with its 2013 restatement of financial statements, 
+ModusLink admitted to deficiencies in its accounting and financial controls, including a failure to 
+reconcile its pricing and billing processes to its contractual obligations. 
+ModusLink’s Secretive Approach to Rebate Negotiation and Retention 
+31. ModusLink’s embrace of rebates as a profit strategy created an incentive to retain 
+rebates to which it was not entitled.  Vendor rebates were pursued and implemented on the 
+operations side of ModusLink’s business (rather than the client-facing sales side).  The operations 
+side, accordingly, turned from a cost center into a mixed cost and profit center, with a profit goal it 
+was expected to hit each year. 
+ 
+ 
+7 
+32. By turning the operations side of its business into a profit center, ModusLink 
+engendered a competitive and contentious dynamic between sales and operations, and the 
+operations staff developed practices that were aimed at increasing rebates while hiding them from 
+scrutiny.  ModusLink’s internal procedures and information systems were designed to keep rebate-
+related information away from sales and other client-facing personnel and to conceal rebate 
+practices from clients.  Management was aware of and directed this deliberate information 
+withholding, ostensibly so that sales personnel did not negotiate away the profits made from the 
+rebates.  The effect was that those with the most knowledge about the client contracts – the client-
+facing personnel – were kept in the dark about the company’s rebate practices.  Company-wide 
+rebate information, likewise, was generally available at the management level only. 
+33. Among the ways the operations staff kept rebate information hidden was by 
+directing vendors to make sure that their invoices did not reflect the anticipated payment of rebates.  
+Emails dating as far back as 2003, and as late as 2011, reflect that operations staff would arrange 
+with vendors to invoice ModusLink at the higher, original price and then return the difference 
+between the “real” or “net” price and the higher price to ModusLink at month- or quarter-end in 
+the form of a rebate.  By keeping the rebate information off of the vendor invoices, the client-
+facing sales personnel (and the clients themselves) would be unaware of the rebates. 
+34. The ModusLink personnel responsible for the concealed rebate program hid their 
+activities by providing inflated cost figures (which included the higher, non-rebated price) to those 
+ModusLink employees who dealt with clients.  
+35. In some instances, members of the operations staff pursued rebates in this fashion 
+specifically because they knew that the client contracts would be structured as cost or cost-plus and 
+thus they could not directly mark-up the vendor costs.   Numerous middle- and upper-level 
+managers in operations received and sometimes sent emails reflecting these practices. 
+36. At times, operations staff members clashed with sales staff members who suspected 
+(accurately) that operations had included rebate-inflated prices into pricing quotes, making it 
+tougher to make a sale to a client.  Members of senior management would occasionally have to 
+mediate these disputes between operations and sales.  
+37. ModusLink operations staff also made sure that its main accounting and billing 
+systems did not contain detailed information regarding rebates.  These practices were designed to 
+and did conceal rebates from those select clients that had contractual rights to review and audit 
+what ModusLink had charged them. 
+38. At various times, ModusLink operations staff referred to its rebate efforts internally 
+as a “masked pricing program” and, more colloquially, as “Scooby Snacks.”2 
+ 
+                                                 
+2  In the cartoon Scooby Doo, Scooby Snacks were a food item (or possibly a dog treat) frequently 
+used as an incentive for the dog Scooby-Doo and his owner Shaggy. 
+ 
+ 
+8 
+ModusLink Failed to Adequately Address Internal Whistleblower Complaint 
+39. In November 2008, an anonymous whistleblower put ModusLink’s management 
+and Audit Committee on notice of the problem posed by ModusLink’s rebate practices, but 
+ModusLink failed to effectively respond.   
+40. An allegation was received through ModusLink’s “EthicsPoint” system regarding 
+the collection of rebates.  This system allowed for the reporting of anonymous tips concerning 
+improper conduct at the company.  The allegation stated that ModusLink’s sourcing department – 
+which was part of the operations function at ModusLink – was conducting a rebate program in 
+which purchase orders provided to vendors and invoices received from vendors were not reduced 
+by the rebate amount, and rebates were paid from vendors to ModusLink on separate paperwork.  
+The allegation further asserted that these rebates were not being disclosed to clients, who were told 
+they were receiving cost-plus pricing.  The allegation squarely identified the problem with this 
+program: “[V]endor rebate agreements in existence [sic] which are not being passed to customers 
+per the contract terms and conditions.”   
+41. The allegation was referred to ModusLink’s Internal Audit team, which began to 
+investigate the rebate program.  At the outset, the Internal Audit director identified that the 
+allegation raised concerns “from a legal and accounting perspective.”  The investigation, however, 
+failed to sufficiently evaluate and investigate the allegation from either perspective.   
+42. No one at ModusLink appears to have sought either a legal or accounting opinion 
+about whether ModusLink could properly charge the non-rebate price to clients on cost and cost-
+plus contracts.  Nor did the Internal Audit investigation involve a review by anyone of the terms of 
+the cost and cost-plus contracts to determine whether rebate amounts needed to be passed back to 
+those clients.  Instead, the Internal Audit team simply asked the operations staff, including its 
+finance personnel, about the rebate program, and they uniformly asserted that the collection of 
+rebates was acceptable because the vendors providing the rebates served multiple ModusLink 
+clients.  When the internal auditors sought historical data concerning rebate practices, they were 
+told that the available data did not contain the level of detail requested and was unreliable, 
+notwithstanding that the requested data was in fact being maintained by ModusLink’s operations 
+staff.  Despite later being told that more detailed information was available, Internal Audit did not 
+obtain or evaluate the information. 
+43. Internal Audit, along with ModusLink’s general counsel, thereafter closed the 
+EthicsPoint investigation, calling the allegation “unfounded” based on its insufficient inquiry.  In 
+March 2009, Internal Audit reported to ModusLink’s Audit Committee that the investigation was 
+closed and that Internal Audit had concluded that the rebates received were ModusLink’s 
+“entitlement.”   
+44. During the Internal Audit investigation, staff at ModusLink identified a risk “that a 
+client could come back and ask for the rebates received on their part orders when the client 
+contract holds a cost or cost-plus option.”  That risk does not appear to have been communicated to 
+ModusLink’s Audit Committee when the complaint was closed. 
+ 
+ 
+9 
+45. The Audit Committee did not engage in any discussion or ask any questions about 
+Internal Audit’s review or its conclusions.  No legal opinion was sought or obtained and no inquiry 
+was made regarding the basis for the cursory conclusion reported to the Audit Committee.  In other 
+words, the Audit Committee tacitly accepted Internal Audit’s report that the rebate program was 
+justified. 
+46. Following the closing of the investigation, ModusLink’s supply chain managers 
+were told to review the company’s rebate practices to eliminate the risk that a client with a cost or 
+cost-plus contract might seek rebates ModusLink received on that client’s business.  While the 
+managers and staff reviewed the company’s rebate practices, they did nothing to change their 
+fundamental nature.  ModusLink failed to implement any new processes, including any processes 
+to check client contracts to determine whether they were cost or cost-plus.  Instead, the responsible 
+managers merely documented the rebate practices then in existence. 
+Role of Catherine Venable 
+47. Catherine Venable held the most senior finance role on the operations side of 
+ModusLink’s business, CFO of Global Operations and its equivalent, from 2008 to 2012.  In prior 
+years, she was CFO of the Americas (2005-2007) and CFO of Asia and Europe (2007-2008).  
+Venable often served as an intermediary between operations and the corporate accounting staff on 
+issues related to rebates (including, for example, whether they were sufficiently predictable to 
+warrant an accrual), and was a strong and consistent advocate for rebates, given their positive 
+impact on the bottom line.   
+48. Venable was responsible for preparing the financial statements for her region and/or 
+business unit (as she was promoted), which were provided to the corporate accounting staff.   
+49. Venable was familiar with ModusLink’s client contracts.  She knew the company’s 
+contracts with certain clients required pass-through pricing of vendor costs, and knew or should 
+have known that certain cost savings, including rebates, had to be passed back to clients on those 
+contracts. 
+50. Venable also knew that the procurement staff was negotiating rebates from vendors 
+at the direction of management.   
+51. During her tenure, Venable repeatedly prepared financial statements knowing that 
+ModusLink was retaining rebates for goods and services procured, in part or whole, for use in 
+performing work for clients with cost and cost-plus contracts.  Venable unreasonably relied on the 
+unfounded rationale that retention of these rebates was acceptable because the vendors providing 
+the rebates were believed to be serving multiple ModusLink clients. Venable took no independent 
+steps to determine whether rebates should have been or were passed back to clients with cost and 
+cost-plus contracts, and thereby, through her negligence, was a cause of ModusLink’s failure to 
+accurately record rebates and, by extension, its revenue and net income. 
+ 
+ 
+10 
+ModusLink’s Required Restatement of Financial Statements Filed with the Commission 
+52. On March 12, 2012, ModusLink’s Form 10-Q filing for the period ended January 
+31, 2012, defended the company’s rebate practices:  
+As part of [ModusLink’s supply chain management] services and in the 
+normal course of our business we purchase certain commodity types of materials, 
+including, but not limited to, print, packaging, media and labels, to meet client 
+requirements, often in quantities well in excess of those required by any one client. 
+As a result, we receive improved pricing on materials, as well as rebates based on 
+aggregate volumes of purchases or other criteria established by the vendor. Cost of 
+revenue for the second quarter of our 2012 fiscal year included the positive impact 
+of approximately $1 million attributable to such rebates. In response to an inquiry 
+by the Securities and Exchange Commission, we are currently evaluating this 
+practice, to determine the extent to which such rebates should be shared with 
+certain of our clients. Based on our operating practices, including our ongoing 
+periodic pricing negotiations with our clients, we believe the benefit of these 
+rebates is effectively shared with our clients and that our accounting for such 
+practices is correct. 
+ 
+53. On June 11, 2012, ModusLink filed with the Commission a Form 8-K, along with a 
+press release from the company.  The Press Release revised ModusLink’s position on rebates, 
+stating,  
+Concurrent with the [Securities and Exchange Commission’s] inquiry, the 
+Audit Committee of the Board of Directors initiated an internal investigation and 
+has determined that certain client contracts have not been aligned consistently with 
+ModusLink’s practice of retaining volume discounts.  In the course of the 
+investigation, the Audit Committee also identified limited instances where vendor 
+costs incurred were marked-up to clients in a manner not consistent with client 
+contacts. 
+ 
+54. ModusLink then announced that “it [was] no longer able to conclude that amounts 
+from such volume discounts and mark-ups, where now found to be inconsistent with client 
+contracts, were correctly accounted for as revenue.  As soon as practicable, the Company expects 
+to restate its audited financial statements from fiscal years 2009 through 2011, as well as the first 
+two quarters of fiscal 2012 and its unaudited selected financial data for fiscal years 2007 and 
+2008.”  In other words, ModusLink announced that its financial statements from 2007 to the 
+present could not be relied upon.   
+55. On January 11, 2013, ModusLink filed an amended Form 10-K with the 
+Commission in which it restated its financial results for the period 2007 through 2011 and the first 
+two quarters of 2012.  In that filing, ModusLink admitted, “based on additional accounting 
+evaluations conducted in connection with the investigation and in consultation with the Audit 
+Committee’s advisors, the Company concluded, and recommended to the Audit Committee, that 
+ 
+ 
+11 
+revenue should not have been recognized for retained rebates and mark-ups associated with the 
+cost-based client contracts.”   
+56. The restatement resulted in a cumulative downward adjustment of $32.9 million in 
+revenue, from 2007 through the first two quarters of 2012.  ModusLink adjusted net income 
+downward by $18.0 million and restated its aggregate net loss of $231.1 million.  These 
+adjustments flowed from the approximately $45 million ModusLink determined that it had 
+improperly billed clients based on rebates and mark-ups ModusLink retained in contravention of 
+client contracts. 
+57. In a “Summary of Investigation Findings” in the Form 10-K filed on January 11, 
+2013, ModusLink conceded that: 
+The errors identified in the course of the Audit Committee’s investigation 
+revealed deficiencies in the Company’s accounting and financial control 
+environment, some of which were determined to be material weaknesses.  These 
+included a failure of effective controls to track and reconcile the Company’s belief 
+that it was entitled to retain rebates and pricing mark-ups against the specific terms 
+of the contractual pricing models and cost disclosure obligations required by client 
+contracts. 
+Compensation of CEO Lawler and CFO Crane 
+58. During the 12-month periods following ModusLink’s filing with the Commission 
+of inaccurate financial statements in its Forms 10-K for the full years of 2010 and 2011, Lawler 
+and Crane received bonuses, incentive compensation, and equity-based compensation.  Neither 
+Lawler nor Crane has reimbursed any portion of this compensation to ModusLink. 
+ModusLink Offered Securities 
+59. On December 20, 2010, ModusLink filed a Form S-8 with the Commission.  That 
+filing detailed ModusLink’s registration of over five million shares of common stock, in 
+connection with its adoption of a 2010 Incentive Award Plan on December 8, 2010.  The 
+registration statement incorporated ModusLink’s Fiscal Year 2010 10-K, which ModusLink later 
+restated, as described above.  ModusLink made this filing, and subsequently offered certain of the 
+registered shares to employees, during the period it improperly billed and kept rebates and mark-
+ups.  
+Violations 
+60. Sections 17(a)(2) and 17(a)(3) of the Securities Act make it unlawful, in the offer or 
+sale of securities, to (1) obtain money or property by means of any material misrepresentation or 
+omission or (2) engage in any transaction, practice or course of business that operates or would 
+operate as a fraud or deceit upon the purchaser.  Negligence is sufficient to establish violations of 
+Sections 17(a)(2) and 17(a)(3) of the Securities Act.  As a result of its negligent conduct described 
+above, ModusLink violated Sections 17(a)(2) and (3) of the Securities Act. 
+ 
+ 
+12 
+61. Section 13(a) of the Exchange Act requires issuers of securities registered 
+pursuant to Section 12 of the Exchange Act to file periodic and other reports with the 
+Commission.  With exceptions not applicable here, Rules 13a-1 and 13a-13 of the Exchange Act 
+require each issuer to file annual and quarterly reports respectively on the appropriate forms and 
+within the period specific on the form.  Rule 12b-20 further requires that the required reports 
+contain such further material information, if any, as may be necessary to make the required 
+statements, in light of the circumstances under which they are made not misleading.  As a result of 
+the conduct described above, ModusLink violated Section 13(a) of the Exchange Act and Rules 
+12b-20, 13a-1, and 13a-13 thereunder. 
+ 
+62. Section 13(b)(2)(A) of the Exchange Act requires issuers of securities registered 
+pursuant to Section 12 of the Exchange Act to make and keep books, records and accounts, 
+which, in reasonable detail, accurately and fairly reflect their transactions and dispositions of 
+their assets.  As a result of the conduct described above, ModusLink violated Section 13(b)(2)(A) 
+of the Exchange Act. 
+ 
+63. Section 13(b)(2)(B) of the Exchange Act requires issuers of securities registered 
+pursuant to Section 12 of the Exchange Act to, among other things, devise and maintain a system 
+of internal accounting controls sufficient to provide reasonable assurances that transactions are 
+recorded as necessary to permit preparation of financial statements in accordance with generally 
+accepted accounting principles. As a result of the conduct described above, ModusLink violated 
+Section 13(b)(2)(B) of the Exchange Act. 
+ 
+64. As a result of her negligent conduct described above, Venable was a cause of 
+ModusLink’s violations of Section 13(b)(2)(A) of the Exchange Act. 
+ 
+65. Section 304 of the Sarbanes-Oxley Act of 2002 requires the chief executive 
+officer and chief financial officer of any issuer required to prepare an accounting restatement due 
+to material noncompliance with the securities laws as a result of misconduct to reimburse the 
+issuer for (i) any bonus or incentive-based or equity-based compensation received by that person 
+from the issuer during the 12-month periods following the false filings, and (ii) any profits 
+realized from the sale of securities of the issuer during those 12-month periods.  Section 304 does 
+not require that the chief executive officer or chief financial officer personally engage in 
+misconduct to trigger the reimbursement requirement, and the Commission does not allege that 
+Lawler and/or Crane participated in misconduct.  As described above, however, ModusLink 
+engaged in misconduct giving rise to its restatement.  During the 12-month period following 
+ModusLink’s filing of inaccurate financial statements in its Forms 10-K for 2010 and 2011, 
+Lawler and Crane received bonuses, incentive compensation, and/or equity-based compensation.  
+Neither Lawler nor Crane has, to date, reimbursed any portion of this compensation or profits 
+stemming from this compensation to ModusLink.  Lawler and Crane have, therefore, violated 
+Sarbanes-Oxley Section 304.  
+ 
+ 
+13 
+IV. 
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
+agreed to in Respondents’ Offers. 
+ 
+ Accordingly, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange 
+Act, it is hereby ORDERED that: 
+ 
+A. Respondent ModusLink shall cease and desist from committing or causing any 
+violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and 
+Section 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 
+13a-13 thereunder. 
+ 
+B. Respondent ModusLink shall, within 14 days of the entry of this Order, pay a civil 
+money penalty in the amount of $1,600,000 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 
+ModusLink as a Respondent in these proceedings, and the file number of these proceedings; a copy 
+of the cover letter and check or money order must be sent to John T. Dugan, Associate Regional 
+Director, Division of Enforcement, Securities and Exchange Commission, Boston Regional Office, 
+33 Arch Street, Boston, MA 02110.   
+ 
+C. Respondent Venable shall cease and desist from committing or causing any 
+violations and any future violations Section 13(b)(2)(A) of the Exchange Act. 
+ 
+ 
+ 
+14 
+D. Respondent Venable shall, within 14 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) 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 
+Venable as a Respondent in these proceedings, and the file number of these proceedings; a copy of 
+the cover letter and check or money order must be sent to John T. Dugan, Associate Regional 
+Director, Division of Enforcement, Securities and Exchange Commission, Boston Regional Office, 
+33 Arch Street, Boston, MA 02110.   
+ 
+E. Respondent Lawler shall cease and desist from committing or causing any 
+violations and any future violations of Section 304 of the Sarbanes-Oxley Act. 
+ 
+F. Respondent Lawler shall, within 14 days of the entry of this Order, reimburse 
+ModusLink for cash and equity incentive compensation in the amount of $78,991 and 24,200 
+shares of common stock (or the cash equivalent value calculated based on the last closing stock 
+price as of the date of this Order) pursuant to Section 304(a) of the Sarbanes-Oxley Act.  
+Respondent Lawler shall simultaneously deliver proof of satisfying this reimbursement obligation 
+to John T. Dugan, Associate Regional Director, Division of Enforcement, Securities and Exchange 
+Commission, Boston Regional Office, 33 Arch Street, Boston, MA 02110.   
+ 
+G. Respondent Crane shall cease and desist from committing or causing any violations 
+and any future violations of Section 304 of the Sarbanes-Oxley Act.   
+ 
+H. Respondent Crane shall, within 14 days of the entry of this Order, reimburse 
+ModusLink Global Solutions, Inc. for cash and equity incentive compensation in the amount of 
+ 
+ 
+15 
+$51,957.60 pursuant to Section 304(a) of the Sarbanes-Oxley Act.  Respondent Crane shall 
+simultaneously deliver proof of satisfying this reimbursement obligation to John T. Dugan, 
+Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, 
+Boston Regional Office, 33 Arch Street, Boston, MA 02110.   
+ 
+I. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be 
+treated as penalties paid to the government for all purposes, including all tax purposes.  To 
+preserve the deterrent effect of the civil penalty, Respondents ModusLink and Venable 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 ModusLink’s and Venable’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 
+ModusLink and Venable agree that they shall, within 30 days after entry of a final order granting 
+the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the 
+Penalty Offset to the Securities and Exchange Commission.  Such a payment shall not be deemed 
+an additional civil penalty and shall not be deemed to change the amount of the civil penalty 
+imposed in this proceeding.  For purposes of this paragraph, a “Related Investor Action” means a 
+private damages action brought against one or more 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 

raw/aaer/2016/AAER-3759.txt

@@ -0,0 +1,419 @@
+1 
+ 
+ 
+ 
+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77431 / March 23, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3759 / March 23, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17177 
+ 
+ 
+In the Matter of 
+ 
+NOVARTIS AG,  
+ 
+Respondent. 
+ 
+ORDER INSTITUTING CEASE-AND-
+DESIST PROCEEDINGS PURSUANT TO 
+SECTION 21C OF THE SECURITIES 
+EXCHANGE ACT OF 1934, MAKING 
+FINDINGS, AND IMPOSING A CEASE-
+AND-DESIST ORDER 
+ 
+I. 
+ 
+ The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 
+public interest that public administrative and cease-and-desist proceedings be, and hereby are, 
+instituted pursuant to 21C of the Securities Exchange Act of 1934 (“Exchange Act”) against 
+Novartis AG (“Novartis” 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: 
+ 
+1. These proceedings arise out of violations of the books and records and internal 
+accounting controls provisions of the Foreign Corrupt Practices Act of 1977 (the "FCPA") by 
+respondent Novartis AG ("Novartis") concerning its pharmaceutical operations in China. 
+ 
+2. From at least 2009 to 2013, certain employees and agents of Novartis 
+subsidiaries conducting business in China engaged in transactions and provided things of value 
+to foreign officials, principally healthcare professionals ("HCPs"). These payments took varied 
+forms and were intended to influence the HCPs and thereby increase sales of Novartis 
+pharmaceutical products. Employees and managers in the involved subsidiaries attempted to 
+conceal the true nature of the transactions through the use of complicit third parties and by 
+improperly recording the relevant transactions on the books and records of the respective 
+subsidiaries, which were consolidated in the financial reports of Novartis.   Examples include 
+improperly recording the payments as legitimate expenses for travel and entertainment, 
+conferences, lecture  fees, marketing events, educational seminars, and medical studies.  
+Novartis also failed to devise and maintain an effective system of internal accounting controls 
+or an effective anti-corruption compliance program. 
+ 
+3. As a result of this conduct, perpetrated by employees and agents of Novartis 
+subsidiaries in China, Novartis violated Section 13(b)(2)(A) of the Securities Exchange Act 
+of 1934 ("Exchange Act") by failing to make and keep books, records and accounts, which, 
+in reasonable detail, accurately and fairly reflect the transactions and disposition of assets of 
+the issuer. Additionally, Novartis violated Section 13(b)(2)(B) of the Exchange Act, as it 
+failed to maintain a system of internal accounting controls sufficient to provide reasonable 
+assurances that within the China subsidiaries: (i) transactions are executed in accordance 
+with management's general or specific authorization; (ii) 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; (iii) 
+transactions are recorded as necessary to maintain accountability for assets; and (iv) that 
+access to assets is permitted only in accordance with management's general or specific 
+authorization. 
+ 
+Respondent 
+ 
+4. Novartis AG ("Novartis") is a corporation organized under the laws of 
+Switzerland. Novartis' headquarters are located in Basel, Switzerland. Novartis issued and 
+maintains a class of publicly traded securities registered pursuant to Section 12(b) of the 
+                                                 
+1  The findings herein are made pursuant to Respondent's Offer of Settlement and are not 
+binding on any other person or entity in this or any other proceeding. 
+ 
+3 
+ 
+Securities Exchange Act of 1934, which are traded on the New York Stock Exchange. 
+ 
+5. Novartis is a global provider of pharmaceutical and over-the-counter health 
+products. Novartis' products are available in 180 countries and Novartis employs 
+approximately 120,000 employees.  Novartis manages its operations by therapeutic area. 
+Novartis conducts business in China solely through its subsidiaries, including the two 
+subsidiaries identified below. 
+ 
+Other Relevant Entities 
+ 
+6. Shanghai Novartis Trading Ltd ("Sandoz China") is headquartered in 
+Shanghai, China. Among other things, Sandoz China conducts the sales and marketing 
+activities of Novartis generic pharmaceutical products in China including Sandostatin. 
+Sandoz China is an indirect subsidiary of Novartis. 
+ 
+7. Beijing Novartis Pharma Co, Ltd ("Novartis China") is based in Beijing, 
+China. Among other things, Novartis China conducts the broader operations for Novartis 
+AG in China including the sale and marketing of proprietary pharmaceutical products. 
+Novartis China is an indirect subsidiary of Novartis. 
+ 
+Sandoz China 
+ 
+8. Between 2009 and 2011, certain employees of Novartis' subsidiary, Sandoz 
+China, improperly provided things of value to HCPs in China in connection with 
+pharmaceutical sales and involved certain complicit managers. The things of value took 
+varied forms, and included gifts, travel, improper sightseeing or vacations, entertainment, 
+and favors for families of HCPs. These things of value were improperly recorded on the 
+general ledger as legitimate employee expenses, sponsorships, conferences, medical 
+studies, and marketing costs. 
+ 
+9. Certain sales representatives of Sandoz China reported to their managers the 
+results of their efforts to increase the sales volume of various generic products.  High 
+prescribing HCPs were referred to as "key" customers and the volume of their prescriptions 
+was reported to certain senior management at Sandoz China. In order to influence HCPs, 
+certain sales representatives provided HCPs with such things as cash and gifts, which were 
+funded through the submission of false expense reports. This practice was known to certain 
+members of management of Sandoz China, including certain area and district managers and 
+the country sales supervisor. For example, in 2011, two sales representatives submitted fake 
+receipts for approximately $8,100 as part of their employee expense reimbursement 
+requests, which were approved by a regional sales manager. The proceeds were used to 
+entertain and provide gifts to HCPs. In one instance, a sales representative submitted a fake 
+$1,154 receipt to purchase holiday gifts for 25 HCPs when the proceeds were actually used 
+to pay for spa and sauna sessions for HCPs. A regional sales manager approved the 
+purchase. 
+4 
+ 
+ 
+10. In connection with this practice, certain employees maintained projections in 
+spreadsheets that directly linked a certain cash value to be provided to HCPs in exchange for a 
+certain number of prescriptions per month.  In certain instances, these planned amounts were 
+referred to as "investments," between several hundred and several thousand dollars annually, 
+and the HCPs were in some instances categorized into and tracked by different tiers, including 
+one tier described as "money worshippers." 
+ 
+11. As part of its normal business operations, Sandoz China hired local Chinese 
+travel companies to arrange transportation, accommodations, and meals for HCPs in 
+connection with education events. However, in many instances, the actual trips did not 
+include an educational purpose or the scientific/educational components were minimal in 
+comparison to the sightseeing or recreational activities, and were instead a method of 
+influencing the HCPs. The related expenses were approved and paid with little or no 
+supporting documentation. For example: 
+ 
+• In 2009, Sandoz China sponsored twenty Chinese HCPs to 
+attend the American College of Surgeons 95th Annual Clinical 
+Congress in Chicago. While the Clinical Congress was 
+devoted to educational purposes, the HCPs were also 
+provided purely sightseeing or recreational activities, such as 
+an excursion to Niagara Falls.  Sandoz China also paid for 
+travel to the U.S. for spouses of the HCPs, $150 in "pocket" 
+or "walking around" money, and cover charges at a strip club. 
+A senior manager of Sandoz China and other Sandoz China 
+employees accompanied the HCPs to Chicago. 
+ 
+• In 2011, a Chinese travel company submitted several invoices 
+totaling approximately $25,000 ostensibly in connection with 
+lectures by an HCP to other HCPs. The invoices were paid 
+and recorded as legitimate expenses despite the lack of any 
+confirmation: (1) that the lecture was organized by Sandoz 
+China and held in the venue for which an invoice was 
+submitted; and (2) that the lecture was attended by HCPs. 
+ 
+12. Sandoz China used other methods to provide monies to HCPs.  In 2009 and 
+201 0, Sandoz China paid HCPs to collect and analyze patient medical data for the stated 
+purpose of better understanding the use and reaction of a particular Novartis drug among 
+patients. Senior levels of the Sandoz China sales and marketing team were involved in the 
+design and execution of the studies. 
+ 
+13. In reality, the studies did not provide any legitimate medical data, but rather 
+were used to financially reward HCPs who had prescribed the drug. The studies were not 
+approved by the Novartis Global Clinical Quality Assurance group, as policy required, and the 
+5 
+ 
+studies did not collect or analyze substantive patient data regarding the drug. Despite the lack 
+of real scientific data, payments of approximately $88-135 per data submission were made to 
+the prescribing HCPs. The payments made to HCPs under these studies totaled approximately 
+$522,000 between 2009 and 201 0. 
+ 
+Novartis China 
+ 
+14. Between 2011 and 2013, employees and agents of Novartis China made 
+payments to government officials in China in connection with pharmaceutical sales. The 
+payments were made through event planning and travel companies retained by Novartis China 
+ostensibly to arrange transportation, accommodations and meals for HCPs in connection with 
+educational conferences and other business activities. Through the use of these complicit 
+vendors, HCPs were provided with improper inducements to prescribe or recommend Novartis 
+products. The subsidiary recorded these payments as legitimate selling and marketing costs in 
+its books. 
+ 
+15. Novartis China retained numerous third-party travel and event planning 
+vendors to organize and manage marketing for HCPs events, both locally within China, and 
+outside China. The range of services varied but in some cases vendors arranged the venue, 
+food, entertainment, flights, hotels, and transit depending upon the location of the event and 
+number of participants.   In the past several years, Novartis China has hosted thousands of 
+such events, and the pharmaceutical business unit within Novartis China was the largest 
+consumer of these services. 
+ 
+16. Despite the widespread use of third-party travel and event planning 
+vendors in China, Novartis did not have s u f f i c i e n t internal a c c o u n t i n g controls or anti-
+corruption compliance measures in connection with the use of these vendors.  Among other 
+things, Novartis failed to conduct sufficient training of its sales staff and managers to prevent 
+and detect inappropriate payments made to and/or through these vendors, failed to conduct 
+proper due diligence in connection with these vendors and failed to ensure sufficient and 
+appropriate support for the selling and marketing expenses submitted by these vendors. 
+ 
+Novartis' Cooperation and Remediation 
+ 
+17. In connection with the SEC Staff s investigation and in response to media 
+reports concerning a competitor in August 2013, Novartis instituted an expansive review of its 
+relationships in China with travel and event planning vendors.  Novartis’ internal review 
+showed that the vast majority of these vendors were retained in connection with events in which 
+HCPs attended.  It also identified a significant percentage of events that did not comply with 
+existing Novartis Corporate policies and procedures.  This included events for which no record 
+existed to verify it had occurred, events for which inconsistent records existed, and events that 
+could not be verified from available information.  Through this mechanism of using travel 
+agencies and similar vendors to plan events, funds were generated that were used to provide 
+improper payments and other inducements to HCPs in order to increase sales of Novartis 
+6 
+ 
+products. 
+ 
+18. As a result of its internal review over relationships with local Chinese third-
+party travel and event planning vendors, Novartis identified weaknesses in its internal controls 
+over third party relationships at Novartis China.  Novartis promptly took remedial steps to 
+improve its internal controls at Novartis China including overhauling its anti-corruption 
+policies and procedures, terminating and/or imposing other disciplinary  sanctions against 
+culpable employees, suspending vendor relationships and payments, doubling its training 
+initiatives, re-organized  its compliance function to include enhanced oversight by regional and 
+headquarter compliance personnel, and eliminated the use of vendors to support external 
+meetings. 
+ 
+Legal Standards and Violations 
+Under Section 21C(a) of the Exchange Act, the Commission may impose a cease-and-
+desist order upon any person who is violating, has violated, or is about to violate any provision 
+of the Exchange Act or any rule or regulation thereunder, and upon any other person that is, was, 
+or would be a cause of the violation, due to an act of omission the person knew or should have 
+known would contribute to such violation. 
+ 
+FCPA Violations 
+ 
+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)]. 
+ 
+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)]. 
+ 
+As described above, Novartis violated Section 13(b)(2)(A) of the Exchange Act by 
+improperly recording the payments to health care providers as sales, marketing, and promotion 
+expenses.  The false entries were initially recorded by Sandoz China and Novartis China which 
+were then consolidated and reported by Novartis in its consolidated financial statements.  Novartis  
+violated Section 13(b)(2)(B) by failing to devise and maintain sufficient accounting controls to 
+detect and prevent the making of improper payments to foreign officials.  
+ 
+ 
+7 
+ 
+ 
+Undertakings 
+ 
+ Respondent has undertaken to:   
+1. Report to the Commission staff periodically, at no less than 
+nine-month intervals during a two-year term, the status of its 
+remediation and implementation of compliance measures.  
+During this two-year period, should Respondent discover 
+credible evidence, not already reported to the Commission staff, 
+that questionable or corrupt payments or questionable or corrupt 
+transfers of value may have been offered, promised, paid, or 
+authorized by Respondent, or any entity or person acting on 
+behalf of Respondent, or that related false books and records 
+have been maintained, Respondent shall promptly report such 
+conduct to the Commission staff. During this two-year period, 
+Respondent shall:  (1) conduct an initial review and submit an 
+initial report, and (2) conduct and prepare at least two follow-up 
+reviews and reports, as described below: 
+ 
+a. Respondent shall submit to the Commission staff a 
+written report within 180 calendar days of the entry of this 
+Order s e t t i n g forth a  complete description of its Foreign 
+Corrupt Practices Act ("FCPA") and anti-corruption related 
+remediation efforts to date, its proposals reasonably 
+designed to improve the policies and procedures of 
+Respondent for ensuring compliance with the FCPA and 
+other applicable anticorruption laws , and the parameters of 
+the subsequent reviews (the "Initial Report").  The Initial 
+Report shall be transmitted to Charles Cain, Deputy Unit 
+Chief, FCPA Unit, Division of Enforcement, United States  
+Securities and Exchange Commission, 100  F St NE, 
+Washington, DC 20549.  Respondent may extend the time 
+period for issuance of the Initial Report with prior written 
+approval of the Commission staff. 
+ 
+b. Respondent shall undertake at least two follow-up reviews, 
+incorporating any comments provided by the Commission 
+staff on the previous report, to further monitor and assess 
+whether the policies and procedures of Respondent are 
+reasonably designed to detect and prevent violations of the 
+FCPA and other applicable anti-corruption laws (the 
+"Follow-up Reports"). 
+ 
+c. The first Follow-up Report shall be completed by no later 
+8 
+ 
+than 270 days after the Initial Report. The second Follow-
+up Report shall be completed by no later than 450 days 
+after the completion of the Initial Report. Respondent may 
+extend the time period for issuance of the Follow-up 
+Reports with prior written approval of the Commission 
+staff. 
+ 
+d. The periodic reviews and reports submitted by Respondent 
+will likely include proprietary, financial, confidential, and 
+competitive business information. Public disclosure of the 
+reports could discourage cooperation, impede pending or 
+potential government investigations and thus undermine the 
+objectives of the reporting requirement. For these reasons, 
+among others, the reports and the contents thereof are 
+intended to remain and shall remain non-public, except (a) 
+pursuant to court order, (b) as agreed by the parties in 
+writing, (c) to the extent that the Commission staff 
+determines in its sole discretion that disclosure would be in 
+furtherance of the Commission's discharge of its duties and 
+responsibilities, or (d) is otherwise required by law. 
+ 
+2. Certify, in writing, compliance with the undertaking(s) 
+set forth above. The certification shall identify the undertaking(s) 
+provide written evidence of compliance in the form of a 
+narrative, and be supported by exhibits sufficient to demonstrate 
+compliance. The Commission staff may make reasonable 
+requests for further evidence of compliance, and Respondent 
+agrees to provide such evidence. The certification and supporting 
+materials shall be submitted to Charles Cain, Deputy Unit Chief, 
+FCPA Unit, with a copy to the Office of the 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 Novartis’ Offer. 
+ 
+ Accordingly, pursuant to 21C of the Exchange Act, it is hereby ORDERED that: 
+ 
+ A. Respondent Novartis cease and desist from committing or causing any violations 
+and any future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act; 
+ 
+B. Respondent shall, within 14 days of the entry of this Order, pay disgorgement, of 
+$21,579,217 and prejudgment interest of $1,470,887 to the Securities and Exchange Commission 
+9 
+ 
+for transfer to the general fund of the United States Treasury, subject to Exchange Act Section 
+21F(g)(3).  If timely payment of disgorgement or prejudgment interest is not made, additional 
+interest shall accrue pursuant to SEC Rule of Practice 600.  Respondent shall, within 14 days of the 
+entry of this Order, pay a civil money penalty in the amount of $2,000,000 to the Securities and 
+Exchange Commission for transfer to the general fund of the United States Treasury, subject to 
+Exchange Act Section 21F(g)(3).  If timely payment of 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 
+Novartis as a Respondent in these proceedings, and the file number of these proceedings; a copy of 
+the cover letter and check or money order must be sent to Charles Cain, Deputy Unit Chief, FCPA 
+Unit, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, 
+DC 20549. 
+ 
+ C. Respondent shall comply with the undertakings enumerated in Section III.       
+above. 
+ 
+ 
+ By the Commission. 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 
+ 
+ 

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+UNITED STATES OF AMERICA 
+Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77447 / March 25, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No.  3760 / March 25, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No.  3-17180 
+ 
+ 
+In the Matter of 
+ 
+ELLIOT R. BERMAN, CPA 
+and 
+BERMAN & COMPANY, P.A., 
+ 
+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 
+pursuant to Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange 
+Act”) and Rules 102(e)(1)(ii) and (iii)2 of the Commission’s Rules of Practice against Elliot 
+                                                 
+1 Section 4C provides, in relevant part, that: “[t]he 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 “[t]he Commission may . . . 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.”  
+ 
+Rule 102(e)(1)(iii) provides, in pertinent part, that “[t]he Commission may . . . deny, temporarily or 
+permanently, the privilege of appearing or practicing before it in any way to any person who is found . . . to 
+have willfully violated, or willfully aided and abetted the violation of any provision of the Federal 
+securities laws or the rules and regulations thereunder.” 
+ 
+2 
+ 
+R. Berman (“Berman”) and Berman & Company, P.A. (“Berman & Co.,” collectively with 
+Berman, “Respondents”).  
+ 
+II. 
+ 
+After an investigation, the Division of Enforcement and the Office of the Chief 
+Accountant allege that: 
+ 
+A. Respondents 
+ 
+1. Elliot R. Berman, a resident of Boca Raton, Florida, has been a CPA 
+licensed in Florida since 2005.  Berman is the sole owner of Berman & Co., which he 
+founded in 2006.  In October 2014, Berman settled, without admitting or denying, to a 
+Cease-and-Desist and 102(e) proceeding in which the Commission found that he willfully 
+violated Section 10A(j) of the Exchange Act, willfully aided and abetted violations of 
+Rule 2-02 of Regulation S-X, and caused a violation of Section 13(a) of the Exchange 
+Act and Rule 13a-1 thereunder, and engaged in improper professional conduct.  Berman 
+was thereafter denied the privilege of appearing or practicing before the Commission as 
+an accountant, with the right to apply for reinstatement after one year.  Exchange Act Rel. 
+No. 73427 (Oct. 24, 2014).  Berman has not been reinstated by the Commission.   
+ 
+2. Berman & Company, P.A. is an accounting and auditing firm based in 
+Boca Raton, Florida.  Berman & Co. has been registered with the Public Company 
+Accounting Oversight Board (“PCAOB”) since 2006.  In October 2014, Berman & Co. 
+settled, without admitting or denying, to a Cease-and-Desist and 102(e) proceeding in 
+which the Commission found that the firm willfully violated Section 10A(j) of the 
+Exchange Act, Rule 2-02 of Regulation S-X, and caused a violation of Section 13(a) of 
+the Exchange Act and Rule 13a-1 thereunder, and engaged in improper professional 
+conduct.  Exchange Act Rel. No. 73427 (Oct. 24, 2014). 
+ 
+B. Related Issuer 
+ 
+3. MusclePharm Corporation (“MSLP”) is a Nevada corporation with its 
+principal place of business in Denver, Colorado.  Since 2010, MSLP has had a class of 
+securities registered with the Commission pursuant to Exchange Act Section 12(g).  
+MSLP engaged Berman & Co. as its auditor in January 2011 and dismissed Berman & 
+Co. in September 2012.   
+ 
+C. Summary 
+ 
+4. Berman & Co. and Berman engaged in improper professional conduct and 
+failed to exercise due professional care and professional skepticism including a critical 
+assessment of the audit evidence as shown by repeated deficiencies during the audits of 
+the 2010 and 2011 financial statements of MSLP.  Specifically, Respondents (1) audited 
+MSLP’s 2010 and 2011 financial statements and also issued audit reports knowing 
+Berman & Co. was not independent; (2) ignored audit evidence demonstrating that 
+3 
+ 
+MSLP’s largest customer in 2011 was a related party requiring disclosure in conformity 
+with Generally Accepted Accounting Principles (“GAAP”) and inappropriately relied on 
+management representations; (3) failed to recognize MSLP improperly accounted for 
+sales incentives, advertising, and promotions (“Sales Incentives”), and inappropriately 
+relied on management representations as sufficient audit evidence regarding the 
+accounting of those Sales Incentives; and (4) failed to recognize that MSLP did not 
+disclose its sponsorship commitments and international sales as required by GAAP. 
+ 
+D. Facts Related to Respondents’ Audits of MSLP’s Financial Statements 
+ 
+5. Berman & Co. issued audit reports containing unqualified opinions on 
+MSLP’s financial statements for fiscal years ended December 31, 2010 and December 
+31, 2011 (the “MSLP Audits”).   
+ 
+6. Berman served as the engagement partner on the MSLP Audits.  Berman, 
+as the engagement partner, was responsible for the audit engagement team’s compliance 
+with professional standards and adequate documentation in the work papers of the 
+findings, analysis, and information on which they relied in forming the audit opinion.  
+Berman also had final authority over the planning, execution, and supervision of the 
+audits and had full responsibility for Berman & Co.’s audit reports.  Berman approved the 
+issuance of audit reports containing unqualified opinions. 
+ 
+7. In each of the MSLP Audits, Berman & Co. represented that the audits 
+were conducted by an independent auditor in accordance with PCAOB standards.  
+Berman signed the audit reports for the MSLP Audits on behalf of Berman & Co.  MSLP 
+included these audit reports in its Commission filings.   
+ 
+8. Berman & Co., however, was not independent and Berman and Berman & 
+Co. failed to conduct the MSLP audits in accordance with PCAOB standards, as 
+described below.   
+ 
+Independence 
+ 
+9. Berman & Co. failed to comply with Rule 2-01(b) of Regulation S-X, 
+PCAOB Rule 3520, and PCAOB standards (see AU §§ 220, 230 and AS 9), and was not 
+independent from MSLP during the MSLP Audits because of indemnification provisions 
+Berman included in Berman & Co.’s engagement letters.  Despite not being independent, 
+Berman & Co. issued audit reports that represented that Berman & Co. was independent.  
+As a result, Berman & Co. willfully violated, and Berman willfully aided and abetted and 
+caused violations of, Rule 2-02(b)(1) of Regulation S-X. 
+ 
+10. Berman claims to have researched the use of indemnification provisions in 
+engagement letters with SEC registrants around the time he founded Berman & Co. in 
+2006, including reviewing PCAOB Rule 3520, PCAOB Rule 3500T, and Rule 2-01 of 
+Regulation S-X. 
+ 
+4 
+ 
+(a) PCAOB Rule 3520, Auditor Independence, provides that a “registered 
+public accounting firm and its associated persons must be independent of the firm’s audit 
+client throughout the audit and professional engagement period.”  Note 1 to PCAOB Rule 
+3520 states that “a registered public accounting firm or associated person’s 
+independence obligation with respect to an audit client encompasses not only an 
+obligation to satisfy the independence criteria applicable to the engagement set out in the 
+rules and standards of the PCAOB, but also an obligation to satisfy all other 
+independence criteria applicable to the engagement, including the independence criteria 
+set out in the rules and regulations of the Commission under the federal securities laws.” 
+(Emphasis added) 
+ 
+(b) PCAOB Rule 3500T(b), Interim Ethics and Independence Standards, 
+provides in part that “in connection with the preparation or issuance of any audit report, a 
+registered public accounting firm, and its associated persons, shall comply with 
+independence standards (1) as described in the AICPA’s Code of Professional Conduct 
+Rule 101, and interpretations and rulings thereunder, as in existence on April 16, 2003 
+(AICPA Professional Standards, ET §§ 101 and 191 (AICPA 2002)), to the extent not 
+superseded or amended by the Board.”  The Note to this rule provides: “The Board’s 
+Interim Independence Standards do not supersede the Commission’s auditor 
+independence rules.  See Rule 2-01 of Reg. S-X, 17 C.F.R.§ 210.2-01.  Therefore, to the 
+extent that a provision of the Commission’s rule is more restrictive – or less restrictive – 
+than the Board’s Interim Independence Standards, a registered public accounting firm 
+must comply with the more restrictive rule.”  (Emphasis added) 
+ 
+(c) Rule 2-01(b) of Regulation S-X provides that the “Commission will not 
+recognize an accountant as independent, with respect to an audit client, if the accountant 
+is not, or a reasonable investor with knowledge of all relevant facts and circumstances 
+would conclude that the accountant is not, capable of exercising objective and impartial 
+judgment on all issues encompassed within the accountant’s engagement.  In determining 
+whether an accountant is independent, the Commission will consider all relevant 
+circumstances, including all relationships between the accountant and the audit client, 
+and not just those relating to reports filed with the Commission.”  17 C.F.R. § 210.2-
+01(b).  Preliminary Note 2 to the rule provides in part:  “The rule does not purport to, and 
+the Commission could not, consider all circumstances that raise independence concerns, 
+and these are subject to the general standards in Rule 2-01(b).  Preliminary Note 3 to the 
+rule provides: “registrants and accountants are encouraged to consult with the 
+Commission’s Office of the Chief Accountant before entering into relationships, 
+including relationships involving the provision of services, that are not explicitly 
+described in the rule.”  (Emphasis added) 
+ 
+11. The Commission has published its interpretation and guidance on auditor 
+indemnification provisions in Codification of Financial Reporting Policies Section 
+602.02f.i (“Indemnification by Client”) (the “Codification”).  The Codification provides 
+in part that when “an accountant and his client, directly or through an affiliate, have 
+entered into an agreement of indemnity which seeks to assure the accountant immunity 
+from liability for his own negligent acts, whether of omission or commission, one of the 
+5 
+ 
+major stimuli to objective and unbiased consideration of the problems encountered in a 
+particular engagement is removed or greatly weakened.”  
+ 
+12. Berman also claims to have reviewed the Office of the Chief Accountant: 
+Application of the Commission’s Rules on Auditor Independence, Frequently Asked 
+Questions, Other Matters, Question 4, dated December 13, 2004 (the “OCA FAQ”).  The 
+OCA FAQ notes the “Commission’s long standing view” that “when an accountant enters 
+into an indemnity agreement with the registrant, his or her independence would come into 
+question.”  The OCA FAQ provides that when “an accountant and his or her client, 
+directly or through an affiliate, enter into an agreement of indemnity which seeks to 
+provide the accountant immunity from liability for his or her own negligent acts, whether 
+of omission or commission, the accountant is not independent.”  The OCA FAQ 
+additionally states that “including in engagement letters a clause that a registrant would 
+release, indemnify or hold harmless from any liability and costs resulting from knowing 
+misrepresentations by management would also impair the firm’s independence.”   
+ 
+13. The PCAOB Office of the Chief Auditor released the PCAOB Standing 
+Advisory Group briefing paper, titled “Emerging Issue – The Effects on Independence of 
+Indemnification, Limitation of Liability, and Other Litigation Related Clauses in Audit 
+Engagement Letters,” dated February 9, 2006 
+http://pcaobus.org/News/Events/Documents/02092006_SAGMeeting/Indemnification.pdf 
+The briefing paper was developed “by the staff of the Office of the Chief Auditor to 
+foster discussion among members of the Standing Advisory Group” and is not a 
+statement of the Board.  The briefing paper discusses the Codification and OCA FAQs.  
+The briefing paper also discusses Ethics Ruling Number 94 under Rule 101 of the 
+American Institute of Certified Public Accountants’ (“AICPA”) Code of Professional 
+Conduct (included in the PCAOB’s interim independence standards), which provides that 
+the auditor’s independence would not be impaired for indemnification language.  
+However, the briefing paper notes that auditors must “…comply with the SEC’s auditor 
+independence requirements as well as those of the Board in an audit of a public 
+company” and concludes that “[b]ecause SEC independence requirements prohibit 
+indemnification agreements in audit engagement letters, Ethics Ruling Number 94 has no 
+practical effect with respect to audits of public companies.” 
+ 
+14. The PCAOB has also highlighted that indemnification provisions will 
+impair an audit firm’s independence under Commission rules.  For example, in 2007, the 
+PCAOB issued a report on its inspection findings noting that indemnification provisions 
+violate the SEC independence rules.  See pages 16-18 of the Report on the PCAOB’s 
+2004, 2005, and 2006 Inspections of Domestic Triennially Inspected Firms, PCAOB Rel. 
+No. 2007-2010 (Oct. 22, 2007) http://pcaobus.org/Inspections/Documents/2007_10-
+22_4010_Report.pdf.   
+ 
+15. Other agencies have also issued guidance recognizing the SEC’s position 
+that auditors that use indemnification provisions are not independent.  See Interagency 
+Advisory on the Unsafe and Unsound Use of Limitation of Liability Provisions in 
+External Audit Engagement Letters, 
+6 
+ 
+http://www.federalreserve.gov/boarddocs/srletters/2006/sr0604a1.pdf (2006). 
+ 
+16. After his claimed research, and despite his claims that he specifically read 
+the PCAOB and Commission rules on independence and the Commission and 
+Commission staff’s specific guidance that indemnification provisions impaired an 
+auditor’s independence, Berman drafted Berman & Co. engagement letters for use with 
+SEC registrant audit clients that included indemnification provisions.   
+ 
+17. MSLP signed Berman & Co. engagement letters, dated January 5, 2011 
+and January 1, 2012, relating to the MSLP Audits (the “MSLP Engagement Letters”).  
+Berman drafted the MSLP Engagement Letters and signed the MSLP Engagement 
+Letters on behalf of Berman & Co.    
+ 
+18. The MSLP Engagement Letters contained the following indemnification 
+provisions:  
+ 
+(a) “The Company agrees to release, indemnify, and hold Berman & Company, 
+P.A. (its partners, affiliates, heirs, executors, personal representatives, 
+successors, and assigns) harmless from any liability and costs resulting from 
+known misrepresentations by management.” 
+ 
+(b)  “The Company agrees to release, indemnify, and hold Berman & Company, 
+P.A. (its partners, affiliates, heirs, executors, personal representatives, 
+successors, and assigns) harmless from any liability and costs resulting from 
+fraud caused by or participated in by the management of the Company.”   
+ 
+(c) “Reasonable costs and time spent in legal matters or proceedings arising from 
+our engagement, such as subpoenas, testimony or consultation involving private 
+litigation, arbitration or government regulatory inquiries at your request or by 
+subpoena will be billed to you separately and you agree to pay the same.” 
+ 
+19. Berman & Co. completed an “Engagement Acceptance Form” for the 
+2010 MSLP Audit (the “2010 Form”).  Berman reviewed and approved this form.  
+Berman & Co. completed an “Engagement Acceptance and Continuance Form” for the 
+2011 MSLP Audit (the “2011 Form”).  Berman reviewed and approved this form.   
+ 
+20. Item 11 of the 2010 Form and Item 7 of the 2011 Form provided that the 
+“SEC expects accountants to comply with the independence requirements established by 
+the PCAOB, Independence Standards Board, and the accounting profession (the AICPA), 
+as well as the requirements promulgated by the Commission and the staff.”  (Emphasis 
+added)  As noted above, Berman specifically read the guidance by the Commission and 
+the staff that provided indemnification provisions impaired an auditor’s independence. 
+ 
+21. Item 11.h of the 2010 Form and item 7.h of the 2011 Form specifically 
+questioned “Are there any relationships with the client or conflicts of interests that might 
+impair independence? … vii. Indemnification?”  Despite having included indemnification 
+provisions in the MSLP Engagement Letters, Respondents incorrectly responded “no” to 
+7 
+ 
+this question both years.   
+ 
+22. Aside from the 2010 Form and 2011 Form, there is no evidence in the 
+work papers that Respondents considered Berman & Co.’s independence in relation to 
+the indemnification provisions in the MSLP Engagement Letters for the MSLP Audits.   
+ 
+23. Berman & Co. invoked the indemnification provisions in the MSLP 
+Engagement Letters and required MSLP to pay approximately $272,000 of costs Berman 
+& Co. incurred related to an SEC investigation.  In fact, Berman provided testimony to 
+the SEC on April 2, 2014 and April 3, 2014, where he was directly questioned about the 
+sufficiency of the MSLP Audits.  On August 7, 2014, Berman sent an invoice to MSLP 
+seeking reimbursement for time spent preparing for his testimony, and the testimony 
+itself.     
+ 
+Related Party Transactions 
+ 
+24. From 2010 through 2012, one customer served as MSLP’s largest 
+customer for each year based on the percentage of sales (“MSLP’s Largest Customer”).   
+ 
+25. In May 2011, MSLP hired a new chief marketing officer (“CMO”).  The 
+CMO was a former executive and co-founder of MSLP’s Largest Customer.  The CMO’s 
+brother remained the CEO of MSLP’s Largest Customer and a greater than 10% indirect 
+owner of the major customer.  In 2011, GAAP required MSLP to disclose transactions 
+with MSLP’s Largest Customer as related party transactions in its financial statements.  
+(See ASC 850) 
+26. Respondents informed MSLP that transactions with MSLP’s Largest 
+Customer were required to be disclosed as related party transactions in its financial 
+statements.  Berman testified that MSLP’s Largest Customer was a related party due to 
+the family relationship.  Berman sent an email to MSLP in which he stated: “I have 
+spoken to the SEC, AICPA, concurring partner, and 2 other accountants.  Everyone has 
+concluded this is a disclosure.”  The work papers do not include this information. 
+ 
+27. MSLP disagreed with Respondents that transactions with MSLP’s Largest 
+Customer were required to be disclosed as related party transactions in its financial 
+statements.  Respondents agreed to accept MSLP’s position that disclosure was not 
+required if MSLP provided Respondents with a memo supporting its reasoning and a 
+representation in the management representation letter.  Berman emailed MSLP that the 
+memo had to be “top notch” because “this is a huge deal for me to let this go.”   
+ 
+28. A few days later, MSLP provided Respondents with a memo purporting to 
+support its position that MSLP’s Largest Customer was not a related party requiring 
+disclosure and a management representation letter.  The MSLP memo was prepared by a 
+non-accountant executive and signed by the CFO, who Respondents had previously 
+determined lacked accounting experience, as well as other MSLP executives.  No other 
+accountant signed the MSLP memo.   
+ 
+8 
+ 
+29. The MSLP memo did not accurately evaluate the necessity of disclosure in 
+accordance with GAAP.  The memo incorrectly focused on disclosure only being required 
+if influence was actually present (rather than whether a family member might control or 
+influence or if there is the opportunity to significantly influence) and failed to adequately 
+address the guidance found in ASC 850 regarding immediate family relationships.  
+ 
+30. The memo also contained facts that Respondents knew or should have 
+known to be red flags and/or that the information in the memo was not accurate.  For 
+example, MSLP management represented in the memo that the CMO “refrained from 
+direct involvement” with MSLP’s Largest Customer.  Respondents, however, knew or 
+should have known this statement was false because the CMO position was to oversee all 
+sales and marketing activities and the CMO’s bonus was dependent upon MSLP’s revenue 
+growth, which was significantly affected by sales to MSLP’s Largest Customer.  There is 
+no evidence, however, that Respondents attempted to corroborate this representation or any 
+other representation in the memo. 
+ 
+31. The memo also concluded that MSLP “is entitled to the presumption that 
+these are arm’s-length transactions and that the ability or opportunity to influence does not 
+exist.”  ASC 850, however, specifically provides that transactions cannot be presumed to 
+be carried out on an arm’s-length basis.  ASC 850-50-5 provides that “[T]ransactions 
+involving related parties cannot be presumed to be carried out on an arm’s length basis, as 
+the requisite conditions of competitive, free-market dealings may not exist.  
+Representations about transactions with related parties, if made, shall not imply that the 
+related party transactions were consummated on terms equivalent to those that prevail in 
+arm’s length transactions unless such representations can be substantiated.” 
+ 
+32. The work papers do not support that Respondents relied on any evidence 
+for the related party disclosure determination aside from the MSLP memo and 
+management representation letter. 
+ 
+33. MSLP failed to make the required GAAP disclosure of related party 
+transactions with MSLP’s Largest Customer in its 2011 financial statements.  Berman & 
+Co. expressed an unqualified opinion despite this material omission of which it was aware. 
+ 
+MSLP Sales Incentives 
+ 
+34. Under GAAP, sales incentives, advertising, and promotions (collectively 
+“Sales Incentives”) must be accounted for as a reduction of revenue, absent evidence of a 
+specific identifiable benefit in which case they can be recorded as an expense.  (See ASC 
+605-50-45-2)  Without evidence of an identifiable benefit, MSLP improperly recorded 
+Sales Incentives as an expense instead of a reduction of revenue, resulting in it 
+overstating revenues in its financial statements by $845,000 or 26% in 2010 and $3.6 
+million or 21% in 2011.   
+ 
+35. Berman & Co. and Berman identified revenue recognition as significant 
+and a fraud risk area for the MSLP Audits.    
+ 
+9 
+ 
+36. During the planning of the 2010 audit and throughout the MSLP Audits, 
+Respondents also identified weak internal controls at MSLP, due in large part to the CFO.  
+Berman & Co.’s 2010 audit planning memo provided that the “CFO lack[ed] requisite 
+technical accounting expertise.”  Indeed, after the 2010 audit, Berman & Co. specifically 
+warned MSLP that “the CFO is not trained in areas that support SEC financial reporting” 
+and “[t]he potential shortfall in this knowledge base is an internal control matter that should 
+be rectified immediately as it directly affects financial reporting.”   
+ 
+37. Despite designating revenue recognition as a fraud risk and determining the 
+CFO lacked the requisite accounting experience, Respondents failed to plan or perform 
+audit procedures to obtain sufficient audit evidence supporting MSLP’s accounting for 
+Sales Incentives.  Respondents’ audit work for the MSLP Audits consisted of reliance 
+upon a memo that MSLP’s CFO signed and provided to Berman & Co. in 2010, which 
+stated that advertising credits are issued to customers as a way to increase business and 
+the “credits are typically booked as advertising expenses.”  The memo did not reference 
+ASC-605-50.  Berman & Co.’s 2011 work papers did not contain a similar memo with a 
+representation from MSLP (such as was provided in connection with the 2010 audit 
+mentioned above).  Berman also testified that he relied on oral representations that the 
+Sales Incentives were accounted for correctly from the MSLP CFO, however, this is not 
+documented in the work papers.  Respondents could not reasonably rely as sufficient 
+audit evidence on either the memo or oral statements of the CFO that they determined 
+was not qualified or trained in areas of SEC financial reporting.   
+ 
+38. Aside from this single memo identified in paragraph 37, Berman & Co.’s 
+2010 and 2011 work papers are devoid of any audit procedures designed to test if MSLP 
+properly accounted for Sales Incentives.  There were no steps in Berman & Co.’s audit 
+program or otherwise performed by Berman & Co. that evaluated if advertising and 
+promotional credits met the requirements of ASC 605-50 to be expensed.  There is not a 
+single reference to ASC 605-50 in Berman & Co.’s 2010 or 2011 audit work papers.   
+ 
+39. The lack of documentation in the work papers should have caused Berman 
+to question whether Berman & Co. tested MSLP’s Sales Incentive accounting.  The staff 
+auditor who performed some of the test work on the 2011 MSLP audit had no prior 
+experience testing Sales Incentives under ASC 605-50 and did not recall receiving any 
+instruction from anyone at Berman & Co. on how to test Sales Incentives. 
+ 
+40. MSLP filed an amended Form 10-K on July 2, 2012, for the year ended 
+December 31, 2011, restating its 2010 and 2011 financial statements because Sales 
+Incentives were not accounted for properly.   
+ 
+41. While Respondents did not perform any work to evaluate if Sales Incentives 
+met the requirements of ASC 605-50 to be expensed, the Respondents’ 2010 and 2011 
+work papers showed that Respondents had reviewed approximately 50 Sales Incentives 
+during the MSLP Audits for other objectives (such as the existence of the sales, the 
+accuracy of the sales amount, and that the sales were recorded in the proper period).  
+Respondents failed to identify that MSLP’s accounting for Sales Incentives was incorrect 
+10 
+ 
+for 45 of the 50 items reviewed.  These 45 Sales Incentives were ultimately restated in 
+MSLP’s 2012 restatement.     
+ 
+Sponsorship Commitments 
+42. In 2011, MSLP had three continuing sponsorship commitments, which 
+required it to make future payments in 2012 and 2013 totaling approximately $5.3 million 
+($2.8 million in 2012 and $2.5 million in 2013).  Contrary to GAAP, MSLP failed to 
+disclose these commitments in its 2011 financial statements.  (See ASC 440)    
+ 
+43. During the 2011 audit of MSLP, Respondents failed to recognize and 
+properly plan the audit to consider whether MSLP was required to disclose its 
+sponsorship commitments.  Berman & Co.’s disclosure checklist, which Berman 
+reviewed and approved and which was used during the MSLP audit, was marked “N/A” 
+for commitments.  The audit work papers do not contain any procedures evaluating 
+whether MSLP’s sponsorship commitments should or should not be disclosed.  
+Moreover, if any audit work was performed relating to sponsorship commitments, 
+Respondents failed to adequately document that they performed a procedure, obtained 
+evidence, or reached an appropriate conclusion.   
+ 
+International Sales 
+44. ASC 280-10-50-41 requires the disclosure of all revenues from external 
+customers attributed to all foreign countries in total from which the public entity derives 
+revenue if material.   
+ 
+45. MSLP failed to disclose in its 2011 financial statements that a material 
+amount, approximately 23%, of its sales were to customers located outside of the United 
+States (“International Sales”) as required by GAAP.   (See ASC 280-10-50-41)  
+ 
+46. Berman was aware that MSLP had International Sales.  Berman, however, 
+failed to properly plan the 2011 audit to obtain sufficient audit evidence regarding the 
+disclosure of International Sales.  Berman & Co.’s 2011 work papers did not contain 
+evidence that Respondents considered whether MSLP was required to disclose its 
+International Sales in conformity with GAAP.  Berman & Co.’s disclosure checklist is 
+marked “item not present” for International Sales.  No documentation relating to why 
+disclosure of International Sales was not required is in the work papers.   
+ 
+47. Berman knew MSLP was trying to grow internationally, but because 
+MSLP’s CFO and CEO told him International Sales were nominal, Berman & Co. did not 
+require testing.  However, no documentation relating to discussions with management 
+relating to International Sales or that International Sales were “nominal” is in the work 
+papers.  
+ 
+ 
+ 
+ 
+11 
+ 
+E. Respondents’ Improper Professional Conduct 
+ 
+48. Rule 102(e)(1)(ii) provides, in pertinent part, that “[t]he 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.” 
+ 
+49. Rule 102(e)(1)(iv)(A) defines “improper professional conduct” under Rule 
+102(e)(1)(ii) to mean “intentional or knowing conduct, including reckless conduct, that 
+results in a violation of applicable professional standards.”  Rule 102(e)(1)(iv)(B) defines 
+“improper professional conduct” under Rule 102(e)(1)(ii) to include 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.   
+ 
+50. Respondents engaged in improper professional conduct, as defined in Rule 
+102(e)(1)(iv)(A) and Rule 102(e)(1)(iv)(B) as explained herein. 
+ 
+51. Rule 102(e)(1)(iii) provides, in pertinent part, that “[t]he 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.” 
+ 
+52. Respondents willfully violated and willfully aided and abetted violations 
+of the federal securities laws as explained herein.   
+ 
+Berman & Co. was Not Independent for the MSLP Audits 
+ 
+53. Rule 2-01(b) of Regulation S-X provides in part 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.”  As a result of the indemnification 
+language in the MSLP Engagement Letters, Berman & Co. was not independent pursuant 
+to Rule 2-01(b) of Regulation S-X.  By submitting audit reports to MSLP that were filed 
+with the Commission that provided Berman & Co. was independent and the audits were 
+conducted in accordance with PCAOB standards, Berman & Co. violated Rule 2-02(b)(1) 
+of Regulation S-X. 
+ 
+54. The Commission in the Codification and the Commission staff in the OCA 
+FAQ have provided guidance relating to Rule 2-01(b) of Regulation S-X that 
+indemnification provisions in engagement letters impair an auditor’s independence.   
+ 
+55. Both PCAOB Rule 3520 and Rule 3500T have notes which state the 
+12 
+ 
+Commission independence rules and regulations must be followed.  The note to PCAOB 
+Rule 3520 provides “a registered public accounting firm or associated person’s 
+independence obligation with respect to an audit client encompasses not only an 
+obligation to satisfy the independence criteria applicable to the engagement set out in the 
+rules and standards of the PCAOB, but also an obligation to satisfy all other 
+independence criteria applicable to the engagement, including the independence criteria 
+set out in the rules and regulations of the Commission under the federal securities laws.”  
+The note to PCAOB Rule 3500T provides “The Board’s Interim Independence Standards 
+do not supersede the Commission’s auditor independence rules.  See Rule 2-01 of Reg. S-
+X, 17 C.F.R.§ 210.2-01.  Therefore, to the extent that a provision of the Commission’s 
+rule is more restrictive – or less restrictive – than the Board’s Interim Independence 
+Standards, a registered public accounting firm must comply with the more restrictive 
+rule.” 
+ 
+56. The PCAOB has also provided public guidance that indemnification 
+provisions will impair an audit firm’s independence under Commission rules, as 
+identified in paragraph 14.   
+ 
+57. Berman included indemnification provisions in the MSLP Engagement 
+Letters.  As a result of the indemnification provisions in the MSLP Engagement Letters, 
+Berman & Co. was not independent as required by Rule 2-01(b).  By submitting audit 
+reports to MSLP, which were filed with the Commission, that provided Berman & Co. 
+was independent and the audits were conducted in accordance with PCAOB standards, 
+Berman & Co. violated, and Berman aided and abetted violations of, Rule 2-02(b)(1) of 
+Regulation S-X. 
+ 
+58. AU § 220, Independence, requires “that the auditor be independent; aside 
+from being in public practice (as distinct from being in private practice), he must be 
+without bias with respect to the client since otherwise he would lack that impartiality 
+necessary for the dependability of his findings, however excellent his technical 
+proficiency may be.”  (See AU § 220 ¶ 2)3    
+ 
+59. AS 9, Audit Planning, ¶ 6 provides that the auditor should determine 
+compliance with independence requirements at the beginning of the audit.   
+ 
+60. As a result of including indemnification provisions in the MSLP 
+Engagement Letters, Respondents also violated professional standards because Berman & 
+Co. was not independent during the MSLP Audits and the work papers do not contain 
+sufficient evidence that independence was evaluated.  (See AU § 220, AS 9)   
+ 
+                                                 
+3 References to PCAOB standards (“AS” and “AU”) in this Order are to the standards in effect at the time 
+the audit work was performed.  The AU standards were initially adopted by the PCAOB in 2003 following 
+passage of the Sarbanes-Oxley Act of 2002, which authorized the PCAOB to establish auditing and related 
+professional practice standards to be used by registered public accounting firms.  After  initial adoption of 
+these standards, the PCAOB began issuing updated standards that replaced some of the standards then in 
+effect.  As a result, the applicable 2010 and 2011 professional standards in effect may be different for each 
+period discussed in the Order, and both are included. 
+13 
+ 
+Respondents Failed to Properly Plan the MSLP Audits 
+ 
+61. The auditor is required to properly plan the audit, which includes the 
+planned nature, timing, and extent of procedures to be performed.  (AU § 311, Planning 
+and Supervision, ¶¶ 1, 5; AS 9 ¶ 4, 10)  Professional standards state the auditor should 
+design and perform audit procedures to address the assessed risks of material 
+misstatement due to fraud.  (AU § 316, Consideration of Fraud in a Financial Statement 
+Audit, ¶ 52) 
+ 
+62. Despite identifying revenue recognition as a fraud risk area, Respondents 
+failed to properly plan the MSLP Audits to obtain sufficient audit evidence supporting 
+MSLP’s accounting for Sales Incentives.  (See, e.g., AU §§ 311, 316, AS 9)  Respondents 
+also failed to properly plan the 2011 MSLP audit relating to sponsorship commitments 
+and International Sales.  (Id.) 
+ 
+Respondents Failed to Obtain Sufficient Appropriate Audit Evidence 
+ 
+63. Auditors are required to obtain sufficient audit evidence.  In 2010, AU 
+§ 326, Evidential Matter, ¶ 22 required auditors to obtain sufficient competent evidential 
+matter to afford a reasonable basis for an opinion regarding the financial statements.  
+Once effective for 2011, AS 15, Audit Evidence, ¶ 4 requires auditors to plan and 
+perform audit procedures to obtain sufficient appropriate audit evidence to provide a 
+reasonable basis for his or her opinion.  AS 13, The Auditor’s Response to the Risks of 
+Material Misstatement, ¶ 7 further requires the auditor to exercise professional skepticism 
+critically assessing the appropriateness and sufficiency of audit evidence.  AU § 316 ¶ 13 
+further provides that professional skepticism requires an ongoing questioning of whether 
+the information and evidence obtained suggests that a material misstatement due to fraud 
+has occurred, and the auditor should not be satisfied with less-than-persuasive evidence 
+because of a belief that management is honest. 
+ 
+64. Oral and written representations from management are part of the 
+evidential matter the auditor obtains, but are not a substitute for the application of 
+auditing procedures necessary to afford a reasonable basis for an opinion regarding the 
+financial statements under audit.  (AU § 333, Management Representations, ¶ 2)  If an 
+audit area is at increased risk of material misstatement, particularly fraud risks, the 
+auditor needs to obtain more reliable evidence regarding relevant assertions and obtain 
+evidence corroborating management’s explanations or representations concerning 
+important matters.  (AS 13 ¶ 7; AS 15 ¶ 17)  Auditors should obtain more persuasive 
+audit evidence from substantive procedures when they have identified pervasive 
+weaknesses in the company’s control environment.  (AS 13 ¶ 6)     
+  
+ Related Party Disclosures 
+ 
+65. After an auditor identifies a related party transaction, the auditor is required 
+to consider whether he has obtained sufficient appropriate evidential matter; evaluate all the 
+information available to him; and satisfy himself that it is adequately disclosed in the 
+14 
+ 
+financial statements.  (AU § 334, Related Parties, ¶ 11)  Professional standards require the 
+auditor to perform procedures to obtain and evaluate sufficient appropriate evidential 
+matter beyond inquiry of management.  (AU § 334, Related Parties, ¶¶ 2 and 9)  AS 14, 
+Evaluating Audit Results, ¶ 8 further provides that the auditor should obtain 
+corroboration for management’s explanations regarding significant unusual relationships.    
+ 
+66. Respondents violated professional standards and failed to obtain sufficient 
+audit evidence in the 2011 MSLP Audit related to related party disclosures.  (See AU §§ 
+333, 334; AS 13, 14, 15)  After Respondents identified a related party, Respondents 
+failed to obtain sufficient appropriate evidence supporting MSLP’s position that 
+disclosure of the related party transactions was not required.  (See id.)  Respondents 
+improperly relied upon management representations in MSLP’s memo and management 
+representation letter.  (See AU §§ 333, 334; AS 14)  The memo, which was prepared by a 
+non-accountant and signed by a CFO who Respondents determined “lacked requisite 
+accounting experience,” did not appropriately evaluate GAAP.  Respondents also failed 
+to corroborate MSLP’s management’s underlying representations in the memo, even 
+when they had information contradicting or, at the very least, calling into question, those 
+representations. 
+ 
+Sales Incentives 
+ 
+67. Respondents violated professional standards and failed to obtain sufficient 
+audit evidence in the 2010 and 2011 MSLP Audits related to Sales Incentives.  (See AU 
+§§ 316, 326, 333; AS 13, 15)  Respondents designated revenue recognition as a fraud 
+risk.  However, aside from a single memo from 2010, the work papers lacked any audit 
+procedures designed to test if MSLP properly accounted for Sales Incentives.  (See AU 
+§ 326, AS 13, 15).  Moreover, Respondents improperly relied on management 
+representations without corroborating statements made by the CFO, who Respondents 
+had determined lacked accounting experience.  (See AU § 333, AS 13, 15)  
+ 
+ Sponsorship Commitments and International Sales 
+ 
+68. AS 14 ¶ 31 requires that “[a]s part of the evaluation of the presentation of 
+the financial statements, the auditor should evaluate whether the financial statements 
+contain the information essential for a fair presentation of the financial statements in 
+conformity with the applicable financial reporting framework.”  Evaluation of the 
+information disclosed in the financial statements includes consideration of the “content of 
+the financial statements (including the accompanying notes)…”   
+ 
+69. In violation of professional standards, Respondents were aware of 
+sponsorship commitments and International Sales at MSLP that required disclosure in the 
+2011 financial statements but were not disclosed.  (See AS 14) 
+ 
+70. Respondents violated professional standards and failed to obtain sufficient 
+audit evidence in the 2011 MSLP Audit related to sponsorship commitments.  (See AS 
+13, 15)  The disclosure checklist was marked “N/A” for commitments and the audit work 
+15 
+ 
+papers do not contain any procedures evaluating whether MSLP’s sponsorship 
+commitments should be disclosed.     
+ 
+71. Respondents violated professional standards and failed to obtain sufficient 
+audit evidence in the 2011 MSLP Audit related to International Sales.  (See AU § 333; 
+AS 13, 15)  Berman & Co.’s disclosure checklist is marked “item not present” for 
+International Sales and no documentation relating to why disclosure of International 
+Sales was not required is in the work papers.  (Id.)  Additionally, no references to 
+discussions with management relating to International Sales are in the work papers, and, 
+even if Respondents did rely on representations of management regarding International 
+Sales, this was insufficient audit evidence.  (See AU § 333) 
+ 
+Respondents Failed to Adequately Document the MSLP Audits 
+72. AS 3 requires an auditor to prepare and retain documentation that provides 
+a written record of the basis for its significant conclusions.  (AS 3 ¶¶ 4 and 5)   Audit 
+documentation must clearly demonstrate that the work was in fact performed.  (AS 3 ¶ 6)  
+Among other items, the audit documentation must contain sufficient information to 
+enable an experienced auditor, having no previous connection with the engagement (1) to 
+understand the nature, timing, extent, and results of the procedures performed, evidence 
+obtained, and conclusions reached and (2) to determine, among other items, the person 
+who reviewed the work and the date of such review.  (AS 3 ¶¶ 4, 5 and 6)  Additionally, 
+audit documentation must include information the auditor has identified relating to 
+significant findings or issues that is inconsistent with or contradicts the auditor’s 
+conclusions.  (AS 3 ¶ 8)   
+ 
+73. Respondents violated professional standards and failed to adequately 
+document the work performed in the MSLP Audits.  (See AS 3)  Specific conduct that 
+violated AS 3 includes: 
+ 
+a) Respondents failed to document in either the 2010 or 2011 MSLP work 
+papers if and how they concluded Berman & Co. was independent when 
+the MSLP Engagement Letters included indemnification provisions;  
+ 
+b) Respondents failed to document the information in Berman’s email to 
+MSLP that stated: “I have spoken to the SEC, AICPA, concurring partner, 
+and 2 other accountants.  Everyone has concluded this is a disclosure,” 
+which contradicted Berman & Co.’s later conclusion that disclosure was not 
+required;  
+ 
+c) Respondents failed to document representations from management 
+relating to Sales Incentives, which Berman claims to have relied upon; 
+ 
+d) Respondents failed to document representations from management 
+relating to International Sales, which Berman claims to have relied upon; 
+and 
+ 
+16 
+ 
+e) Berman & Co.’s MSLP audit work papers do not contain documentation 
+evidencing sufficient audit evidence was obtained over Sales Incentives, 
+sponsorship commitments, or International Sales.  If Respondents did 
+perform any audit work in these areas, then Respondents violated AS 3 
+because the work papers do not document any work, including the 
+procedures performed, evidence obtained, or conclusions reached.   
+ 
+Berman Failed to Properly Supervise the MSLP Audits 
+ 
+74. AS 10 provides that the “engagement partner is responsible for the 
+engagement and its performance,” including “proper supervision of the work of 
+engagement team members and for compliance with PCAOB standards.”  (See AS 10 ¶ 3)  
+The engagement partner should review the work of engagement team members and 
+evaluate whether the work was properly performed and documented, the objectives of the 
+procedures were achieved, and the results of the audit work support the conclusions 
+reached.  (See AS 10 ¶ 5)   
+ 
+75. Berman, the engagement partner on the MSLP Audits, failed to properly 
+supervise those audits.  Berman failed in his supervision duties because he reviewed all of 
+the audit work papers and failed to recognize that the MSLP Audits were not compliant 
+with PCAOB standards.  Berman failed to properly evaluate whether the nature and extent 
+of audit procedures performed over Sales Incentives, sponsorship commitments, and 
+International Sales were sufficient under PCAOB standards.  In addition, Berman failed to 
+supervise the documentation of the firm’s audit procedures in accordance with AS 3.  
+ 
+76. Additionally, Berman failed to inform his staff of their responsibilities about 
+how to audit Sales Incentives.  Berman reviewed the audit work papers and failed to 
+recognize that Berman & Co. did not perform any procedures to test whether MSLP 
+properly accounted for Sales Incentives under ASC 605-50.  Consequently, Berman failed 
+to recognize that the results of Berman & Co.’s audit work did not support its conclusion 
+that MSLP properly accounted for Sales Incentives.   
+ 
+77. Additionally, while Berman reviewed the disclosure checklist he failed to 
+recognize that it incorrectly marked sponsorship commitments and International Sales as 
+“N/A” and “item not present,” respectively.  
+ 
+78. Berman also reviewed the Engagement Acceptance Forms and failed to 
+address that they incorrectly stated that there were no indemnification provisions. 
+ 
+Respondents Failed to Issue Accurate Audit Reports 
+ 
+79. The auditor is required to evaluate its audit results and whether the financial 
+statements “contain the information essential for a fair presentation of the financial 
+statements in conformity with the applicable financial reporting framework.”  (AS No.14 
+¶¶ 4 and 31)  AU § 508 ¶ 7, Reports on Audited Financial Statements, adds that the auditor 
+may state in his standard report that the financial statements present fairly, in all material 
+17 
+ 
+respects, an entity’s financial position, results of operations, and cash flows in conformity 
+with GAAP only when the auditor has conducted the audit in accordance with standards set 
+forth by the PCAOB.   
+ 
+80. Berman & Co. and Berman violated PCAOB standards and failed to issue 
+accurate audit reports for the MSLP Audits.  (See AS 14, AU § 508)  Berman & Co.’s 
+March 31, 2011 and April 13, 2012 audit reports, signed by Berman for the firm and 
+provided to MSLP, wrongly stated that Berman & Co. audited MSLP’s December 31, 
+2010 and 2011 financial statements (1) as an independent auditor; (2) in accordance with 
+the standards of the PCAOB, and (3) in its opinion the financial statements present fairly, 
+in all material respects, the financial position of, and the results of its operations and its 
+cash flows, in conformity with accounting principles generally accepted in the United 
+States of America.  Berman approved the issuance of audit reports containing unqualified 
+opinions. 
+ 
+Respondents Failed to Exercise Due Care and Professional Skepticism  
+81. PCAOB standards require auditors to exercise due professional care in the 
+planning and performance of the audit.  (AU § 230 ¶ 1)  Due professional care concerns 
+“what the independent auditor does and how well he or she does it,” requiring the auditor 
+to exercise professional skepticism, including an attitude that includes a questioning mind 
+and a critical assessment of audit evidence.  (See AU § 230 ¶¶ 4, 7, 8)  Additionally, the 
+auditor’s responses to the assessed risks of material misstatement, particularly fraud risks, 
+should involve the application of professional skepticism in gathering and evaluating audit 
+evidence.  (See AS 13)  Examples of the application of professional skepticism in response 
+to the assessed fraud risks are “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.”  (See AS 13 ¶ 7, AU § 230 ¶ 7) 
+ 
+82. Respondents violated professional standards and failed to exercise due 
+care and professional skepticism during the MSLP audits.  (See AU § 230, AS 13)  
+Respondents’ failures are evidenced by the repeated deficiencies previously set forth 
+herein, including: 
+ 
+a) Respondents issued audit reports for the MSLP Audits purporting to be 
+from an independent audit firm when the firm was not independent because 
+it had indemnification provisions in the MSLP Engagement Letters; 
+ 
+b) Respondents failed to recognize MSLP inappropriately accounted for Sales 
+Incentives and failed to express a qualified or adverse opinion despite 
+knowing that MSLP failed to disclose related party transactions, 
+sponsorship commitments, and International Sales as required by GAAP;  
+ 
+c) Respondents ignored audit evidence demonstrating that transactions with 
+MSLP’s Largest Customer were related party transactions requiring 
+disclosure; and 
+18 
+ 
+ 
+d) Respondents failed to obtain sufficient audit evidence regarding MSLP’s 
+accounting for Sales Incentives, related party transactions, and International 
+Sales by inappropriately relying on management representations. 
+ 
+F. Violations 
+ 
+1. As a result of the conduct described above, Berman & Co. willfully violated, 
+and Berman willfully aided and abetted and caused Berman & Co.’s violations of, Rule 2-
+02(b)(1) of Regulation S-X, which provides in part that the accountant’s report shall state 
+“whether the audit was made in accordance with generally accepted auditing standards.” 
+ 
+2. As a result of the conduct described above, Berman & Co. and Berman 
+willfully aided and abetted and caused MSLP’s violations of 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 reports with the Commission and to keep this 
+information current. 
+ 
+3. As a result of the conduct described above, Respondents engaged in 
+improper professional conduct under Rule 102(e)(1)(ii) as defined in Rule 102(e)(1)(iv)(A) 
+of the Commission’s Rules of Practice.  The audit failures by Respondents related to 
+independence, related party transactions, Sales Incentives, sponsorship commitments, and 
+International Sales were the result of knowing or reckless conduct that resulted in a 
+violation of applicable professional standards.   
+ 
+4. As a result of the conduct described above, Respondents engaged in 
+improper professional conduct under Rule 102(e)(1)(ii) as defined in Rule 
+102(e)(1)(iv)(B)(1) of the Commission’s Rules of Practice.  The audit failures by 
+Respondents related to independence, related party transactions, and Sales Incentives were 
+the result of highly unreasonable conduct that resulted in a violation of applicable 
+professional standards in circumstances in which Respondents knew or should have known 
+that heightened scrutiny was warranted.   
+ 
+5. As a result of the conduct described above, Respondents engaged in 
+improper professional conduct under Rule 102(e)(1)(ii) as defined in Rule 
+102(e)(1)(iv)(B)(2) of the Commission’s Rules of Practice.  Respondents’ unreasonable 
+conduct included failures with respect to independence, related party transactions, and 
+Sales Incentives discussed herein, as well as unreasonable conduct related to 
+Respondents’ failures during the 2011 MSLP Audit relating to sponsorship commitments 
+and International Sales.   
+ 
+6. As a result of the conduct described above, Respondents willfully violated 
+and willfully aided and abetted violations of provisions of the federal securities laws and 
+rules and regulations thereunder pursuant to Rule 102(e)(1)(iii).   
+ 
+ 
+19 
+ 
+ 
+III. 
+ 
+In view of the allegations made by the Division of Enforcement and the Office of 
+the Chief Accountant, the Commission deems it appropriate that public administrative and 
+cease-and-desist proceedings be instituted to determine: 
+ 
+A.  Whether the allegations set forth in Section II hereof are true and, in 
+connection therewith, to afford Respondents an opportunity to establish any defenses to such 
+allegations;  
+ 
+B.  What, if any, remedial action is appropriate against Respondents pursuant 
+to Section 4C of the Exchange Act and Rule 102(e) of the Commission’s Rules of 
+Practice, including, but not limited to, censure or denying, temporarily or permanently, 
+the privilege of appearing or practicing before the Commission; 
+ 
+C.  Whether, pursuant to Section 21C of the Exchange Act, Respondents 
+should be ordered to cease and desist from committing or causing violations of and any 
+future violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder and 
+Rule 2-02(b)(1) of Regulation S-X, whether Respondents should be ordered to pay a civil 
+penalty pursuant to Section 21B(a) of the Exchange Act, and whether Respondents 
+should be ordered to pay disgorgement pursuant to Sections 21B(e) and 21C(e) of the 
+Exchange Act. 
+ 
+IV. 
+ 
+IT IS ORDERED that a public hearing for the purpose of taking evidence on the 
+questions set forth in Section III hereof shall be convened not earlier than 30 days and not 
+later than 60 days from service of this Order at a time and place to be fixed, and before an 
+Administrative Law Judge to be designated by further order as provided by Rule 110 of the 
+Commission’s Rules of Practice, 17 C.F.R. § 201.110.   
+ 
+IT IS FURTHER ORDERED that Respondents shall file an Answer to the 
+allegations contained in this Order within twenty (20) days after service of this Order, as 
+provided by Rule 220 of the Commission’s Rules of Practice, 17 C.F.R. § 201.220.  
+ 
+If Respondents fail to file the directed answer, or fail to appear at a hearing after 
+being duly notified, the Respondents may be deemed in default and the proceedings may be 
+determined against Respondents 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. 
+ 
+20 
+ 
+IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an 
+initial decision no later than 300 days from the date of service of this Order, pursuant to 
+Rule 360(a)(2) of the Commission’s Rules of Practice.  
+ 
+In the absence of an appropriate waiver, no officer or employee of the Commission 
+engaged in the performance of investigative or prosecuting functions in this or any factually 
+related proceeding will be permitted to participate or advise in the decision of this matter, 
+except as witness or counsel in proceedings held pursuant to notice.  Since this proceeding is 
+not “rule making” within the meaning of Section 551 of the Administrative Procedure Act, it 
+is not deemed subject to the provisions of Section 553 delaying the effective date of any 
+final Commission action. 
+ 
+ By the Commission. 
+ 
+ 
+ 
+        Brent J. Fields 
+        Secretary 
+ 
+ 

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+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77473 / March 30, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3761 / March 30, 2016 
+ 
+INVESTMENT ADVISERS ACT OF 1940 
+Release No. 4360 / March 30, 2016 
+ 
+INVESTMENT COMPANY ACT OF 1940 
+Release No. 32060 / March 30, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17186 
+ 
+ 
+In the Matter of 
+ 
+BURRILL CAPITAL 
+MANAGEMENT, LLC; G. 
+STEVEN BURRILL, CPA; 
+VICTOR A. HEBERT, ESQ.; 
+and HELENA C. SEN, CPA,   
+ 
+Respondents. 
+ 
+ 
+ 
+ 
+ORDER INSTITUTING PUBLIC 
+ADMINISTRATIVE AND CEASE-AND-
+DESIST PROCEEDINGS, PURSUANT TO 
+SECTIONS 4C AND 21C OF THE 
+SECURITIES EXCHANGE ACT OF 1934,  
+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, AND RULE 
+102(e)(1)(iii) 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 Sections 203(e) 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”) against Burrill Capital Management, LLC, and pursuant to Sections 4C and 21C of the 
+Securities Exchange Act of 1934 (“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 
+2 
+ 
+Rules of Practice against G. Steven Burrill, CPA, Victor A. Hebert, Esq., and Helena C. Sen, CPA 
+(collectively, “Respondents”).1    
+ 
+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, 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 and Rule 102(e)(1)(iii) 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 finds2 that: 
+ 
+Summary 
+1.        These proceedings concern the misappropriation of more than $18 million in investor 
+funds by Burrill Capital Management, LLC (“BCM”), a San Francisco-based exempt reporting 
+adviser, and its CEO, G. Steven Burrill (“Burrill”).  From December 2007 through August 2013, 
+Burrill, through BCM, misappropriated approximately $18 million under the guise of “advanced 
+                                                 
+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. 
+ 
+Rule 102(e)(1)(iii) provides, in pertinent part, that: 
+ 
+ The Commission may . . . deny, temporarily or permanently, the privilege of appearing or 
+practicing before it . . . to any person who is found…to have willfully violated, or 
+willfully aided and abetted the violation of any provision of the Federal securities laws or 
+the rules and regulations thereunder. 
+ 
+2 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 
+ 
+management fees” from Burrill Life Sciences Capital Fund III (“Fund III”), a $283 million venture 
+capital fund advised by BCM.  Burrill took this money to cover cash shortages in his non-Fund III 
+related Burrill & Company businesses, pay employee salaries, and to support his lavish lifestyle, 
+including expensive vacations and gifts.   
+2.        By mid-2013, Burrill had misappropriated approximately $13 million more in 
+management fees from Fund III than it was required to pay in fees over the entire life of the fund.  
+Burrill was aided in his scheme by Victor Hebert, Esq. (“Hebert”), Chief Administrative Officer, 
+Managing Director and Chief Legal Officer for the Burrill entities, and Helena Sen, CPA (“Sen”), 
+the Controller and most senior accounting person for the Burrill entities.   
+3.        In August 2013, several members of Fund III’s Investment Committee discovered the 
+misappropriation and notified Fund III’s investors.    
+ 
+Respondents 
+4. Burrill Capital Management, LLC (“BCM”), is a Delaware limited liability 
+company and filed reports as an exempt reporting adviser (“ERA”) with the Commission from 
+April 2012 to January 2015, when it withdrew its ERA registration.  BCM was wholly owned by 
+Steven Burrill and had its principal place of business in San Francisco, California.  BCM acted as 
+the investment adviser to several venture capital funds operated by Burrill, including Fund III.  
+BCM is currently defunct and is no longer authorized to do business in California.   
+ 
+5.        G. Steven Burrill, CPA, age 71, resides in San Francisco, California.  Burrill is a 
+CPA licensed in California (inactive since 1998; delinquent status from 2014).  From 1977 to 
+1993, he was an audit partner at a major auditing firm, leading the high/tech manufacturing group 
+of the firm.  Burrill left the auditing firm in 1993 and formed Burrill & Craves, which later became 
+Burrill & Company, LLC (“Burrill & Co.”).  Initially formed to provide advice to companies on 
+business strategy and partnerships, the firm, among other things, raised venture capital funds 
+focused on the biotechnology industry.  Burrill owned 100% of Burrill & Co. and BCM.  Burrill 
+was a member of Fund III’s General Partner.   
+6.        Victor A. Hebert, age 78, resides in Piedmont, California and is a licensed attorney 
+in California.  Hebert worked at Burrill & Co. from October 2008 to February 2014 as Chief 
+Administrative Officer, Managing Director, and Chief Legal Counsel.  From 2009 through 2013, 
+he also served as the Chair of Fund III’s Investment Committee and oversaw Burrill & Co.’s 
+accounting department.  From October 2011 until he was removed, Hebert was a member of Fund 
+III’s General Partner.  Prior to joining Burrill & Co., Hebert practiced law with a San Francisco 
+based law firm for 46 years, where he was a partner for over 25 of those years.  That firm dissolved 
+in 2008.   
+7.        Helena C. Sen, CPA, age 62, resides in Orinda, California.  Sen was a CPA 
+licensed in California from 1989 (inactive since early in her employment with Burrill & Co.; 
+surrendered her license in November 2015).  From April 2006 through March 2014, Sen was 
+Burrill & Co.’s Controller and the most senior person in its accounting department.  Sen reported 
+to Hebert in his role as Chief Administrative Officer.   
+4 
+ 
+Other Relevant Entities 
+8.        Burrill Life Sciences Capital Fund III, LP (“Fund III” or the “Fund”) is a 
+private pooled investment vehicle and a Delaware limited partnership formed by Burrill in 2006.  
+Fund III is a $283 million, 10-year venture capital fund that invests in life sciences companies, 
+globally, from early stage companies to public companies.    Burrill Life Sciences Capital Fund III 
+Partners, LP was the General Partner (“GP”) of Fund III during the relevant time period and BCM 
+served as Fund III’s investment adviser.  Fund III was initially set to expire in February 2016, but 
+was extended in March 2015, to December 2017.  
+9.        Burrill Life Sciences Capital Fund III Partners, LP, (“GP”) is a Delaware 
+limited partnership and was the General Partner of Fund III during the relevant time period.  It was 
+removed as the General Partner, effective March 2014.  The members of the GP were Burrill, 
+Hebert (from October 2011) and a group of three other individuals who were not implicated in 
+Burrill’s scheme.  The GP was entitled to Fund III’s management fees, or alternatively, it could 
+designate another entity to receive the fees.  In exchange for management fees, the GP was 
+responsible for managing, controlling and conducting the affairs of Fund III.  The GP selected 
+BCM to provide advisory services to Fund III.   
+10. Burrill & Company, LLC (“Burrill & Co.”) is a Delaware limited liability 
+company created in 1993 and is wholly owned by Burrill.  Burrill & Co. was the holding company 
+for Burrill’s several other business ventures, including his media group, merchant banking group 
+and Burrill’s personal ownership interests in the Burrill venture capital funds, including Fund III.  
+Burrill & Co. is currently nonoperational.  Burrill & Co. did not participate in the management of 
+Fund III. 
+Facts 
+     A.  Background 
+ 
+11.        In 2006, Burrill formed Fund III, a $283 million venture capital fund focusing on 
+investments in life sciences companies, globally, from early stage companies to public companies 
+(known as “portfolio companies”).  Fund III had a 10-year lifespan, and originally was set to expire 
+in February 2016.  Fund III is structured as a Limited Partnership, with Burrill Life Sciences 
+Capital Fund III Partners, LP serving as its GP.  Fund III’s investors are its limited partners, with 
+the six largest investors making up the Limited Partners Advisory Committee (“LPAC”).  The 
+investors include state pension funds, public companies and institutional investors.  
+ 
+12.        Fund III is governed by a Limited Partnership Agreement (“LPA”), which 
+delineates, among other things, the manner and amount of management fees the GP is entitled to 
+from Fund III for managing the fund.  According to the LPA, the GP (or its designee) is entitled to 
+2% of committed capital for six years payable on the first day of each fiscal quarter for services to 
+be rendered during that quarter (and then 2% of cost basis of the investments, plus reserves, after 
+the initial 6 years).  From the management fee, as enumerated in the LPA, the GP was to cover 
+expenses in connection with the management of the fund (e.g., salaries, travel, wages, rent).  
+5 
+ 
+Although Fund III’s GP was technically entitled to receive the management fee, in practice this fee 
+was deposited in several different Burrill entities’ bank accounts, primarily BCM’s.  The LPA did 
+not authorize Burrill to take management fees in advance, nor did it authorize Burrill to take loans 
+from Fund III.  In addition, the LPA explicitly prohibited any actions that would be detrimental to 
+the activities and affairs of the fund and required that all conflicts of interest promptly be disclosed 
+to the LPAC.  Burrill signed the LPA in his capacity as a member of the GP.   
+ 
+13.        At the outset of Fund III, each of its investors committed a specific amount of 
+capital and paid a percentage of this capital commitment to make initial investments in Fund III’s 
+portfolio companies.  The investors contractually agreed to pay the remainder of their capital 
+commitment over the life of Fund III through periodic capital call demands made by the GP.  
+According to the LPA, this capital would then be used to invest in Fund III’s portfolio companies 
+and pay Fund III management fees as well as certain other Fund III expenses.   
+ 
+14.        From late 2008 through early 2014, members of Fund III’s Investment Committee, 
+which was comprised of Burrill, Hebert, and three other individuals, met multiple times a month to 
+determine which portfolio companies Fund III should invest in as well as determine the amount of 
+capital needed, in order to make additional follow-on investments in the portfolio companies.  
+After these meetings, Burrill and Sen, on behalf of Fund III’s GP, periodically sent capital call 
+demand letters to Fund III’s limited partners requiring them to fund the remaining portions of their 
+capital commitment so that Fund III could make additional investments in the portfolio companies.   
+ 
+15.  Burrill operated a number of entities under the Burrill enterprise including other 
+venture capital funds as well as merchant banking and media businesses.  Hebert and Sen were 
+employed by BCM and, although they provided services to BCM and Fund III, they also provided 
+services to other Burrill-related entities.  Burrill used BCM as the operating entity through which 
+he received income from, and paid expenses for, all of the various Burrill-related entities – 
+including expenses that were wholly unrelated to Fund III’s business.  He also took draws from 
+BCM, and charged personal expenses to, BCM, which were booked as additions to his draws.  
+ 
+16.  BCM was Fund III’s investment adviser.  Burrill wholly owned, and controlled, BCM.  
+As an investment adviser, BCM owed a fiduciary duty to its clients, one of which was Fund III.  
+This required BCM to act in the utmost good faith, and put the interests of its clients ahead of its 
+own.  See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963).  This is so even 
+though BCM advised venture capital funds and filed reports as an “exempt” reporting adviser.   
+ 
+B.   Burrill Misappropriates, and Hebert and Sen Aid and Abet the Misappropriation of, 
+Fund III’s Money  
+ 
+17.        In late 2007, BCM began to face cash flow shortages.  According to BCM’s 
+accounting records, the expenses for the Burrill-related entities, as well as Burrill’s personal 
+expenses, far exceeded the revenue his businesses were generating.  In late 2007, Sen met with 
+Burrill and told him that due to BCM’s cash deficit, BCM was unable to make payroll or pay 
+BCM’s expenses for that period.  Burrill instructed Sen to take $400,000 from Fund III to make up 
+6 
+ 
+the cash shortfall and to treat the transaction as an “advance on management fees” that the GP 
+expected to earn in the first quarter of 2008.  Burrill told Sen the advance management fees were 
+“strictly a timing issue” (because BCM was entitled to take the management fees four days later on 
+January 1, 2008).    
+ 
+18.        Sen had read the LPA, and understood that Fund III was supposed to pay 
+management fees to the GP at the beginning of each quarter for services to be provided to the fund 
+during that quarter.  Nonetheless, at Burrill’s direction, Sen transferred money from Fund III’s 
+bank account to BCM.  She recorded the transfer as a “prepaid expense” in Fund III’s books and 
+records.   
+ 
+19.        In mid-2008, Sen told Burrill that BCM was again short of cash, and unable to pay 
+its expenses.  BCM’s expenses included salaries and Burrill’s draws and personal expenses.  
+Burrill told Sen to cover the shortfall by taking an advance on management fees from Fund III.  
+Sen followed Burrill’s instruction and again booked the management fee advance to the general 
+ledger as a prepaid expense.  From that point forward through July 2013, on many occasions when 
+BCM faced a cash shortfall in a quarter, Sen acted under Burrill’s directive to cover the deficit by 
+taking money from Fund III, because it – as compared to all of Burrill’s other entities – had the 
+most money available to it in the form of committed, but still-uncalled capital.   
+ 
+20.        Hebert joined Burrill & Co. in October 2008 as Chief Administrative Officer, Chief 
+Legal Officer and Managing Director, and learned about Burrill’s practice of taking money from 
+Fund III to fund BCM’s cash shortages.  Sen began reporting to Hebert in late 2008 and in the first 
+part of 2009, she told Hebert about the practice of taking money from Fund III to meet BCM’s 
+cash flow shortages, including Sen’s and Hebert’s own salaries and Burrill’s draws.  Hebert never 
+told Sen to stop taking money from Fund III, and the practice did not stop until Fund III ran out of 
+money. 
+ 
+C.   Cash Flow Meetings 
+ 
+21.        From early 2009 through July 2013, Sen, Hebert and Burrill met frequently to 
+discuss the Burrill enterprise’s cash flow.  At these meetings, Sen informed Hebert and Burrill 
+about the various Burrill entities’ cash flow deficits.  The three discussed the cash shortages and 
+decided to cure them by continuing to take money from Fund III, and book it to the general ledger 
+as prepaid expenses.  Sen regularly informed Burrill and Hebert at the cash flow meetings how 
+much money they had taken under the guise of advanced management fees and also kept track of 
+the transfers on a document referred to internally as a “cash needs spreadsheet”.  BCM’s 
+accounting manager provided these spreadsheets to Burrill when he signed the Fund III cash 
+transfer authorizations.  On at least one occasion, Burrill directed Sen to take money from Fund III 
+and transfer it to his and his wife’s joint bank account, when there were no other funds available to 
+meet Burrill’s personal monthly draw, which he collected for providing services to Fund III and his 
+other non-Fund III related entities.  In response to Burrill’s directive, Sen transferred money from 
+Fund III to BCM and then to Burrill and his wife’s joint bank account.  
+ 
+7 
+ 
+22.        By approximately the first quarter of 2012, the amount of money Burrill had taken 
+from Fund III exceeded the total amount of management fees that the GP could earn over the life 
+of the fund, which was set to expire in February 2016.  At that point, in Q1 2012, no further 
+management fees were due to the GP from Fund III.  Burrill, Sen and Hebert, continued to take 
+money from Fund III under the guise of advance management fees.  By May 2013, the money 
+Burrill had taken exceeded the total management fees that could be earned over Fund III’s life by 
+at least $13 million – approximately four years’ worth of fees.  Burrill used the $13 million to pay 
+for, among other things, salaries, rent, charitable contributions, Burrill’s family vacation to St. 
+Barth’s and Paris, jewelry, gifts and travel for Burrill’s girlfriend, gifts for Burrill’s wife, private 
+jets and private car service for Burrill and his family members. 
+ 
+      D.   Capital Calls and The “Cushion” 
+ 
+23.        Not only did Burrill, Hebert, and Sen misappropriate or aid and abet the 
+misappropriation of Fund III’s existing cash, they also asked investors for more money than was 
+needed for Fund III’s follow-on investments so that they could continue to fund BCM’s operations.  
+From early 2009 through approximately early 2014, Hebert led Fund III’s weekly Investment 
+Committee meetings.  After the meetings, Hebert told Sen how much money the committee agreed 
+was needed for follow-on investments so that Sen could prepare the capital call letters.  Sen drafted 
+the capital call letters, which specifically stated that the “proceeds of the capital call would be used 
+for [a particular investment]” or for general “follow-on investments” in Fund III’s portfolio 
+companies.  With Burrill’s permission, Sen inserted Burrill’s electronic signature into the capital 
+call letters and sent them to the investors.   
+ 
+24.        In February 2009, Sen began inflating the amounts included in the capital call 
+demand letters above what the Investment Committee determined was needed for follow-on 
+investments and the then due management fees and expenses.  Sen called the inflated excess 
+portion of the capital call the “cushion.”  This “cushion” ranged from $50,000 to $1.5 million on 
+the applicable capital calls.  Sen, knowing Burrill expected her to have excess cash on hand to 
+advance fees, added a “cushion” so there would be sufficient money in Fund III’s bank account for 
+Burrill to pay, among other things, BCM’s operating expenses (including her and Hebert’s salaries 
+as well as non-Fund III related expenses) and Burrill’s draws, personal expenses and Fund 
+management fees and expenses.   
+ 
+25.        Sen told Hebert about the excess portion of the capital call in 2009.  Sen, Hebert 
+and Burrill discussed the excess at the cash flow meetings, after which, Burrill, with Hebert’s 
+knowledge, called in millions of dollars in additional capital from Fund III’s investors.  Burrill and 
+Hebert knew, or were reckless in not knowing, that the money called from Fund III investors 
+would be used in part to continue funding BCM’s cash flow shortages, significant portions of 
+which were wholly unrelated to Fund III’s business and included propping up Burrill’s other 
+business ventures that were operating at a loss.  Neither of them disclosed the “cushion” to Fund 
+III’s investors, its Investment Committee, or any other members of Fund III’s GP.  Moreover, 
+Burrill and Sen knew, or should have known, that the capital call letters misled investors into 
+8 
+ 
+thinking that the capital demanded was used only for follow-on investments and currently due 
+management fees and expenses.  
+ 
+26.        From 2008 until August 2011, in addition to preparing the capital call letters, Sen 
+signed bank transfers authorizing cash transfers from Fund III to BCM to cover BCM’s expenses 
+(as well as Burrill’s personal expenses).  In August 2011, Sen stopped signing the transfer 
+authorizations because she was uncomfortable with how high the advanced fee balance had grown 
+(approximately $12 million).  From that point forward, Burrill became the primary signer of the 
+bank transfer authorizations.  
+ 
+      E.   Delayed Milestone Payments to Investors  
+ 
+27.        Burrill, with Sen’s assistance, also funded BCM’s cash deficits by delaying the 
+distributions of portfolio company milestone payments and stock payments to Fund III’s investors.  
+Fund III periodically received payments from Fund III’s portfolio companies as they met specific 
+predetermined milestones.  Burrill and Sen, on behalf of the GP, were responsible for distributing 
+those payments to Fund III’s investors based on their ownership percentage in Fund III, but Burrill 
+– with Sen’s assistance – instead used that money to pay BCM’s expenses, including expenses that 
+were wholly unrelated to Fund III’s business.     
+ 
+28.        In September 2012, Sen emailed Burrill that BCM had no cash available to make 
+payroll and stated “[t]here is only one other option, which is to delay a distribution” of the 
+approximately $1 million in milestone payments paid into Fund III and awaiting distribution to 
+investors.  Burrill directed Sen to withdraw the milestone payments from Fund III, and she did.  
+Sen recorded the withdrawal in Fund III’s prepaid expense account.  The following month, in order 
+to make the required milestone payments to Fund III investors, Sen added a $1 million “cushion” 
+to the October 31, 2012 capital call demand.  Burrill and Sen then used the “cushion” to pay the 
+investors their milestone payment with the investors’ own money.  None of this was disclosed to 
+investors.  
+ 
+F.  The Scheme is Revealed to Investors 
+ 
+29.        In late August of 2013, Fund III’s Investment Committee members became aware 
+that virtually all the committed capital in Fund III had already been called in and spent.  They 
+called an emergency meeting of Fund III’s Investment Committee.  
+ 
+30.        On September 4, 2013, Burrill and Hebert met with the Investment Committee to 
+discuss Fund III’s cash reserves.  At Burrill’s direction, Sen created a spreadsheet showing how the 
+approximately $18 million taken under the guise of advanced fees was spent (including Burrill’s 
+personal expenses).   During the meeting, Burrill admitted that he had taken money from Fund III 
+to develop other venture funds under the Burrill brand.  He said he owed Fund III approximately 
+$7.8 million and Sen passed out a spreadsheet showing approximately $7.8 million was spent on 
+other venture funds’ development costs.  Burrill directed Sen not to hand out the other portion of 
+the spreadsheet which detailed how the remainder of the fees were spent, which included Burrill’s 
+personal expenses.  
+9 
+ 
+ 
+31.        Before October 2013, Fund III’s investors did not know that Burrill had 
+misappropriated approximately $18 million from the Fund under the guise of “advance 
+management fees,” nor did they know that Burrill had taken $13 million more from Fund III than 
+the GP was entitled to earn over the entire life of the Fund.  On October 27, 2013, three of the 
+Investment Committee members sent a letter to the Fund III LPAC and informed them about the 
+misappropriation.  The LPAC subsequently removed the GP (which included Burrill and Hebert) 
+from managing Fund III, effective March 2014.  In March of 2014, Hebert resigned from Burrill & 
+Co. and Sen’s position with Burrill & Co. was eliminated.  
+ 
+32. All told, Burrill used approximately $4.6 million of the money he misappropriated 
+from Fund III to pay for his cash draws and personal expenses, including family vacations to St. 
+Barth’s and Paris, jewelry from Tiffany&Co., travel, charitable contributions, private jets, private 
+cars, and gifts.   
+ 
+Violations 
+ 
+33. As a result of the conduct described above, BCM and Burrill willfully violated, and 
+Hebert willfully aided and abetted and caused, BCM’s and Burrill’s violations of Section 206(1) of 
+the Advisers Act which prohibits an investment adviser from employing any device, scheme, or 
+artifice to defraud any client or prospective client.  
+ 
+34. As a result of the conduct described above, BCM and Burrill willfully violated, and 
+Hebert and Sen willfully aided and abetted and caused, BCM’s and Burrill’s violations of Section 
+206(2) of the Advisers Act, which prohibits an investment adviser from engaging in any 
+transaction, practice or course of business which operates as a fraud or deceit upon any client or 
+prospective client.3  
+ 
+35.        As a result of the conduct described above, BCM and Burrill willfully violated, and 
+Hebert and Sen willfully aided and abetted and caused, BCM’s and Burrill’s violations of Section 
+206(4) of the Advisers Act and Rule 206(4)-8 thereunder, which prohibit an investment adviser to 
+a pooled investment vehicle from making any untrue statement of a material fact necessary to 
+make the statements made, in light of the circumstances under which they were made, not 
+misleading to any investor or prospective investor in the pooled investment vehicle, or engaging in 
+any act, practice, or course of business which is fraudulent, deceptive, or manipulative with respect 
+to an investor or prospective investor in a pooled investment vehicle.   A violation of 206(4) and 
+the rules thereunder does not require scienter.  SEC v. Steadman, 967 F. 2d 636, 647 (D.C. Cir. 
+1999). 
+ 
+                                                 
+3 Scienter is required for violations of Section 206(1), but negligence is sufficient for violations 
+of Sections 206(2) or 206(4) and Rule 206(4)-8 thereunder.  See Steadman v. SEC, 603 F.2d 
+1126, 1134 (5th Cir. 1979); SEC v. Daifotis, 874 F. Supp. 2d 870, 887 (N.D. Cal. June 12, 2012).   
+10 
+ 
+IV. 
+ 
+ In view of the foregoing, the Commission deems it appropriate and in the public interest to 
+impose the sanctions agreed to in Respondents’ Offers. 
+ 
+ Accordingly, pursuant to Sections 203(e), 203(f) and 203(k) of the Investment Advisers 
+Act , and Section 9(b) of the Investment Company Act and Sections 4C and 21C of the Exchange 
+Act and 102(e)(1)(iii) of the Commission’s Rules of Practice,  it is hereby ORDERED that: 
+ 
+A. Respondents BCM, Burrill and Hebert cease and desist from committing or causing 
+any violations and any future violations of Sections 206(1) of the Advisers Act. 
+  
+B. Respondents BCM, Burrill, Hebert and Sen cease and desist from committing or 
+causing any violations and any future violations of Section 206(2) of the Advisers 
+Act. 
+ 
+C.  Respondents BCM, Burrill, Hebert and Sen 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)-8 thereunder. 
+ 
+D. Respondents Burrill, Hebert and Sen be, and hereby are: 
+ 
+(1) barred from association with any broker, dealer, investment adviser, 
+municipal securities dealer, municipal advisor, transfer agent, or 
+nationally recognized statistical rating organization; 
+ 
+(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.   
+ 
+E. Respondent BCM is censured.   
+ 
+F.        Respondents Burrill and Sen are denied the privilege of appearing or practicing 
+before the Commission as accountants. 
+ 
+G.        Respondent Hebert is denied the privilege of appearing or practicing before the 
+Commission as an attorney.     
+  
+H.        Any reapplication for association by the Respondents 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 
+11 
+ 
+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. 
+ 
+I. Respondents Burrill and BCM shall, jointly and severally, pay disgorgement of 
+$4,600,000.00, and prejudgment interest of $185,000.00 to the Securities and Exchange 
+Commission (for a total of $4,785,000.00).  $2,125,000.00 is due within 10 days of the date of this 
+Order.  The remaining $2,660,000.00 is due within 90 days of the date of this Order; provided that 
+any payments Respondents Burrill and BCM make directly to Fund III during this 90-day period, 
+reflected by evidence acceptable to the Commission staff, will be credited, dollar-for-dollar, 
+towards the satisfaction of Respondents Burrill’s and BCM’s disgorgement and prejudgment 
+interest obligations.   
+ 
+J. To the extent payment of $4,600,000.00 in disgorgement and $185,000.00 
+prejudgment interest is not paid to the Commission (or credited dollar-for-dollar as provided in 
+Paragraph I) within 90 days of this Order, all amounts not paid (or credited) will remain due and 
+payable to the Commission and additional interest shall accrue pursuant to SEC Rule of Practice 
+600 from the date of the Order.   
+ 
+K. Respondents Burrill and BCM shall, jointly and severally, within 10 days of the 
+entry of this Order, pay a civil money penalty in the amount of $1,000,000.00 to the Securities and 
+Exchange Commission.  If timely payment of a civil money penalty is not made, additional interest 
+shall accrue pursuant to 31 U.S.C. § 3717. 
+ 
+L.        Respondent Hebert shall, within 10 days of the entry of this Order, pay a civil 
+money penalty in the amount of $185,000.00 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.  
+ 
+M.       Respondent Sen shall pay a civil monetary penalty in the amount of $90,000.00 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 shall be made in the 
+following installments:  (1) Sen will make an initial payment of $35,000 within 10 days of the 
+entry of the Order; (2) within 90 days of the entry of this Order, $13,750; (3) within 180 days of 
+the entry of this Order, $13,750; (4) within 270 days of the entry of this Order, $13,750; and (4) 
+within a year of the entry of this Order, $13,750.  If any payment is not made by the date the 
+payment is required by this Order, the entire outstanding unpaid 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:   
+ 
+12 
+ 
+(1) Respondent may transmit payment electronically to the Commission, which 
+will provide detailed ACH transfer/Fedwire instructions upon request;  
+ 
+(2) Respondent may make direct payment from a bank account via Pay.gov 
+through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or  
+ 
+(3) Respondent may pay by certified check, bank cashier’s check, or United 
+States postal money order, made payable to the Securities and Exchange 
+Commission and hand-delivered or mailed to:  
+ 
+Enterprise Services Center 
+Accounts Receivable Branch 
+HQ Bldg., Room 181, AMZ-341 
+6500 South MacArthur Boulevard 
+Oklahoma City, OK 73169 
+ 
+Payments by check or money order must be accompanied by a cover letter identifying BCM, 
+Burrill, Hebert and/or Sen as a Respondent in these proceedings, and the file number of these 
+proceedings; a copy of the cover letter and check or money order must be sent to Erin Schneider, 
+Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, 44 
+Montgomery Street, Suite 2800, San Francisco, CA 94104.   
+ 
+ N. For good cause shown, Commission staff may extend any of the payment dates set 
+forth in this Order.   
+ 
+O. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair 
+Fund is created for the disgorgement, prejudgment interest and penalties referenced in paragraphs I, 
+K, L and M 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, 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. 
+ 
+ P. After receipt of the disgorgement, interest, and penalties referenced in paragraphs I, 
+K and L above (distribution fund), the Commission shall, within 30 days after receipt of the funds, 
+13 
+ 
+pay such funds to Fund III which suffered a net harm as a result of the violations described in this 
+Order.  With respect to payments received pursuant to paragraph M, the Commission shall pay such 
+funds to Fund III on a timely basis.  Commission staff will seek the appointment of a tax 
+administrator as the ordered payment constitutes a qualified settlement fund under section 468B(g) 
+of the Internal Revenue Code, 26 U.S.C. § 468B(g), and related regulations, 26 C.F.R. §§ 1.468B-1 
+through 1.468B-5. Taxes, if any, and related administrative expenses will be paid from the 
+distribution fund.  
+ 
+ Q. After receipt of the penalty payments referenced in paragraph M above (distribution 
+fund) and any additional payment received pursuant to paragraph M, the Commission shall, on a 
+timley basis, pay such funds to Fund III which suffered a net harm as a result of the violations 
+described in this Order.  Commission staff will seek the appointment of a tax administrator as the 
+ordered payments constitute a qualified settlement fund under section 468B(g) of the Internal 
+Revenue Code, 26 U.S.C. § 468B(g), and related regulations, 26 C.F.R. §§ 1.468B-1 through 
+1.468B-5. Taxes, if any, and related administrative expenses will be paid from the distribution fund. 
+ 
+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 
+ 

raw/aaer/2016/AAER-3762.txt

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+ 
+ 
+UNITED STATES OF AMERICA 
+before the 
+SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77532 / April 5, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3762 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17198
+       
+      :  
+ :  
+ :   
+In the Matter of : ORDER INSTITUTING ADMINISTRATIVE 
+      : PROCEEDINGS PURSUANT TO RULE 
+JAMES A. WHITE,    : 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 
+A. White (“Respondent” or “White”) 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 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. White, age 72, is a resident of Midlothian, Virginia.  From October 2008 
+until April 2011, White was the Chief Financial Officer of Superior Bancorp (“Superior”), a bank 
+holding company with a class of securities that was registered with the Commission pursuant to 
+Section 12(b) of the Securities Exchange Act of 1934 (“Exchange Act”).  White has never held any 
+securities licenses and has never been registered with the Commission in any capacity.   
+ 
+2. On January 13, 2016, the Commission filed a complaint against White and 
+other named defendants, in SEC v. White, et al. (Civil Action No. 4:16-CV-00023), in the United 
+States District Court for the Northern District of Florida.  The Commission’s complaint alleged, 
+among other things, that from at least March 2009 until at least November 2010, White and the 
+other named defendants actively participated in an accounting fraud at Superior and its primary 
+operating division, Superior Bank.  The Commission’s complaint further alleged, among other 
+things, that White and the other named defendants engaged in schemes to avoid impairing loans 
+appropriately or increasing Superior Bank’s allowance for loan and lease losses.  The 
+Commission’s complaint further alleged, among other things, that White and the other named 
+defendants’ schemes resulted in Superior filing materially false and misleading financial 
+statements in, among other filings, Superior’s Form 10-K for fiscal year 2009 and in its quarterly 
+reports for fiscal years 2009 and 2010.  The Commission’s complaint further alleged, among other 
+things, that White, in his capacity as Chief Financial Officer, knowingly signed false Sarbanes-
+Oxley certifications, knowingly made misrepresentations to Superior’s outside auditor, and 
+knowingly circumvented Superior’s internal accounting controls.  
+  
+3. Without admitting or denying the allegations within the Commission’s 
+complaint, White consented to an order, entered by the United States District Court on March 23, 
+2016, permanently enjoining White from future violations of Sections 17(a) of the Securities Act of 
+1933 (“Securities Act”), and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 
+13a-14, 13b2-1, and 13b2-2 thereunder, and from aiding and abetting violations of Section 17(a) of 
+the Securities Act, Sections 10(b) and 13(a) of the Exchange Act, and Rules 10b-5, 12b-20, and 
+13a-13 thereunder.  
+ 
+ 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 White’s Offer. 
+ 
+ Accordingly, it is hereby ORDERED, effective immediately, White is suspended from 
+appearing or practicing before the Commission as an accountant.   
+ 
+ By the Commission. 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 
+ 

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+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No.  77542 / April 6, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3763 / April 6, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17201 
+ 
+ 
+ 
+In the Matter of 
+ 
+Thakkar CPA, PLLC,  
+Gregory Scott Williford, CPA, 
+Mahesh Thakkar, CPA, and 
+Poorvesh Thakkar,  
+ 
+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 and in the 
+public interest 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) of the Commission’s Rules of Practice2 against Thakkar CPA, PLLC 
+                                              
+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) provides, in relevant part: 
+ 2 
+(“Thakkar CPA”), Gregory Scott Williford (“Williford”), and Mahesh Thakkar; and that cease-
+and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Exchange Act 
+against Poorvesh Thakkar.   
+ 
+II. 
+ 
+ In anticipation of the institution of these proceedings, the Respondents have submitted 
+Offers of Settlement (the “Offers”) which the Commission has determined to accept.  Solely for 
+the purpose of these proceedings and any other proceedings brought by or on behalf of the 
+Commission, or to which the Commission is a party, and without admitting or denying the findings  
+herein, except as to the Commission’s jurisdiction over them and the subject matter of these 
+proceedings, which are admitted, and except as provided herein in Section V, Respondents consent 
+to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings 
+Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934, and Rule 102(e) of the 
+Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a 
+Cease-and-Desist Order (“Order”), as set forth below.   
+ 
+III. 
+ 
+ On the basis of this Order and Respondents’ Offers, the Commission finds3 that: 
+ 
+A. SUMMARY 
+ 
+1. These proceedings arise out of Thakkar CPA, PLLC d/b/a The Hall Group CPAs 
+(“Thakkar CPA” or “successor firm”) issuance of 15 public company audit reports while it was not 
+registered with the Public Company Accounting Oversight Board (“PCAOB”).  Thakkar CPA’s 
+audit reports misrepresented that the firm was properly licensed and registered with the PCAOB 
+and falsely stated that it conducted audits in accordance with PCAOB standards.  Under 
+Commission rules and applicable state and federal law, Thakkar CPA was unqualified to issue the 
+                                                                                                                                                    
+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 . . . 
+*** 
+(i) not to possess the requisite qualifications to represent others; or  
+*** 
+(ii) to have engaged in unethical or improper professional conduct; or  
+*** 
+(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.  
+ 
+ 3 
+reports because it was not registered with the PCAOB and was not licensed in Texas to practice 
+public accountancy as The Hall Group CPAs.  Additionally, Thakkar CPA did not conduct its 
+audits in accordance with professional standards. 
+   
+2. In November 2013, Mahesh Thakkar, with the assistance of his son Poorvesh, formed 
+Thakkar CPA to acquire certain assets of David S. Hall, P.C. d/b/a The Hall Group CPAs 
+(“predecessor firm”), including the client list and the seller’s rights to the name The Hall Group 
+CPAs. They completed the purchase and sale transaction, and hired Scott Williford in January 
+2014 to manage the firm’s audit practice.  Between January 2014 and January 2015, Williford 
+authorized Thakkar CPA to issue 15 audit reports as The Hall Group CPAs and conducted 30 
+reviews of interim financial information included in issuers’ periodic Commission filings.  But 
+Williford and Mahesh knew, or were at least reckless in not knowing, and Poorvesh knew, or 
+should have known, that Thakkar CPA was not licensed in Texas to practice public accountancy as 
+The Hall Group CPAs and was not registered with the PCAOB.  And, as the engagement partner 
+for each of Thakkar CPA’s engagements, Williford failed to comply with PCAOB standards when 
+he authorized the firm to issue an audit report without an engagement quality review for any of the 
+firm’s audits or reviews.  In addition, Thakkar CPA improperly provided audit services to 
+DynaResource, Inc., one of the 14 issuers, after David Hall joined DynaResource, Inc. as CFO in 
+April 2014.  Thakkar CPA lacked the independence required of an auditor for the DynaResource, 
+Inc. engagements because Thakkar CPA delivered a $313,516 buyout promissory note to David S. 
+Hall, P.C. d/b/a The Hall Group CPAs which remained outstanding even after Hall became 
+DynaResource, Inc.’s CFO. 
+ 
+B. RESPONDENTS 
+ 
+3.  Thakkar CPA is a Texas corporation formed to acquire certain assets of David S. 
+Hall, P.C., a Texas-based, PCAOB-registered accounting firm that was licensed to practice public 
+accountancy in Texas as The Hall Group CPAs.  Between at least January 6, 2014 (the “Closing 
+Date”) and January 29, 2015, Thakkar CPA issued 15 audit reports for 14 public companies and 
+conducted 30 reviews of interim financial information for 11 public companies.  Thakkar CPA is 
+neither registered with the PCAOB nor licensed in Texas to practice public accountancy as The 
+Hall Group CPAs at any time.  Although Thakkar CPA was licensed to practice public 
+accountancy in Texas as “Thakkar CPA,” it has not practiced under this name and its license 
+expired on June 30, 2015. 
+ 
+4. Gregory Scott Williford, age 55, is a CPA licensed in Texas and was previously 
+licensed in Missouri and Oklahoma.  From approximately January 17, 2014 until he resigned on 
+January 29, 2015, Williford functioned as the Managing Partner of, but had no ownership in, 
+Thakkar CPA.  He served as the engagement partner on each of Thakkar CPA’s engagements.  
+Prior to joining Thakkar CPA, he was a non-equity Director from 2010 to 2013 and an equity 
+partner from 2003 to 2010 of a Big Four firm and, prior to that, a partner at another large public 
+accounting firm. 
+ 
+5. Mahesh Thakkar, age 64 and a resident of Frisco, Texas, is a CPA licensed in Texas 
+and a Chartered Accountant in India.  He is the Founding Partner and sole shareholder of Thakkar 
+ 4 
+CPA, but did not actively participate in providing audit services to Thakkar CPA’s clients.  He is 
+Poorvesh Thakkar’s father. 
+ 
+6. Poorvesh Thakkar, age 34 and a resident of Frisco, Texas, is Thakkar CPA’s Vice 
+President of Operations.  He is not an accountant.  He has no known disciplinary history.  He is 
+Mahesh Thakkar’s son. 
+ 
+C. OTHER RELEVANT ENTITY AND INDIVIDUAL 
+ 
+7. David S. Hall, P.C. is a Texas corporation which was licensed to practice public 
+accountancy in Texas as The Hall Group CPAs from April 5, 2006 through May 31, 2014.  
+Thakkar CPA acquired certain assets of David S. Hall, P.C. on or about January 6, 2014, after 
+which the firm ceased operations.  On March 25, 2015, David S. Hall requested that David S. Hall, 
+P.C.’s registration of The Hall Group, CPAs with the PCAOB be withdrawn. 
+ 
+8. David S. Hall, age 57 and a resident of Lewisville, Texas is a CPA licensed in Texas.  
+Hall owns 100% of David S. Hall, P.C.  On April 15, 2014, Hall became the CFO of 
+DynaResource, Inc., whose auditor was David S. Hall, P.C. d/b/a The Hall Group CPAs until 
+January 29, 2014 and, thereafter, Thakkar CPA d/b/a The Hall Group CPAs. 
+ 
+D. FACTS 
+ 
+i. Thakkar CPA Begins Doing Business as The Hall Group CPAs. 
+ 
+9. Thakkar CPA began operating in January 2014 after acquiring certain assets of David 
+S. Hall, PC d/b/a The Hall Group CPAs and hiring Williford as its managing partner.  Williford 
+was the only CPA actively involved in Thakkar CPA’s day-to-day operations and audit work until 
+July 2014, when the firm hired an audit manager.  After Williford resigned in January 2015, 
+Thakkar CPA advertised but did not fill an audit partner position opening, and has since ceased 
+providing audit services to public companies. 
+ 
+10. Before agreeing to sell the predecessor firm’s assets, Hall insisted that Thakkar CPA 
+hire an experienced CPA to manage the firm’s audit services to be provided on public company 
+engagements.  Poorvesh found Williford’s resume online and interviewed him.  Poorvesh is not a 
+CPA nor does he have auditing experience.  And though he believed Williford was qualified based 
+on his public accountancy experience, he did not probe the details of Williford’s experience.  For 
+instance, Poorvesh was unaware that Williford did not audit public companies after 2010, when he 
+stepped down as partner to become a director at a Big Four firm.  Indeed, the Thakkars took 
+limited steps before offering him the job to ensure that Williford possessed a current or sufficient 
+understanding of PCAOB standards, Commission regulations or other matters for which he would 
+be responsible.  Williford’s duties and responsibilities as managing partner included establishing 
+the firm’s quality control policies and procedures, hiring, training, and supervising audit personnel, 
+soliciting new business and serving as the engagement partner for all audit and review 
+engagements. 
+ 
+ 5 
+11. Poorvesh Thakkar served as Thakkar CPA’s Vice President of Operations, in which 
+role he was responsible for administrative oversight of the firm, human resources, cash 
+management, and regulatory matters, including Thakkar CPA’s registration with the PCAOB and 
+TSBPA licensing.4  Poorvesh relied on Williford to conduct audit services in accordance with 
+PCAOB standards and rules.   
+ 
+12. After the Closing Date, Hall introduced Williford to the predecessor firm’s clients to 
+facilitate the successor firm in obtaining their audit engagements for 2014 but was otherwise 
+uninvolved in the successor firm’s 2014 audit and review engagements.  Poorvesh Thakkar 
+believed that doing business as The Hall Group CPAs made it less likely that a client would change 
+to a different auditor.  Indeed, issuers included audit reports on their current and prior year 
+financial statements signed by “The Hall Group CPAs” without any distinction between 
+predecessor David S. Hall, P.C. d/b/a The Hall Group CPAs and successor Thakkar CPA d/b/a The 
+Hall Group CPAs.     
+ 
+ii. Thakkar CPA Was Not Registered with the PCAOB 
+ 
+13. Sarbanes-Oxley, as amended, and PCAOB rules require public accounting firms to be 
+PCAOB-registered to prepare or issue audit reports with respect to any issuer, broker, or dealer.5  
+Williford, Mahesh Thakkar, and Poorvesh Thakkar each understood that Thakkar CPA was 
+required to be registered with the PCAOB to prepare or issue an audit report with respect to any 
+issuer.  Indeed, Thakkar CPA’s primary objective in acquiring The Hall Group CPAs – a PCAOB-
+registered accounting firm – was to succeed to the firm’s registration and immediately provide 
+public company auditing services.  However, Thakkar CPA never registered with the PCAOB. 
+ 
+14. Williford believed that Mahesh and Poorvesh Thakkar registered Thakkar CPA with 
+the PCAOB but did nothing to confirm the registration status and did not directly communicate 
+with PCAOB staff at any time.  By May 2014, however, Williford learned of negative inspection 
+results related to the PCAOB’s 2013 inspection of the predecessor firm, and became concerned 
+that they would be imputed to Thakkar CPA.  He understood that Poorvesh followed up with the 
+PCAOB to state that new management did not want to be held responsible for the prior work under 
+                                              
+4  Williford was not involved in obtaining or maintaining Thakkar CPA’s license to practice public 
+accountancy in Texas or its registration with the PCAOB.   
+ 
+5  Section 2(a)(7) of Sarbanes-Oxley defines the term “issuer” to mean “an issuer (as defined in section 3 of 
+the Securities Exchange Act of 1934), the securities of which are registered under section 12 of that Act, or that is 
+required to file reports under section 15(d), or that files or has filed a registration statement that has not yet become 
+effective under the Securities Act of 1933, and that it has not withdrawn.”  Section 3(a)(8) of the Exchange Act 
+defines the term “issuer” to mean “any person who issues or proposes to issue any security; except that with respect 
+to certificates of deposit for securities, voting-trust certificates, or collateral-trust certificates, or with respect to 
+certificates of interest or shares in an unincorporated investment trust not having a board of directors or of the fixed, 
+restricted management, or unit type, the term ‘issuer’ means the person or persons performing the acts and assuming 
+the duties of depositor or manager pursuant to the provisions of the trust or other agreement or instrument under 
+which such securities are issued; and except that with respect to equipment-trust certificates or like securities, the 
+term ‘issuer’ means the person by whom the equipment or property is, or is to be, used.” 
+ 
+ 6 
+inspection and inquired how to register Thakkar CPA as a new firm with the PCAOB.  Williford 
+mistakenly understood that Poorvesh received no response from the PCAOB and simply assumed 
+the firm could continue performing audits in the absence of an explicit PCAOB directive 
+otherwise.  In a July 14, 2014 email to Poorvesh Thakkar, the PCAOB wrote, in relevant part: 
+ 
+“As a registered firm, Hall Group CPAs is responsible for complying with 
+PCAOB rules and it cannot transfer its registration to another accounting firm 
+. . . Thakkar CPA PLLC must be registered with the Board to audit, or play a 
+substantial role in the audit of, an issuer or a broker-dealer.  To register with the 
+Board, the firm may submit a Form 1 registration application for Board 
+approval.  As mentioned above, the Form 4 succession process is available 
+(1) if there has been a change in a registered firm’s form of organization . . . or 
+(2) if a registered firm is acquired by an unregistered firm, or combines with 
+any other entity or entities, including other registered firms, to form a new 
+public accounting firm.  Form 4 can be used only in those circumstances and 
+only if the firm seeking to succeed to registration status makes certain 
+representations in the form.  In the absence of those conditions, a firm cannot 
+use Form 4 to succeed to the registration status of a predecessor and would need 
+to file a registration application on Form 1 if it wished to seek registration.” 
+15. In late October 2014, the Thakkars ultimately filed a Form 1 in their first effort to 
+register Thakkar CPA with the PCAOB, on which they disclosed that Thakkar CPA had issued 
+audit reports for issuers and implicitly acknowledged that it was unregistered when it did so.  
+Thakkar CPA’s application was formally withdrawn on February 18, 2015. 
+ 
+iii. Thakkar CPA Was Not Licensed to Practice Public Accountancy as The Hall 
+Group CPAs 
+ 
+16. Rule 2-01(a) of Regulation S-X provides that the Commission will not recognize any 
+person as either a public accountant or certified public accountant who is not in good standing as 
+such under the laws of the place of his residence or principal office.  Under the Texas Public 
+Accountancy Act,6 a firm may not provide attest services7 unless it holds a validly-issued firm 
+license,8 and only a license holder may issue a report on a financial statement.9  Accordingly, an 
+individual license holder may not issue audit reports unless the entity through which he practices 
+also holds a validly-issued firm license.  Additionally, the Public Accountancy Act sets certain 
+                                              
+6  See TEX. OCC. CODE CH. 901 (the “Public Accountancy Act”). 
+7  See the Texas Administrative Code, Rule 501.52(4), which defines “attest service” to include, among other 
+things: “an audit or other engagement required by the [TSBPA] to be performed in accordance with the auditing 
+standards adopted by the AICPA, PCAOB, or another national or international accountancy organization recognized 
+by the [TSBPA].” 
+8  See TEX. OCC. CODE § 901.351 (requiring firm licenses). 
+9  See id. § 901.456 (Reports on Financial Statements; Use of Name or Signature on Certain Documents). 
+ 7 
+restrictions on the name or designation a firm may assume or use.  In particular, the name assumed 
+or used by a corporation must include the name of at least one current or former shareholder.10   
+ 
+17. Thakkar CPA, a Texas corporation 100% owned by Mahesh Thakkar, did not comply 
+with Texas State law’s practice and naming requirements by practicing public accountancy as The 
+Hall Group CPAs.  First, Thakkar CPA was not licensed to practice as “The Hall Group CPAs.”  
+Second, it is improper for Thakkar CPA to use “The Hall Group CPAs” as its business name 
+because it does not include the name of at least one current or former shareholder.11  Mahesh 
+Thakkar knew that Thakkar CPA issued audit reports as The Hall Group and knew or was reckless 
+in not knowing that his firm was not licensed to do so. 
+ 
+18. The Commission therefore could not recognize Thakkar CPA as a certified public 
+accountant because the firm was not duly registered and in good standing as such under the laws of 
+its place of residence or principal office as required pursuant to Rule 2-01(a) of Regulation S-X. 
+ 
+iv. Williford and Thakkar CPA Failed to Conduct Audits and Reviews in 
+Accordance with Professional Standards 
+ 
+19. Between January 6, 2014, and January 29, 2015, Thakkar CPA issued 15 audit reports 
+that 14 issuers included in filings with the Commission.  Additionally, Thakkar CPA conducted 30 
+reviews of interim financial information included in Forms 10-Q that 11 issuers filed with the 
+Commission.   Engagement letters, each signed by Williford on behalf of the firm, identified 
+Williford as the engagement partner and stated that the firm will conduct its audits and reviews in 
+accordance with PCAOB standards.   
+   
+20. Williford failed to conduct Thakkar CPA’s audits and reviews in accordance with 
+applicable professional standards because he: (i) failed to obtain engagement quality reviews 
+(“EQR”) of any of the firm’s audits or reviews; (ii) led Thakkar CPA’s reviews of DynaResource, 
+Inc.’s first, second, and third quarter 2014 financial information while the firm was not 
+independent of DynaResource, Inc.; (iii) approved the issuance of audit reports covering periods he 
+did not audit; and (iv) improperly approved the issuance of audit reports that stated the audits were 
+conducted in accordance with PCAOB standards. 
+ 
+a. Williford and Thakkar CPA Failed to Obtain Engagement Quality Reviews of 
+Audits and Reviews 
+21. Auditing Standard No. 7, Engagement Quality Review (“AS 7”), requires auditors to 
+obtain an EQR and concurring approval to issue the engagement report for each audit and interim 
+review engagement. 
+ 
+22. Although Williford recognized that no one at Thakkar CPA was qualified to conduct 
+EQRs, he failed to arrange for a qualified person outside the firm to conduct them.  Instead, 
+                                              
+10  See id. § 901.455 (Name requirements and restrictions). 
+11  Hall never held any ownership interest in Thakkar CPA. 
+ 8 
+Williford elected to altogether forgo an EQR for all of the firm’s audit and review engagements. 
+He improperly determined that obtaining an EQR was unnecessary because the audits did not 
+involve complex accounting or auditing issues or issuers with significant operating activities.  The 
+firm and Williford’s failure to obtain an EQR resulted in none of Thakkar CPA’s audits or reviews 
+being conducted in accordance with PCAOB standards. 
+ 
+b. Thakkar CPA Was Not Independent with Respect to DynaResource, Inc. 
+23. Thakkar CPA lacked sufficient policies and procedures concerning independence 
+requirements and failed to adequately assess its independence with respect to DynaResource, Inc. 
+after learning that David Hall became its CFO effective April 15, 2014.  PCAOB Quality Control 
+Standard QC Section 20, System of Quality Control for a CPA Firm’s Accounting and Auditing 
+Practice,  states that “[p]olicies and procedures should be established to provide the firm with 
+reasonable assurance that personnel maintain independence (in fact and in appearance) in all 
+required circumstances”  and that “[t]he firm and its personnel must be free from any obligation to 
+or interest in the client, its management or its owners.” QC 20.09-10.  Respondents believed that 
+there were no independence issues because Thakkar CPA completed its audit for the company’s 
+December 31, 2013 fiscal year and issued its audit report on April 15, 2014 – the same day Hall 
+became DynaResource, Inc.’s CFO.  But Mahesh and Poorvesh Thakkar knew that David Hall had 
+a direct financial interest in Thakkar CPA, who became CFO of one of Thakkar CPA’s clients in 
+April 2014.  Williford, failed to establish procedures that provided Thakkar CPA with reasonable 
+assurance that Thakkar CPA and its personnel maintained independence.  Additionally, each 
+Respondent failed to consider whether either of the following circumstances impaired Thakkar 
+CPA’s independence with respect to DynaResource, Inc. in subsequent periods:  
+ 
+ Thakkar CPA delivered a note payable to David S. Hall, P.C., which remained outstanding 
+even after Hall became DynaResource, Inc.’s CFO, as a result of the terms of the asset 
+purchase agreement, under which Thakkar paid Hall $450,000 in cash and delivered a 5%, 
+two-year promissory note for $313,516.  The final purchase price also was dependent upon 
+the future success of Thakkar CPA as the purchase price was to be adjusted up or down 
+based upon actual collection during the three years following the Closing Date.  
+Additionally, the asset purchase agreement included a provision under which Hall could 
+earn fees for providing services to Thakkar CPA after the Closing Date (although Hall did 
+not earn any fees under this provision). 
+ 
+ Thakkar CPA unilaterally suspended payments on the promissory note to David S. Hall, 
+P.C. in May 2014 after Poorvesh determined that future collections were likely to be less 
+than the amounts expected at the Closing Date.   
+24. These events impaired Thakkar CPA’s independence with respect to its reviews of 
+interim financial information that DynaResource, Inc. included in its Forms 10-Q filed with the 
+Commission in 2014.   As a consequence of the promissory note to David S. Hall, P.C., Thakkar 
+CPA was not independent of DynaResource, Inc. after Hall became its CFO on April 15, 2014, as 
+required under Rules 2-01(c)(1) and 2-01(c)(3) of Regulation S-X which state, in part, that an 
+accountant is not independent when the accounting firm has any loan to or from or certain business 
+ 9 
+relationships with an audit client’s officers.  Nonetheless, Thakkar CPA continued to provide audit 
+services.   
+ 
+c. Thakkar CPA Issued Audit Reports Covering Periods It Did Not Audit 
+25. Thakkar CPA improperly issued 13 audit reports that expressed an opinion on one or 
+two prior periods it did not audit.  As noted above, issuers included audit reports on their current 
+and prior year financial statements signed by “The Hall Group CPAs,” without any distinction 
+between predecessor David S. Hall, P.C. d/b/a The Hall Group CPAs and successor Thakkar CPA, 
+PLLC d/b/a The Hall Group CPAs.    
+ 
+26. Williford knew Thakkar CPA, PLLC d/b/a The Hall Group CPAs was a different audit 
+firm than David S. Hall, P.C. d/b/a The Hall Group CPAs.  However, Williford, did not plan and 
+perform audit procedures on the financial information relating to the periods that were audited by 
+David S. Hall, P.C. d/b/a The Hall Group CPAs.  Nonetheless, Williford authorized Thakkar CPA 
+to issue audit reports containing opinions on financial statements for periods that it did not audit.  
+Among other violations, this violated PCAOB Auditing Standard No. 15, Audit Evidence, (“AS 
+15”) because Williford failed to obtain sufficient appropriate audit evidence to afford a reasonable 
+basis for Thakkar CPA’s opinions covering periods audited by David S. Hall, P.C. d/b/a The Hall 
+Group CPAs.  See AS 15, ¶ 4. 
+ 
+d. Improper Issuance of Reports on Audited Financial Statements 
+27. Under AU 508, an auditor may only issue an unqualified opinion on historical 
+financial statements when the auditor has formed such an opinion on the basis of an audit 
+performed in accordance with PCAOB standards.  AU 508.07.  Rule 2-02(b)(1) of Regulation S-X 
+requires an accountant’s report to state whether the audit was made in accordance with generally 
+accepted auditing standards.  “[R]eferences in Commission rules and staff guidance and in the 
+federal securities laws to GAAS or to specific standards under GAAS, as they relate to issuers, 
+should be understood to mean the standards of the PCAOB plus any applicable rules of the 
+Commission.” Commission Guidance Regarding the Public Company Accounting Oversight 
+Board’s Auditing and Related Professional Practice Standard No. 1, Rel. No. 34-49708 (May 14, 
+2004).  Thus, an auditor violates Regulation S-X Rule 2-02(b)(1) if it issues a report stating that it 
+had conducted its audit in accordance with PCAOB standards when it had not. See In re Andrew 
+Sims, CPA, Rel. No.34-59584, AAER No. 2950 (Mar. 17, 2009).  As described above, Williford 
+failed to obtain an EQR as required under AS 7 for any of Thakkar CPA’s audit engagements  
+Additionally, Williford failed to plan and perform audit procedures to obtain sufficient appropriate 
+audit evidence to provide a reasonable basis for Thakkar CPA’s opinions as required under AS 15, 
+with respect to periods previously audited by David S. Hall, P.C., d/b/a The Hall Group CPAs.  
+Thus, Thakkar CPA should not have issued, and Williford should not have approved the issuance 
+of, audit reports asserting that Thakkar CPA had conducted its audits in accordance with PCAOB 
+standards. 
+ 10 
+ 
+E. VIOLATIONS 
+ 
+28. As a result of the conduct described above, Thakkar CPA did not possess the requisite 
+qualifications to represent others and therefore is subject to Section 4C(a)(1) of the Exchange Act 
+and the Commission’s Rules of Practice Rule 102(e)(1)(i). 
+ 
+29. As a result of the conduct described above, Thakkar CPA, Williford, and Mahesh 
+Thakkar engaged in improper professional conduct subject to Section 4C(a)(2) of the Exchange 
+Act and the Commission’s Rules of Practice 102(e)(1)(ii).   
+ 
+30. As a result of the conduct described above, Thakkar CPA willfully violated, Williford 
+and Mahesh Thakkar willfully aided and abetted, and Poorvesh Thakkar caused Thakkar CPA’s 
+violations of Rule 2-02(b)(1) of Regulation S-X which requires an accountant’s report to state 
+whether the audit was made in accordance with generally accepted auditing standards.   
+ 
+31. As a result of the conduct described above, Thakkar CPA willfully violated, Williford 
+and Mahesh Thakkar willfully aided and abetted, and Poorvesh Thakkar caused Thakkar CPA’s 
+violations of Section 102(a) of Sarbanes-Oxley which makes it unlawful for any person that is not 
+a registered public accounting firm to prepare or issue, or to participate in the preparation or 
+issuance of, any audit report with respect to any issuer.12   
+ 
+32. As a result of the conduct described above, Thakkar CPA, Williford, Mahesh Thakkar 
+and Poorvesh Thakkar caused issuers to violate Section 13(a) of the Exchange Act and Rules 13a-1 
+and 13a-13 thereunder which require every issuer of a security registered pursuant to Section 12 
+of the Exchange Act file with the Commission periodic reports as the Commission may require, 
+and mandate that periodic reports contain such further material information as may be necessary 
+to make the required statements not misleading. The obligation to file such reports embodies the 
+requirement that they be true and correct.  Williford authorized issuers to include Thakkar CPA’s 
+audit reports that falsely stated that the audits had been conducted in accordance with PCAOB 
+standards.  Additionally, Mahesh Thakkar, Poorvesh Thakkar, and Williford knew that issuers 
+included the firm’s audit reports, which they knew or should have known falsely represented that 
+the firm was registered with the PCAOB, in filings with the Commission.  Additionally, Mahesh 
+Thakkar knew or should have known that Thakkar CPA was not licensed to practice accountancy 
+as The Hall Group CPAs and therefore was not recognized as an accountant under Rule 2-01 of the 
+Regulation S-X. 
+ 
+                                              
+12  A violation of the Sarbanes-Oxley Act or any rule issued by the PCAOB under the Act is treated in the 
+same manner as a violation of the Exchange Act 15 U.S.C.A. § 7202(b)(1). 
+ 11 
+F. FINDINGS 
+ 
+ Based on the foregoing, the Commission finds that: 
+ 
+a. Thakkar CPA does not possess the requisite qualifications to represent others 
+pursuant to Section 4C(a)(1) of the Exchange Act and Rule 102(e)(1)(i) of the Commission’s Rules 
+of Practice;   
+ 
+b. Thakkar CPA, Williford and Mahesh Thakkar 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. Thakkar CPA (i) willfully violated Rules 2-02(b)(1) of Regulation S-X and Section 
+102(a) of Sarbanes-Oxley; and (ii) caused issuers to violate Section 13(a) of the Exchange Act and 
+Rules 13a-1 and 13a-13 thereunder; 
+ 
+d. Williford (i) willfully aided and abetted Thakkar CPA’s violations of Rule 
+2-02(b)(1) of Regulation S-X and Section 102(a) of Sarbanes-Oxley; and (ii) caused issuers to 
+violate Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder; 
+ 
+e. Mahesh Thakkar (i) willfully aided and abetted Thakkar CPA’s violations of Rule 
+2-02(b)(1) of Regulation S-X and Section 102(a) of Sarbanes-Oxley; and (ii) caused issuers to 
+violate Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder; and 
+ 
+f. Poorvesh Thakkar (i) caused Thakkar CPA’s violations of Rule 2-02(b)(1) of 
+Regulation S-X and Section 102(a) of Sarbanes-Oxley; and (ii) caused issuers to violate Section 
+13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. 
+ 
+IV. 
+ 
+ In view of the foregoing, the Commission deems it appropriate and in the public interest to 
+impose the sanctions agreed to in the Respondents’ Offers. 
+ 
+ Accordingly, it is hereby ORDERED, effective immediately, that: 
+ 
+ A. Pursuant to Section 21C of the Exchange Act, Thakkar CPA, Williford, Mahesh 
+Thakkar, and Poorvesh Thakkar shall cease and desist from committing or causing any violations 
+or future violations of Section 13(a) of the Exchange Act and Rules 13a-1, and 13a-13 
+thereunder, Rule 2-02(b)(1) of Regulation S-X, and Section 102(a) of Sarbanes-Oxley. 
+ 
+B. Pursuant to Sections 4C and 21C of the Exchange Act and Rule 102(e)(1)(i), (ii) 
+and (iii) of the Commission’s Rules of Practice Respondent Thakkar CPA be, and hereby is denied 
+the privilege of appearing or practicing before the Commission as an accountant. 
+ 
+ 12 
+C. Pursuant to Sections 4C and 21C of the Exchange Act and Rule 102(e)(1)(ii) and 
+(iii) of the Commission’s Rules of Practice Respondent Mahesh Thakkar be, and hereby is denied 
+the privilege of appearing or practicing before the Commission as an accountant. 
+ 
+ D. After five years from the date of this Order, Mahesh Thakkar 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 Mahesh 
+Thakkar’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) Mahesh Thakkar, or the public accounting firm with which he is 
+associated, is registered with the PCAOB in accordance with the 
+Sarbanes-Oxley Act of 2002, and such registration continues to be 
+effective; 
+ 
+b) Mahesh Thakkar, 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 Mahesh 
+Thakkar will not receive appropriate supervision; 
+ 
+c) Mahesh Thakkar, 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) Mahesh Thakkar acknowledges his responsibility, as long as 
+Mahesh Thakkar 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. 
+ 
+E. The Commission will consider an application by Mahesh Thakkar 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, 
+ 13 
+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 Mahesh Thakkar’s character, 
+integrity, professional conduct, or qualifications to appear or practice before the Commission. 
+ 
+F. Pursuant to Sections 4C and 21C of the Exchange Act and Rule 102(e)(1)(ii) and 
+(iii) of the Commission’s Rules of Practice Respondent Williford be, and hereby is denied the 
+privilege of appearing or practicing before the Commission as an accountant. 
+ 
+G. After five years from the date of this Order, Williford 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 
+Williford’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) Williford, or the public accounting firm with which he is associated, 
+is registered with the PCAOB in accordance with the Sarbanes-
+Oxley Act of 2002, and such registration continues to be effective; 
+ 
+b) Williford, 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 Williford will not 
+receive appropriate supervision; 
+ 
+c) Williford, 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) Williford acknowledges his responsibility, as long as Williford 
+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. 
+ 14 
+ 
+H. The Commission will consider an application by Williford 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 Williford’s character, 
+integrity, professional conduct, or qualifications to appear or practice before the Commission. 
+ 
+ I. Thakkar CPA shall pay disgorgement of $285,355, prejudgment interest of $10,132 
+and civil penalties of $64,000, 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) $44,935.88 within 14 days of the entry of this Order; 
+(ii) $44,935.88 within 120 days of the entry of this Order; 
+(iii) $44,935.88 within 240 days of the entry of this Order;  
+(iv) $44,935.88 within 365 days of the entry of this Order; 
+(v) $44,935.88 within 455 days of the entry of this Order; 
+(vi) $44,935.88 within 545 days of the entry of this Order; 
+(vii) $44,935.88 within 635 days of the entry of this Order; and 
+(viii) $44,935.84 within 730 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 disgorgement, prejudgment interest, and civil penalties, plus any additional 
+interest accrued pursuant to SEC Rule of Practice 600 and/or pursuant to 31 U.S.C. 3717, shall be 
+due and payable immediately, without further application.   
+ 
+J. Mahesh Thakkar shall pay civil penalties in the amount of $32,000 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) $8,000 within 14 days of the entry of this Order; 
+(ii) $8,000 within 120 days of the entry of this Order; 
+(iii) $8,000 within 240 days of the entry of this Order; and 
+(iv) $8,000 within 365 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.   
+ 
+K. Poorvesh Thakkar shall pay civil penalties in the amount of $16,000 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: 
+ 15 
+ 
+(i) $4,000 within 14 days of the entry of this Order; 
+(ii) $4,000 within 120 days of the entry of this Order; 
+(iii) $4,000 within 240 days of the entry of this Order; and 
+(iv) $4,000 within 365 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. 
+  
+L.  Williford shall pay civil penalties of $32,000 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 the following installments: $10,667 
+within 14 days of the entry of this Order, $10,667 within 120 days of the entry of this Order, and 
+$10,666 within 240 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.   
+ 
+Payments ordered 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 
+Thakkar CPA, Williford, Mahesh Thakkar, or Poorvesh Thakkar as a Respondent in these 
+proceedings, and the file number of these proceedings; a copy of the cover letter and check or 
+money order must be sent to David Peavler, Division of Enforcement, Securities and Exchange 
+Commission, 801 Cherry Street, Suite 1900, Fort Worth, TX 76102.   
+ 
+ 16 
+M. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be 
+treated as penalties paid to the government for all purposes, including all tax purposes.  To 
+preserve the deterrent effect of the civil penalty, Respondents agree that in any Related Investor 
+Action, they shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of 
+any award of compensatory damages by the amount of any part of Respondent’s payment of a civil 
+penalty in this action ("Penalty Offset").  If the court in any Related Investor Action grants such a 
+Penalty Offset, Respondents agree that they shall, within 30 days after entry of a final order 
+granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of 
+the Penalty Offset to the Securities and Exchange Commission.  Such a payment shall not be 
+deemed an additional civil penalty and shall not be deemed to change the amount of the civil 
+penalty imposed in this proceeding.  For purposes of this paragraph, a "Related Investor Action" 
+means a private damages action brought against Respondents by or on behalf of one or more 
+investors based on substantially the same facts as alleged in the Order instituted by the 
+Commission in this proceeding. 
+ 
+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 
+Williford, Mahesh Thakkar, and Poorvesh Thakkar, and further, any debt for disgorgement, 
+prejudgment interest, civil penalty or other amounts due by Williford, Mahesh Thakkar, or 
+Poorvesh Thakkar 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 
+Williford, Mahesh Thakkar, or Poorvesh Thakkar 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 
+ 
+ 
+ 
+ 

raw/aaer/2016/AAER-3764.txt

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+ 
+1 
+UNITED STATES OF AMERICA 
+Before the 
+SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77596 / April 12, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3764 / April 12, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17207 
+ 
+ 
+ 
+In the Matter of 
+ 
+INTL FCSTONE 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 INTL FCStone Inc. (“INTL FCStone,” 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 him and the subject matter of these proceedings, which are admitted, 
+Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to 
+Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-
+Desist Order (“Order”), as set forth below.   
+ 
+2 
+III. 
+On the basis of this Order and Respondent’s Offer, the Commission finds that1: 
+Summary 
+1. This matter arises from INTL FCStone’s violations of the reporting, books and records, 
+and internal control provisions of the Exchange Act.  Between fiscal year 2010 and June 30, 2013, 
+INTL FCStone overstated its operating revenues by $10 million and its net income by $6 million as a 
+result of accounting errors in recording and reporting over-the-counter (“OTC”) derivative trading gains 
+at a subsidiary, INTL FCStone Markets, LLC (“IFM”).  INTL FCStone’s internal accounting controls 
+failed to timely prevent or detect the accounting errors.  In January 2014, INTL FCStone restated its 
+financial statements, determined that certain of its controls were not designed or operating effectively, 
+and reported the existence of a material weakness in internal control over financial reporting (“ICFR”) 
+as of September 30, 2013. 
+Respondent 
+2. INTL FCStone, a Delaware corporation based in New York, New York, provides 
+execution and advisory services in commodities, currencies and international securities.  INTL 
+FCStone’s common stock is registered under Section 12(b) of the Exchange Act and trades on the 
+Nasdaq Global Market under the ticker symbol “INTL.”   
+INTL FCStone Delays Filing its Fiscal Year 2013 Form 10-K 
+3. On December 17, 2013, INTL FCStone disclosed that it would delay the filing of its 
+Form 10-K for its fiscal year ended September 30, 2013, as a result of errors in the reconciliation of 
+IFM’s accounting records to its back office system.  The Company also disclosed that it was evaluating 
+the effect these errors may have on previously filed consolidated financial statements and continuing to 
+assess the Company’s disclosure controls and procedures and ICFR for current and prior periods. 
+4. In its fiscal year 2013 Form 10-K filed on January 15, 2014, INTL FCStone restated its 
+consolidated financial statements for fiscal years 2011 and 2012, restated certain financial information 
+for fiscal year 2010, restated quarterly fiscal year 2012 financial information, revised its quarterly fiscal 
+year 2013 financial information to correct immaterial errors, and disclosed a material weakness in ICFR 
+related to accurate and timely accounting for certain over-the-counter derivative trading activities at 
+September 30, 2013.  The effect of the restatements on INTL FCStone’s pre-tax income (loss) is 
+reflected in the following chart (dollars in millions). 
+                                                 
+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 
+Pre-Tax 
+Income 
+FYE 
+9/30/2010 
+FYE 
+9/30/2011 
+Quarter 
+Ended 
+12/31/11 
+Quarter 
+Ended 
+3/31/12 
+Quarter 
+Ended 
+6/30/12 
+Quarter 
+Ended 
+9/30/12 
+FYE 
+9/30/12 
+As Originally 
+Reported $17.9 $59.5 $(0.7)  $3.6  $5.9 $10.5 $19.3 
+As Restated 16.0 55.4 (0.7) 2.5 3.6 10.4 15.8 
+Amount of  
+Overstatement $1.9 $4.1 $-0- $1.1 $2.3 $0.1 $3.5 
+Percentage  
+Overstatement 11.9% 7.4% -0-% 44.0% 63.9% 1.0% 22.2% 
+ 
+The revisions to INTL FCStone’s pre-tax income (loss) increased INTL FCStone’s third quarter 
+fiscal year 2013 from $4.1 million to $4.9 million (a $0.8 million, or a 16.3% understatement as 
+originally reported).  Additionally, INTL FCStone corrected errors related to intercompany physical 
+sales which were not correctly eliminated.  These errors overstated INTL FCStone’s fiscal year 2011 
+and 2012 sales of physical commodities and cost of sales by $1.3 billion (1.9% of sales) and $2.6 
+billion (3.6% of sales), respectively.  Additionally, these errors overstated the first, second and third 
+quarter FY 2013 sales of physical commodities and cost of sales of 1.3%, 7.7%, and 10.6%, 
+respectively (based on sales). 
+IFM’s Asset Reconciliation Process 
+5. IFM used an internally-developed application to capture, store and report master records 
+(i.e., customer/broker) and transactional data (i.e., quotes, orders, trades, etc.) for its OTC derivatives 
+trading business.  IFM refers to this system as “ETT,” which stands for Electronic Trade Ticket.  
+Information from ETT was a part of the system of books, records and accounts that INTL FCStone 
+relied upon to prepare its consolidated financial statements.  At month-end, IFM’s accounting 
+department reconciled information extracted from ETT to the activity recorded in the general ledger 
+(the “Asset Reconciliation Process”). 
+6. IFM relied on a manual Asset Reconciliation Process, which was performed and 
+reviewed by the same person, the IFM controller.  As a part of the Asset Reconciliation Process each 
+month, the IFM controller manually ran queries to identify and extract transactional data from ETT, 
+converted the extracted data to an Excel spreadsheet, and then reconciled the activity in ETT to the 
+activity recorded in IFM’s general ledger.  IFM’s controls and procedures failed to segregate the duties 
+between the preparer and the reviewer of the Asset Reconciliation Process. 
+INTL FCStone Discovers the Accounting Errors  
+7. During its audit of INTL FCStone’s consolidated financial statements for the year ended 
+September 30, 2013, INTL FCStone’s independent auditor questioned an item on the reconciliation 
+between ETT and the general ledger.  INTL FCStone’s prompt investigation led to a more fulsome 
+ 
+4 
+examination of the Asset Reconciliation Process and caused management to conclude that its ICFR 
+related to accurate and timely accounting for certain over-the-counter derivative trading activities were 
+not reasonably designed to detect errors in recording trading gains to the general ledger.  
+8. During its review, INTL FCStone identified errors relating to differences between 
+ETT’s balances and the amounts that had been recorded in the general ledger at period-end.  
+Specifically, INTL FCStone discovered :  (1) a $4.0 million overstatement of trading gains on the 
+transfer of certain cotton derivative positions between IFM’s internal trading books during fiscal year 
+2011 (the “Cotton Positions Error”); (2) a $1.3 million and a $3.0 million overstatement of trading 
+gains on certain energy derivative positions (the “ClearPort Error”); (3) a $1.1 million understatement 
+of goodwill associated with the acquisition of Hanley (no income statement impact) and a $0.7 million 
+overstatement of trading gains on certain derivative positions acquired as a part of the Hanley Group 
+acquisition (the “Hanley Error”); and (4) certain other errors that INTL FCStone corrected as a part of 
+the restatement (the “Other Errors”).   
+The Cotton Positions Error and the ClearPort Error 
+9. The Asset Reconciliation Process failed to capture valuation errors related to certain 
+trades that were moved between IFM’s market-maker and back-to-back trading books.  “Market-
+Maker” accounts include positions that expose the Company to market risk.  “Back-to-back” accounts 
+are generally fully hedged and managed to generate no significant profit or loss. 
+10. In November 2010, certain cotton positions in two market-maker accounts were 
+transferred to IFM’s back-to-back trading book.  At the time the positions were moved, the value of the 
+transferred positions reflected a $4.0 million loss.  The accounting department did not properly account 
+for the losses associated with the transferred cotton positions, which caused a $4.0 million 
+overstatement of trading gains for fiscal year 2011.   
+11. In April 2011, four accounts with OTC derivatives positions that were cleared through 
+CME ClearPort and characterized as “back-to-back” accounts were reclassified to “market-maker” 
+accounts.  At the end of April 2011, IFM recognized the change in the value of its market-maker 
+accounts as trading gains for the month.  However, in calculating the net change of its market-maker 
+accounts, IFM erroneously considered the March 31, 2011 value of the four ClearPort accounts to be 
+zero rather than $1.3 million, thereby creating a $1.3 million overstatement of trading gains in fiscal 
+year 2011.   
+12. In subsequent months, IFM erroneously double-counted gains associated with the four 
+ClearPort accounts.  Because the operations department did not notify the accounting department about 
+the ClearPort account reclassification, the ClearPort Error accounts were improperly included in two 
+separately-generated manual revenue computations.   In May 2013, the IFM controller discovered that 
+certain adjustments to record revenue associated with these accounts had been recorded backwards.  In 
+response, the IFM controller made an adjustment to correct year-to-date fiscal year 2013 revenues.  
+Corresponding adjustments, however, were not made to correct a $3.0 million overstatement of 
+revenues related to fiscal years 2011 and 2012. 
+ 
+5 
+13. Two factors contributed to the ClearPort Error.  First, existing controls were not 
+designed to ensure that a change in classification of accounts from back-to-back to market-maker, or 
+vice versa, was communicated to the accounting department.  Second, controls over the reconciliation 
+between trading system data and the general ledger and the review thereof were not designed to detect 
+errors timely in recording trading gains to the general ledger.   
+The Hanley Error 
+14. On July 1, 2010, INTL FCStone acquired Chicago-based Hanley Group of companies, a 
+trading firm that specialized in complex OTC structured products.  Prior to the acquisition, one of 
+Hanley’s companies, HGC Trading, was a customer of IFM.  IFM valued its derivative positions with 
+HGC Trading within ETT.  HGC Trading independently valued these same positions using HGC 
+Trading’s internal system, known as Option 1.  Because ETT and Option 1 used different assumptions 
+and valuation methodologies, IFM and HGC Trading maintained different valuations for the same 
+derivative positions.   
+15. During the pre-acquisition due diligence, the risk department determined that HGC 
+Trading’s valuation exceeded IFM’s by $1.1 million.  However, the purchase accounting of the Hanley 
+acquisition erroneously used the Option 1 valuations instead of the ETT valuations and therefore failed 
+to properly account for the valuation differences, which caused INTL FCStone to overstate the value of 
+the derivatives and understate goodwill by $1.1 million. 
+16. INTL FCStone also failed to account for changes in values of the derivative positions 
+between the acquisition date and September 1, 2010, when IFM transferred HGC Trading’s positions to 
+IFM’s accounting records.  By September 2010, the valuation difference between the two systems had 
+increased by $0.7 million.  Consequently, INTL FCStone’s revenues were overstated by an additional 
+$0.7 million. 
+Other Errors 
+17. In addition to the above misstatements, INTL FCStone corrected certain immaterial 
+errors with respect to the impact on the intercompany physical precious metal sales which it had not 
+correctly eliminated for the consolidated income statements, resulting in a gross-up of physical 
+commodities and costs of sales of physical commodities for fiscal years 2011 and 2012 as well as 
+interim quarters within fiscal years 2012 and 2013.  As a result of these errors, INTL FCStone’s fiscal 
+year 2011 and 2012 sales of physical commodities and cost of sales were overstated by $1.3 billion 
+(1.9% of sales) and $2.6 billion (3.6% of sales), respectively. 
+Remedial Measures 
+18. In determining to accept the Respondent’s Offer, the Commission considered the 
+remedial acts undertaken by INTL FCStone. 
+ 
+6 
+Violations 
+19. As a result of the conduct described above, INTL FCStone 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 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. 
+20. As a result of the conduct described above, INTL FCStone 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. 
+21. Lastly, as a result of the conduct described above, INTL FCStone 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 transactions are recorded as 
+necessary to permit preparation of financial statements in accordance with generally accepted 
+accounting principles. 
+IV. 
+ 
+In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed 
+to in Respondent INTL FCStone’s Offer. 
+ 
+Accordingly, it is hereby ORDERED that: 
+ 
+A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from 
+committing or causing any violations and any future violations  of Sections 13(a), 13(b)(2)(A), and 
+13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.   
+ 
+B. Respondent shall, within 30 days of the entry of this Order, pay a civil money penalty in 
+the amount of $150,000 to the Securities and Exchange Commission 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:  
+ 
+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 INTL 
+FCStone 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 David L. Peavler, Division of Enforcement, 
+Securities and Exchange Commission, Fort Worth Regional Office, 801 Cherry Street, Suite 1900, Fort 
+Worth, Texas 76102.   
+ 
+ By the Commission. 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 

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+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77644 / April 19, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3765 / April 19, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17212 
+ 
+In the Matter of 
+ 
+LOGITECH 
+INTERNATIONAL, S.A., 
+MICHAEL DOKTORCZYK, 
+and SHERRALYN BOLLES, 
+CPA, 
+ 
+Respondents. 
+ 
+ 
+ORDER INSTITUTING CEASE-AND-DESIST 
+PROCEEDINGS PURSUANT TO SECTION 
+21C OF THE SECURITIES EXCHANGE ACT 
+OF 1934, MAKING FINDINGS, AND 
+IMPOSING CEASE-AND-DESIST ORDERS 
+AND PENALTIES 
+   
+ 
+I. 
+ 
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that cease-
+and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities 
+Exchange Act of 1934 (“Exchange Act”) against Logitech International, S.A. (“LOGI” or “the 
+Company”), Michael Doktorczyk (“Doktorcyzk”), and Sherralyn Bolles, CPA (“Bolles”) 
+(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 Cease-and-Desist Proceedings Pursuant to Section 21C of the 
+Securities Exchange Act of 1934, Making Findings, and Imposing Cease-and-Desist Orders and 
+Penalties (“Order”), as set forth below.   
+ 
+2 
+ 
+III. 
+ 
+ On the basis of this Order and Respondents’ Offers, the Commission finds1 that: 
+ 
+Summary 
+ 
+ These proceedings arise out of, and this Order covers, recurring instances of improper 
+accounting in three separate areas at Logitech International, S.A. during a five-year period.  The first 
+concerns LOGI’s actions and omissions in fraudulently accounting for the write-down of a failed 
+product in its fiscal year2 2011 (“FY11”) financial statements.  The second relates to actions and 
+omissions by LOGI, Michael Doktorczyk, and Sherralyn Bolles concerning the accounting for the 
+Company’s warranty liabilities in the FY12 and FY13 financial statements, and concerning the 
+failure to correct, in the FY13 financial statements, a known error in not amortizing intangibles from 
+a prior acquisition.  The third concerns books and records, reporting, and control violations by 
+LOGI pertaining to the Company’s revenue recognition in its Americas region in FY09.   
+Doktorczyk and Bolles, whose employment at LOGI began in July 2011 and July 2012, 
+respectively, were not involved in the first and third areas. 
+ 
+Respondents 
+ 
+Logitech International S.A. is incorporated in Switzerland and has substantial operations in 
+the United States.  LOGI is primarily involved in manufacturing and selling peripherals for 
+computers and electronic devices.  Its shares are listed on both the Nasdaq Global Select Market, 
+under the trading symbol LOGI, and the SIX Swiss Exchange, under the trading symbol LOGN.  
+The company maintains an executive office and its Americas region headquarters in Newark, 
+California.  LOGI’s common stock is registered with the Commission pursuant to Exchange Act 
+Section 12(b).  
+ 
+Michael Doktorczyk, age 50, resides in Menlo Park, California.  From July 2011 (when he 
+started at the Company) through August 2014, he was the Company’s Vice President of Finance 
+and Corporate Controller.  In May 2013, when LOGI filed its Form 10-K for FY13, Doktorczyk 
+was also the Company’s Principal Financial Officer and Principal Accounting Officer.  
+Doktorczyk’s employment at LOGI ended in August 2014. 
+ 
+Sherralyn Bolles, age 50, resides in Castro Valley, California.  From July 2012 (when she 
+started at the Company) through August 2014, she was the Director of Accounting and Financial 
+Reporting for the Company.  Bolles’s employment at LOGI ended in August 2014. 
+ 
+                                                 
+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 The Company’s fiscal year is April 1 to March 31.   
+3 
+ 
+Accounting for Revue Product/Components 
+(Concerning the Company) 
+ 
+1. In October 2010 (LOGI’s fiscal Q311), LOGI launched a product called “Revue,” a 
+set-top device that connected to televisions, allowing internet usage and video 
+streaming.  Prior to launching Revue, LOGI had retained a contract manufacturer 
+(“CM”) in Asia to produce hundreds of thousands of units in anticipation of 
+demand during the year-end holidays.  LOGI had also authorized the CM to 
+purchase millions of dollars of components to meet expected demand. 
+ 
+2. From the outset, Revue sales were significantly below LOGI’s internal forecasts.  
+By late November 2010, sales and finance personnel, including senior executives, 
+were addressing whether the market price of $299 should be cut.  LOGI’s CFO at 
+the time (“Former CFO”), and its acting controller (“Former Acting Controller”), 
+were aware that LOGI might have to evaluate taking a “lower of cost or market” 
+(“LCM”) charge if the value of Revue inventory was impaired.  
+ 
+3. Under Generally Accepted Accounting Principles (“GAAP”)3, the Company was 
+required to value its inventory at the lower of the inventory’s cost or market value.  
+Specifically, if the market value of a company’s inventory (generally calculated for 
+finished goods as the estimated selling prices in the ordinary course of business, 
+less reasonably predictable costs of completion, disposal, and transportation) is less 
+than its cost, then the company must write-down the inventory value in its financial 
+statements.   
+ 
+4. On or around December 7, 2010, because of high inventory levels and weak sales, 
+LOGI directed CM to stop manufacturing Revue, including halting all work-in-
+progress.  LOGI also instructed CM not to ship over 26,000 finished Revue units.  
+Further, because CM, at LOGI’s direction, had purchased parts for future 
+manufacturing, LOGI was liable for approximately $11 million of excess 
+components. 
+ 
+5. At the end of Q311 (December 31, 2010), Revue sales were only 40% of LOGI’s 
+forecasts for that product.  As part of its Q311 financial closing process, LOGI 
+performed an LCM analysis of the Revue finished goods inventory and concluded 
+that no adjustment, or write-down, was required.   
+ 
+6. On or around January 5, 2011, LOGI’s Senior Vice-President of Operations (SVP-
+Operations) informed several executives that he intended to “dispose of the 
+components” awaiting assembly by CM in light of Revue’s “current trajectory.”  
+Shortly thereafter, the SVP-Operations instructed the VP of Global 
+Sourcing/Supplier Management (VP-Global Sourcing) to “sell all of the 
+components we could.”   
+                                                 
+3 FASB Accounting Standards Codification 330-10-35 Inventory – Subsequent Measurement. 
+4 
+ 
+ 
+7. Later in January 2011, LOGI management informed the Board of Directors about 
+the poor sales of Revue and about management’s future plans for the product, 
+including a plan to lower the retail price of Revue to $249 in Q112, and to $199 in 
+Q312.  Management did not inform its independent auditor of this pricing plan 
+strategy. 
+ 
+8. On January 27, 2011, LOGI issued its Q311 earnings release, reporting strong 
+results, increasing its guidance for annual revenue for fiscal year-end March 31, 
+2011, and affirming its guidance for annual operating income in a range of $170M-
+$180M. 
+ 
+9. During LOGI’s fiscal Q411, Revue sales continued to be far below projections.  For 
+all of Q411, despite regular discounting and promotions, Revue sales were 30% of 
+internal product forecasts.  By quarter-end, retailers were selling fewer than 1,000 
+Revue units per week. 
+ 
+10. At the end of Q411, LOGI had over 163,000 units of Revue finished inventory in 
+its US distribution centers, with another 52,000 finished and work-in-progress units 
+in Asia.  Based on the sales rate for Q411, LOGI had well over a year’s supply of 
+Revue.  At the quarter-end sales rate to retailers, LOGI had over three years of 
+inventory. 
+ 
+11. In mid-March 2011, an accountant in LOGI’s Regional Finance area asked LOGI’s 
+VP-Global Sourcing about financial risk for the Revue product and the number of 
+units that could be built from on-hand components.  The VP-Global Sourcing 
+informed her that there was no plan to use the components and that Global Sourcing 
+was attempting to sell whatever could be sold.  He also noted: “If we need to scrap 
+[work-in-progress] and components, we should assume a recoverable value of 
+zero.” 
+ 
+12. On or around March 23, 2011, a LOGI Finance employee sent the Former Acting 
+Controller a summary of potential excess and obsolete inventory for contract 
+manufacturers in preparation for a meeting the next day to discuss required 
+accounting adjustments for the year-end financials.  The summary highlighted a 
+total potential excess inventory of $19.4M for Revue units and components that 
+“should be reserved.” 
+ 
+13. On March 31, 2011, LOGI announced that, for reasons unrelated to Revue, it would 
+miss the guidance it had provided to the market two months earlier.  LOGI lowered 
+the previous guidance for operating income by $30M (to a range of $140M-
+$150M).  Internally, the CEO characterized the guidance miss as a “disaster” and 
+informed his executive team, including the Former CFO, that management’s 
+credibility with the market was damaged. 
+5 
+ 
+ 
+14. For its FY11 year-end financial close process, LOGI initially prepared an LCM 
+analysis indicating that no LCM adjustment was required for Revue finished goods 
+inventory.  The company’s independent auditor arranged separate meetings with 
+LOGI’s Former CFO and Former Acting Controller to discuss the importance of 
+the assumptions in the LCM analysis.  In the meetings, the independent auditor 
+stressed the need to consider future pricing assumptions and strategies.  Within 
+days, LOGI revised the LCM analysis and, based on a planned price cut to $249 in 
+Q112, recorded a $2.2M adjustment.  However, in the revised analysis, LOGI did 
+not account for the planned Q312 price cut to $199, nor did LOGI consider the 
+excess component inventory. 
+ 
+15. After receiving the revised LCM with the $2.2 million adjustment, the independent 
+auditor noted the roughly $11 million of excess component inventory and informed 
+the Former Acting Controller and Regional Finance that LOGI was also required to 
+evaluate and, if necessary, record an adjustment for the component inventory. 
+ 
+16. LOGI’s Regional Finance accountant resisted adjusting for the component 
+inventory.  When the independent auditor persisted, Regional Finance again 
+emailed the VP-Global Sourcing, notifying him there was “heated discussion” with 
+the independent auditor about Revue, and asking him to determine the number of 
+Revue units that could be built from the component inventory. 
+ 
+17. The VP-Global Sourcing, who was responsible for managing the component 
+inventory liability, informed Regional Finance and the Former Acting Controller 
+that production had been stopped for months and that he did not “see a chance that 
+we are ever going to build [the components] into units.”  He wrote that a build-out 
+of components was a “far fetched scenario that has never been formulated.”  He 
+also explained that, at the direction of the SVP-Operations, “we have been working 
+since January to resell component liabilities” with only modest success: “the easiest 
+stuff to resell . . . is moving at 40-50 cts on the dollar maximum.  For the rest of 
+components, we should assume 25cts on the dollar of recovery, the rest will be a 
+hard loss.” 
+ 
+18. The Former Acting Controller forwarded the information to the Former CFO, who 
+asked about the potential exposure if the information was correct.  In her reply to 
+the Former CFO, the Former Acting Controller suggested that, by assuming the 
+excess components would be built into finished goods, LOGI could reduce the 
+amount it would have to write-down.  There was no basis for any such assumption.  
+ 
+19. The Former CFO replied:  “Yes, we need to understand with precision what we are 
+looking at and what decisions we need to make or clarify.  We are still committed 
+to making the right decisions and staying within our lowered range for Q4—we 
+need to achieve them both.”   
+6 
+ 
+ 
+20. On the next day (April 18, 2011), the Former Acting Controller received a detailed 
+list of the excess components.  Less than an hour later, she sent a spreadsheet 
+containing an LCM component analysis to the independent auditor, calculating an 
+adjustment of $1.1M, based on a hypothetical build-out of 79,000 additional 
+finished units of Revue.  The Former Acting Controller ignored the fact 
+(communicated to her two days earlier) that LOGI had been actively attempting to 
+sell all of the components, with only limited success and below cost.  Instead, she 
+based the Company’s accounting on a “far fetched scenario.”      
+ 
+21. On or around April 18, 2011, after forwarding the component LCM analysis 
+spreadsheet to the independent auditor, the Former Acting Controller met with 
+members of the independent audit team.  At that meeting, the Former Acting 
+Controller discussed LOGI’s plans to use the $11 million of excess components to 
+build 79,000 finished Revue units.  She also represented that LOGI could use 
+excess components (beyond what was needed to make 79,000 Revue units) to 
+manufacture even more Revue units.  The Former Acting Controller’s 
+representations were false. 
+ 
+22. During the week of April 18, 2011, the Former Acting Controller and Former CFO 
+met with senior members of the independent audit team.  In those meetings the 
+Former Acting Controller and Former CFO confirmed the assumptions used in the 
+LCM analyses, and represented that LOGI was committed to the Revue product for 
+the long-term and was going to build at least 79,000 additional units using excess 
+components.  These representations were false.   
+ 
+23. At the time the representations were made, the Former Acting Controller and 
+Former CFO knew, or were reckless in not knowing, that LOGI had no plan to 
+produce additional units of Revue.  They knew, or were reckless in not knowing, 
+that CM had not shipped any Revue units since late November 2010, and had 
+stopped production in early December 2010.  In fact, they knew, or were reckless in 
+not knowing, that LOGI had no timetable for re-starting production or even for 
+completing the work-in-progress units and, for months, had been attempting to sell 
+excess component inventory at substantial discounts.   
+ 
+24. On or around May 27, 2011, the Former Acting Controller and Former CFO signed 
+a management representation letter to the independent audit firm.  The letter 
+contained material misrepresentations concerning the valuation of inventory and the 
+LCM analysis for Revue inventory.  Specifically, with respect to the Revue LCM 
+analysis, the letter represented that “we considered future pricing 
+adjustments/discounts which are probable of occurring.”  This representation was 
+false because the LCM analysis did not consider the planned price drop to $199 in 
+Q312 or other discounting or promotions that would likely be required to sell the 
+excess finished goods inventory. 
+7 
+ 
+ 
+25. The Former Acting Controller and Former CFO knew, or were reckless in not 
+knowing, that the representations in the management representation letter 
+concerning inventory valuation and the LCM analysis were false.  Prior to including 
+the language on LCM and inventory valuation in the representation letter, the 
+independent audit team had made both the Former Acting Controller and Former 
+CFO aware of the importance of considering future pricing in the LCM analysis.  
+As LOGI acknowledged in its November 2014 restatement, the Company had not 
+considered future pricing adjustments/discounts that were probable of occurring.  
+The LCM analysis provided to the independent audit firm, and which the Former 
+Acting Controller and Former CFO discussed with the auditor, did not address—or 
+account for—LOGI’s plan to lower the price to $199 in or before Q312.  
+ 
+26. On May 27, 2011, LOGI filed its Form 10-K with the Commission.  The Former 
+CFO signed the Form 10-K as the Company’s CFO and Principal Accounting 
+Officer.  LOGI reported operating income of $142.7M, which was within the 
+lowered range of $140M-$150M that LOGI had communicated to investors on 
+March 31, 2011.   
+ 
+27. On November 14, 2014, LOGI restated its financial results for FY11 and FY12 
+because of errors in the timing of the Revue-related inventory write-downs.  At the 
+time it initially filed its FY11 financial statements, LOGI overstated its operating 
+income by $30.7M, i.e., over 27%.  If LOGI had properly accounted for Revue-
+related inventory in May 2011, it would have reported operating income of 
+approximately $112M, far below the lowered guidance of $140M-$150M.  
+ 
+Warranty Accrual Accounting 
+(Concerning the Company, Doktorczyk, and Bolles) 
+ 
+28. Historically, LOGI divided its operations into three geographical regions: Americas 
+(AMR); Europe, Middle East and Africa (EMEA); and Asia-Pacific/Japan (APJ).  
+LOGI offered warranties on its products sold throughout the world.  Depending 
+upon the particular country and type of product, the warranties ranged from one to 
+five years.4  In FY09, after its independent auditor raised the need to accrue for its 
+warranty liability, LOGI began recording a liability in its books and records.   
+ 
+29. In the latter part of FY09, accountants within LOGI, including the same Former 
+Acting Controller, developed a warranty accrual model for the AMR region based 
+on the assumption that, if a product failed, it would fail quickly and be returned 
+within one quarter.  The Company did not have a basis for this assumption, nor did it 
+have sufficient data to evaluate such an assumption.  The warranty model also did 
+                                                 
+4  The need to account for contingent liabilities, including liability for future product warranty claims, was addressed 
+in SFAS 5, Accounting for Contingencies.  Pertaining to warranties in particular, SFAS 5 was codified as ASC 460-
+10-25, Product Warranties. 
+8 
+ 
+not consider when the warranty liability began (i.e., when products were purchased 
+by end-users) or when the liability ended (i.e., one, two, or five years after purchase 
+of a product by the end-user).  This model was shared with the independent auditors.  
+ 
+30. From FY08 through FY11, the deficiencies of LOGI’s AMR model—and the need 
+for a more robust method—were known within LOGI’s finance and accounting 
+groups.  During FY10, LOGI’s then-controller noted that the Company’s warranty 
+model was “not good” because it was not based on the total number of products 
+under warranty in the hands of consumers.  Despite this recognition, LOGI 
+continued to use the model to record the warranty liability.  
+ 
+31. During LOGI’s FY12, a senior accountant was assigned to provide operational input 
+on LOGI’s warranty in the AMR region.  The senior accountant reviewed the model 
+and could not understand the reason or basis for various discretionary inputs or the 
+underlying assumptions.  She also discovered that the model did not take into 
+account the length of the product warranty term.  Specifically, the senior accountant 
+determined that, if LOGI were to change its warranty term (e.g., increase the length 
+of the warranty from one-year to three-years), the model’s calculated exposure (i.e., 
+the required accrual) would not change.  In other words, the model calculated the 
+same warranty accrual regardless of whether products carried a three-month 
+warranty or a 10-year warranty. 
+ 
+32. The senior accountant inquired but could not get an explanation or basis for the 
+inputs or why changing the warranty term would not impact the calculated accrual.  
+The senior accountant also realized that the model did not use “sell-through data” 
+(data on product sales to consumers).  Although she lacked expertise in warranty 
+accounting, she concluded that the Company’s warranty accrual model did not 
+comply with GAAP.  
+ 
+33. In Q312, the senior accountant developed a new, more robust “waterfall” model 
+despite having only limited historical sales and return data available to her.   Using 
+the new model, she estimated that the Company was under-reserved by several 
+million dollars.  She reported her findings to her supervisor, who arranged a meeting 
+with Doktorczyk (the controller).    
+ 
+34. Since at least 2004, LOGI’s finance and accounting groups and senior management 
+used a quarterly “exposure list” to keep track of significant recorded entries, 
+potential exposures or charges, reclassifications, and other items.  LOGI’s finance 
+and accounting groups did not share the exposure list with its independent auditor.  
+In Q312, the warranty accrual was added to the list as a “potential exposure,” with 
+the amount of exposure “TBD” [to-be-decided].  The warranty accrual remained on 
+the list as a “potential exposure” for six more quarters. 
+ 
+9 
+ 
+35. On or around December 21, 2011 (the end of Q312), the senior accountant presented 
+her conclusions to Doktorczyk, the Former Acting Controller, and others.  In the 
+presentation, the senior accountant set forth the deficiencies with the existing model 
+and indicated a likely under-accrual of $3.4M.   Doktorczyk did not ensure that 
+deficiencies in the model were corrected.  
+ 
+36. Five months later, in May 2012, as part of the Company’s internal accounting 
+controls, the senior accountant was asked to confirm5 the accuracy of certain 
+statements, one of which included language about the Company’s warranty 
+provisions.  Because she believed the warranty accrual did not comply with GAAP, 
+the senior accountant refused to confirm or certify the statement.  The senior 
+accountant’s refusal to confirm or certify the statement about the warranty 
+provisions was not raised with, and accordingly was not acted upon by, Doktorczyk.   
+ 
+37. Bolles started at LOGI in Q213.  In Q313, an accountant in Financial Planning and 
+Analysis (FP&A) became responsible for calculating the warranty accrual.  She 
+noted the same problems, and came to the same conclusion, as the senior accountant.  
+When the FP&A accountant studied the existing AMR warranty model, she could 
+not understand the basis for the inputs and assumptions, and attempted, 
+unsuccessfully, to get an explanation of the AMR model’s inputs and rationale. 
+ 
+38. In Q313, the FP&A accountant also discovered that the warranty accrual models for 
+the Company’s other regions (EMEA and APJ) were different than the AMR model.  
+In addition, she determined that LOGI had not updated its warranty accrual 
+calculation in its EMEA region for the two prior quarters because the person who 
+had previously done the calculation had been laid off and no one could find the 
+model.  Bolles was informed about the lack of any support for the EMEA 
+calculation.   
+ 
+39. By the end of Q313, the FP&A accountant had concluded that LOGI’s warranty 
+accrual, as computed with the existing model, was not appropriate under GAAP.  
+She informed Doktorczyk and Bolles about the significant problems with the 
+warranty accrual calculation, and asked for technical accounting assistance.  
+ 
+40. To assist the FP&A accountant, Bolles assigned the senior accountant who a year 
+earlier had concluded that the existing model did not calculate a warranty accrual 
+that was GAAP-compliant.  At the end of Q313, a meeting was scheduled with the 
+independent auditor to discuss the warranty accrual methodology.  Shortly before the 
+meeting, Bolles postponed it.  The meeting never occurred.  According to the FP&A 
+accountant, the meeting was cancelled because the corporate accounting group did 
+“not want to rock the boat . . . at this time with a revised warranty methodology.”  
+ 
+                                                 
+5 This was a sub-certification process that LOGI had implemented. 
+10 
+ 
+41. In mid-Q413, the supervisor of the FP&A accountant arranged a meeting with 
+LOGI’s Former CFO.  One purpose of the meeting was to address the concerns with 
+the warranty model, the range of additional exposure reflected by a modified 
+methodology, and to “share with [LOGI’s Former CFO] our understanding of 
+whether the issue can be contained to FY13 or not.” 
+ 
+42. On or about February 14, 2013, LOGI’s top finance and accounting officers—
+LOGI’s Former CFO, Doktorczyk, Bolles, and the VP of FP&A, as well as the 
+senior accountant and FP&A accountant, attended a meeting at which the senior 
+accountant presented her findings regarding the warranty model issues and concerns, 
+much like the presentation she had made 14 months earlier.  The senior accountant 
+told LOGI’s Former CFO that the existing warranty accrual model was not GAAP-
+compliant.   
+ 
+43. The February 2013 presentation was explicit about the deficiencies in the current 
+model and the estimated amount of additional exposure: $4.2M.   The presentation 
+also set forth two options for transitioning to a new model: a one-time switch in 
+methodology or a “gradual change to existing approach.”  The first option would 
+result in an immediate charge or “catch up adjustment” to LOGI’s financial results.  
+The second option would “change the current model gradually to increase reserves 
+until [the] catch up entry is not material before switching the model.”  The second 
+option was not GAAP-compliant. 
+ 
+44. At the direction of LOGI’s Former CFO, the Company implemented the second 
+option—the plan to gradually increase the reserve.  Specifically, the Company 
+planned for, and added, $1M to its warranty accrual for Q413.  The Company added 
+the $1M in Q413 by manipulating certain formulas in its existing warranty accrual 
+model.  The Company also planned to add $1M per quarter for the first three 
+quarters of FY14.   
+ 
+45. Despite the warranty accrual remaining as a “potential exposure” item on the 
+exposure list for six quarters, neither LOGI’s Former CFO nor any LOGI accountant 
+informed the Company’s independent auditor about the under-accrual or the 
+problems with the existing model for over a year and a half, during which time 
+LOGI filed four Forms 10-Q and two Forms 10-K.   
+ 
+46. Toward the end of Q413, the senior accountant also discovered that LOGI 
+apparently had not amortized certain intangibles from a FY10 acquisition.  The 
+senior accountant informed Bolles of the potential error in March 2013, over two 
+months before the filing of the FY13 Form 10-K.  The potential amortization error, 
+which was estimated at approximately $1.87M, was also added as a “potential 
+exposure” item on the finance and accounting groups’ exposure list.   
+ 
+11 
+ 
+47. No later than April 2013, Bolles was aware that her staff, which included the senior 
+accountant, had researched the intangibles issue and concluded that the Company 
+had failed to amortize certain intangibles.  Bolles did not cause the error to be 
+corrected in FY13 or inform the independent auditor about it before the filing of the 
+Form 10-K.  
+ 
+48. On May 30, 2013, LOGI filed its Form 10-K for FY13, which contained material 
+misstatements and omissions about the Company’s product warranty accruals.  In 
+particular, LOGI misstated the amount of its product warranty liability by over 
+$17.2M.  
+ 
+49. LOGI’s Former CFO resigned from LOGI in April 2013.   Doktorczyk was asked to 
+become the Company’s principal financial officer and principal accounting officer, 
+and he signed the Form 10-K in that capacity approximately two weeks later.  At the 
+time he signed the Form 10-K, Doktorczyk knew, or should have known, about two 
+accounting errors/exposures that the Company had failed to correct in its books and 
+records and about which the Company had failed to inform its independent auditor.   
+ 
+50. On May 30, 2013, Doktorczyk and Bolles signed a letter to the Company’s audit 
+firm representing that “there were no material transactions, agreements or accounts 
+that have not been properly recorded in the accounting records underlying the 
+consolidated financial statements.”  The materiality threshold in the letter was 
+$500K.  At the time they signed the letter, Doktorczyk and Bolles knew, or should 
+have known, about two issues—additional warranty accrual exposure (estimated to 
+be $4.2M at the time) and failure to amortize intangibles (approx. $1.87M) —that 
+exceeded the letter’s materiality threshold and had not been properly recorded in the 
+Company’s books and records. 
+ 
+51. On May 30, 2013, Doktorczyk certified that the Form 10-K did 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 the Form 10-K.  
+Doktorczyk also certified that the financial statements, and other financial 
+information in the Form 10-K, fairly presented in all material respects the financial 
+condition, results of operations and cash flows of LOGI for the period reported.  At 
+the time he signed the certification, Doktorczyk knew, or should have known, of the 
+errors/exposures concerning the warranty accrual and failure to amortize intangibles, 
+and the effect of those errors/exposures on the financial statements and results of 
+operations.   
+ 
+52. Prior to the filing of the Company’s Form 10-K in May 2013, Bolles knew, or 
+should have known, that LOGI’s internal accounting controls with respect to its 
+warranty accrual were insufficient.  Bolles was not only aware of deficiencies with 
+the AMR warranty model, but also knew, or should have known, that LOGI had 
+12 
+ 
+inadequate accounting controls over its warranty reserve in the EMEA region.  No 
+later than January 2013, she had been informed that LOGI had not updated its 
+warranty accrual calculation for two consecutive quarters in the EMEA region and, 
+thus, she knew, or should have known, the Company did not have an adequate basis 
+for the reserves it had recorded in those quarters. 
+ 
+53. The misstatements and omissions with respect to the warranty accrual were 
+material.  At the end of FY12, LOGI reserved $5.2M for its warranty obligations 
+and reported net income of $71.5M.  Using an appropriate methodology (i.e., the 
+model that LOGI subsequently proposed and adopted), the Company should have 
+reserved $25.5M -- an under-accrual of over $21M.  Similarly, in FY13, LOGI’s 
+accrual was over $17M lower than the GAAP-compliant model required.  
+  
+54. On August 7, 2013, LOGI filed an amended Form 10-K for FY13, disclosing and 
+correcting the warranty accrual and amortization expense errors, revising its 
+financial statements for FY09 through FY13, and correcting its reporting on internal 
+control.    
+Revenue Recognition in AMR 
+(Concerning the Company) 
+ 
+55. From late FY08 through FY09, LOGI improperly recognized revenue for sales to 
+its largest wholesale distributor (Distributor) in the AMR region. 
+ 
+56. Historically, in its AMR region, most of LOGI’s sales were to wholesale 
+distributors and large retailers.  For most sales, including those to Distributor, LOGI 
+recognized revenue at the time it shipped products (net of reserves for estimated 
+returns, incentives, price protection, and promotional programs).  This method of 
+revenue recognition is frequently called “sell-in.” 
+ 
+57. Under GAAP6, to recognize revenue based on “sell-in,” LOGI had to meet certain 
+criteria, including: LOGI’s price to Distributor had to be substantially fixed or 
+determinable at the time of sale, LOGI had to transfer the risks and rewards of 
+product ownership (principally, risk of loss) to Distributor, LOGI could not have 
+any significant obligation to bring about the resale of the product, and LOGI had to 
+be reasonably assured that it could collect payment from the seller. 
+ 
+58. If LOGI could not meet the criteria for “sell-in” revenue recognition, then GAAP 
+required the Company to recognize revenue only when it had met all the required 
+criteria in GAAP, which was generally when the wholesale distributor (or retailer) 
+sold the product to the next reseller (or end user) in the distribution chain. 
+                                                 
+6 Statement of Financial Accounting Standards No. 48 (“SFAS 48”), Revenue Recognition When Right of Return 
+Exists, which specifies the criteria a company must meet to recognize revenue at time of sale. This was subsequently 
+codified into the Accounting Standards Codification (“ASC”) as ASC 605-15-25 for FY10 and later. 
+ 
+13 
+ 
+ 
+59. By the end of FY08, and through FY09, the facts and circumstances of LOGI’s 
+relationship with Distributor required LOGI to recognize revenue based upon “sell-
+through.”  Nevertheless, throughout FY09, the Company continued to recognize 
+revenue from Distributor based upon “sell-in.”  
+ 
+  Logitech’s Course of Dealing with Distributor 
+ 
+60. From at least FY07 though FY09, LOGI consistently made large end-of-quarter 
+sales to Distributor in a “hockey stick” pattern: modest sales in the first two months, 
+with a sharp increase in sales in the quarter’s final weeks.  
+  
+61. In order to encourage Distributor to purchase excess product, LOGI provided 
+incentives to reach quarterly purchase thresholds, provided discounts for bulk 
+container sales, and gave discounts for large, lump-sum payments of overdue 
+invoices at quarter-end. 
+ 
+62. To meet its sales numbers, LOGI sold excess quantities of certain products to 
+Distributor with the understanding that LOGI would assist Distributor in selling the 
+products or would allow Distributor to return the products outside of the return 
+period or in excess of the contractual return rights.  When Distributor returned 
+products, LOGI credited the full invoice price and allowed Distributor to keep the 
+incentives and discounts. 
+ 
+63. Because of LOGI’s selling significant amounts of lower-demand goods, Distributor 
+had excess inventory of LOGI product and, as a result, withheld payment until 
+LOGI provided a plan for reducing Distributor’s inventory.  Although Distributor 
+had title to the inventory, Distributor considered the inventory to be “owned” only 
+if it had paid LOGI for that inventory. 
+ 
+64. To facilitate payment of past-due invoices, LOGI negotiated discounts based, in 
+part, on Distributor’s amount of “owned” inventory.  During FY09, LOGI gave 
+Distributor nearly $3M in such discounts.  Although LOGI had established a 
+pattern of offering and negotiating these end-of-quarter payment discounts going 
+back to FY07, LOGI did not accrue for them at the time of sale/shipment. 
+ 
+65. Distributor viewed the discounts as “owned” inventory discounts that were intended 
+to compensate Distributor for its carrying costs of excess inventory.  LOGI’s 
+practice of using discounts to obtain payment of past-due invoices and negotiating 
+discounts based, in part, on “owned” inventory levels was inconsistent with the 
+GAAP requirement that the price at the time of sale be fixed or determinable. 
+ 
+ 
+ 
+14 
+ 
+LOGI’s Attempts to Alleviate Excess Inventory Levels at Distributor 
+ 
+66. Given the facts and circumstances of its business with Distributor, LOGI should 
+have recognized revenue using the “sell-through” model no later than Q408.  
+Instead, in FY09, LOGI attempted to alleviate the large build-up of inventory by 
+finding buyers for Distributor’s excess inventory, arranging “sideways” 
+transactions, and allowing Distributor to return excess amounts of product.  In 
+effect, LOGI treated Distributor as an additional warehouse for inventory.  
+ 
+67. Throughout FY09, LOGI assisted Distributor in finding buyers for the excess 
+inventory that Distributor had purchased under generous incentives.   
+ 
+68. Despite Distributor’s elevated inventories of LOGI product, LOGI continued to 
+make large end-of-quarter sales to Distributor in FY09, selling some products even 
+though Distributor already had excess quantities.  
+ 
+69. In Q209 and Q309, in an effort to reduce Distributor’s inventory, LOGI authorized 
+extra-contractual returns and arranged “sideways” transactions or “channel to 
+channel” sales, in which LOGI would find a purchaser, have the product returned or 
+transferred from Distributor’s warehouse, and insulate Distributor from losing 
+money on the sale.  In Q209 and Q309, LOGI also accepted millions of dollars of 
+excess returns from Distributor.  LOGI characterized some of the returns as 
+“sideways” transactions, claiming that the Company needed the inventory to satisfy 
+a customer in another of its channels, and requesting that Distributor return the 
+product. 
+ 
+70. LOGI actively sought buyers for Distributor’s inventory at lower prices than 
+Distributor had paid, and then protected Distributor from losing money on the 
+transactions.  Specifically, LOGI credited Distributor at the original invoice price 
+for the extra-contractual returns and then re-sold the product at lower prices. 
+ 
+71. Despite LOGI’s efforts to reduce Distributor’s inventory levels, Distributor still had 
+excessive inventory of LOGI product in late FY09.  As a result, LOGI and 
+Distributor negotiated a special return of $12.5M of products, much of which LOGI 
+had sold to Distributor over a year earlier.  LOGI scrapped some of that product  
+shortly after it was returned. 
+ 
+72. Along with the other concessions LOGI gave to Distributor in FY09, the special 
+return was an  indication that LOGI should not have recognized revenue on sales to 
+Distributor upon “sell-in” in FY 09.  Instead, GAAP required that LOGI recognize 
+revenue from Distributor only upon Distributor’s sale of the product.   
+ 
+73. If LOGI had switched to a “sell-through” model for Distributor at the beginning of 
+FY09, as required by GAAP (assuming all general revenue recognition criteria 
+15 
+ 
+were achieved upon “sell-through”), LOGI’s gross sales would have been $52M 
+lower in FY09.  Given LOGI’s reported operating income of $109M and gross 
+margins of 31.3%, LOGI materially overstated its operating income by 
+approximately $16.2M in FY09, as a result of its improperly recognizing revenue 
+from Distributor. 
+ 
+Violations 
+ 
+74. As a result of the conduct described above, Logitech violated 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. 
+ 
+75. As a result of the conduct described in Paragraphs 28-54 above, Doktorczyk 
+violated Section 13(b)(5) of the Exchange Act, and Rules 13a-14, 13b2-1 and 13b2-
+2 thereunder, and caused Logitech’s violations of Sections 13(a), 13(b)(2)(A) and 
+13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11 and 13a-13 
+thereunder. 
+ 
+76. As a result of the conduct described in Paragraphs 28-54 above, Bolles violated 
+Rule 13b2-1 promulgated under the Exchange Act, and caused Logitech’s 
+violations of Sections 13(a), 13(b)(2)(A) and (B) of the Exchange Act, and Rules 
+12b-20, 13a-1, 13a-11 and 13a-13 thereunder. 
+  
+Logitech’s Remedial Efforts 
+In determining to accept the Offers, the Commission considered remedial acts promptly 
+undertaken by LOGI and the cooperation LOGI 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. Respondent Logitech International, S.A. shall cease and desist from committing or 
+causing any violations and any future violations of Sections 10(b), 13(a), 
+13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 
+13a-11, and 13a-13 thereunder. 
+ 
+B. Respondent Michael Doktorczyk shall cease and desist from committing or causing 
+any violations and any future violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), 
+and 13(b)(5) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, 13a-13, 13a-14, 
+13b2-1 and 13b2-2 thereunder. 
+16 
+ 
+ 
+C. Respondent Sherralyn Bolles shall cease and desist from committing or causing any 
+violations and any future violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) of 
+the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13b2-1 thereunder. 
+ 
+D. Respondent Logitech International, S.A. shall, within ten (10) days of the entry of 
+this Order, pay a civil money penalty in the amount of $7,500,000 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, as amended. The Commission will hold funds paid 
+pursuant to this paragraph in an account at the United States Treasury pending a 
+decision whether the Commission, in its discretion, will seek to distribute funds or, 
+subject to Exchange Act Section 21F(g)(3), transfer them to the general fund of the 
+United States Treasury.  If timely payment is not made, additional interest shall 
+accrue pursuant to 31 U.S.C. § 3717. 
+ 
+E. Respondent Michael Doktorczyk 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.  The Commission may distribute civil money penalties 
+collected in this proceeding if, in its discretion, the Commission orders the 
+establishment of a Fair Fund pursuant to 15 U.S.C. § 7246, Section 308(a) of the 
+Sarbanes-Oxley Act of 2002, as amended. The Commission will hold funds paid 
+pursuant to this paragraph in an account at the United States Treasury pending a 
+decision whether the Commission, in its discretion, will seek to distribute funds or, 
+subject to Exchange Act Section 21F(g)(3), transfer them to the general fund of the 
+United States Treasury.  If timely payment is not made, additional interest shall 
+accrue pursuant to 31 U.S.C. § 3717. 
+ 
+F. Respondent Sherralyn Bolles shall pay a civil penalty of $25,000 to the Securities 
+and Exchange Commission.  The Commission may distribute civil money penalties 
+collected in this proceeding if, in its discretion, the Commission orders the 
+establishment of a Fair Fund pursuant to 15 U.S.C. § 7246, Section 308(a) of the 
+Sarbanes-Oxley Act of 2002, as amended. The Commission will hold funds paid 
+pursuant to this paragraph in an account at the United States Treasury pending a 
+decision whether the Commission, in its discretion, will seek to distribute funds or, 
+subject to Exchange Act Section 21F(g)(3), transfer them to the general fund of the 
+United States Treasury.  Payment shall be made in the following installments: 
+$12,500, within ten days of the date of this Order; $12,500 by January 31, 2017.  If 
+any payment is not made by the date the payment is required by this Order, the 
+entire outstanding balance of the civil penalty, plus any additional interest accrued 
+pursuant to 31 U.S.C. § 3717, shall be due and payable immediately, without further 
+application. 
+ 
+17 
+ 
+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  
+ 
+(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 
+Logitech International, S.A., Michael Doktorczyk, or Sherralyn Bolles as a Respondent in these 
+proceedings, and the file number of these proceedings; a copy of the cover letter and check or 
+money order must be sent to Gerald Hodgkins, Esq., Division of Enforcement, Securities and 
+Exchange Commission, 100 F St., NE, Washington, DC 20549-6561.   
+ 
+ O. Such civil money penalty may be distributed pursuant to Section 308(a) of the 
+Sarbanes-Oxley Act of 2002, as amended (“Fair Fund distribution”).  Regardless of whether any 
+such Fair Fund distribution is made, amounts ordered to be paid as civil money penalties pursuant 
+to this Order shall be treated as penalties paid to the government for all purposes, including all tax 
+purposes.  To preserve the deterrent effect of the civil penalty, Respondents agree that in any 
+Related Investor Action, Respondents shall not argue that Respondents are entitled to, nor shall 
+they benefit by, offset or reduction of any award of compensatory damages by the amount of any 
+part of Respondents’ payment of a civil penalty in this action ("Penalty Offset").  If the court in any 
+Related Investor Action grants such a Penalty Offset, Respondents agree that they shall, within 30 
+days after entry of a final order granting the Penalty Offset, notify the Commission's counsel in this 
+action and pay the amount of the Penalty Offset to the Securities and Exchange Commission.  Such 
+a payment shall not be deemed an additional civil penalty and shall not be deemed to change the 
+amount of the civil penalty imposed in this proceeding.  For purposes of this paragraph, a "Related 
+Investor Action" means a private damages action brought against Respondent by or on behalf of 
+one or more investors based on substantially the same facts as alleged in the Order instituted by the 
+Commission in this proceeding. 
+  
+18 
+ 
+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. 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 
+ 

raw/aaer/2016/AAER-3766.txt

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+ 
+ 
+UNITED STATES OF AMERICA 
+Before the 
+SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES ACT OF 1933 
+Release No. 10068 / April 19, 2016 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77645 / April 19, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No. 3766 / April 19, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17213 
+ 
+In the Matter of 
+ 
+ENER1, INC., 
+ 
+CHARLES L. GASSENHEIMER, 
+ 
+JEFFREY A. SEIDEL,  
+ 
+and 
+ 
+ROBERT R. KAMISCHKE, 
+  
+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 Ener1, Inc., Charles L. Gassenheimer, Jeffrey A. Seidel, and Robert R. Kamischke 
+(collectively “Respondents”).   
+ 
+II. 
+ 
+ In anticipation of the institution of these proceedings, Respondents have submitted Offers 
+of Settlement (“Offers”) which the Commission has determined to accept.  Solely for the purpose 
+ 2 
+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 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 
+  Ener1, Inc. was formerly a NASDAQ-listed U.S. company that designed, manufactured, 
+and developed lithium ion batteries for transportation, grid energy, and consumer products.  Ener1 
+committed violations of the federal securities laws resulting in materially overstated earnings and 
+assets for year-end 2010 as well as the first quarter of 2011.  It did so by: (1) not impairing at year-
+end 2010 its investments in the equity of an unconsolidated related-party entity of which it had 
+48% voting rights; (2) improperly recognizing revenue from sales of batteries to that entity during 
+the fourth quarter of 2010; and (3) not properly assessing the collectability of its loan and accounts 
+receivables from that entity to determine whether those assets were impaired at year-end 2010 and 
+end of the first quarter of 2011.  Ener1 materially misstated its financial statements because its 
+management did not appropriately analyze the impairment issues and because senior management 
+did not communicate certain facts relevant to an impairment analysis to Ener1’s accounting staff 
+and external auditor.  Ener1 lacked sufficient procedures and staff to determine the relevant U.S. 
+Generally Accepted Accounting Principles (“GAAP”) as well as accounting internal controls to 
+obtain necessary information to apply GAAP.  In the course of the foregoing, Respondents 
+committed various violations of the federal securities law as cited herein. 
+Respondents 
+1. Ener1, Inc. (“Ener1”) was, at all relevant times, headquartered in New York with 
+offices in Indiana and Florida (was a Florida corporation, founded in 1985) and was a public, US-
+based company that designed, manufactured and developed lithium ion batteries for transportation, 
+grid energy, and consumer products.  On December 2, 2011, the NASDAQ Stock Market, LLC, 
+filed a Form 25 notice of delisting of Ener1’s common stock from the NASDAQ market and 
+terminating its registration obligation under Section 12(b) pursuant to Section 12(d) of the 
+Exchange Act.  On January 26, 2012, Ener1 filed for bankruptcy.  On March 30, 2012, Ener1 filed 
+a Form 15 notice of deregistration of its securities from registration under Section 12(g) and 
+suspension of duty to file reports under Sections 13 and 15(d) of the Exchange Act.  As of that day, 
+it emerged from bankruptcy as a private company.   
+                                                 
+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. Charles L. Gassenheimer (“Gassenheimer” or “Respondent”), age 42, of Glen 
+Head, New York, was at all times relevant the Chief Executive Officer (“CEO”) and Board 
+Chairman of Ener1.  He became an Ener1 Director in 2006, Board Chair in 2007, and CEO in 
+2008.  Gassenheimer also became the CEO and Director of Ener1 Group, Inc.  As CEO, 
+Gassenheimer signed the certifications associated with Ener1’s Form 10-K for the year-ended 
+December 31, 2010 and the Form 10-Q for the quarter ended March 31, 2011. 
+3. Jeffrey A. Seidel (“Seidel” or “Respondent”), age 53, of New Canaan, 
+Connecticut, was Chief Financial Officer (“CFO”) of Ener1 from September 2010 to October 
+2011.  Seidel joined Ener1 as Vice President for Corporate Strategy in 2008 and became Ener1’s 
+Chief Strategy Officer in January 2010.  Seidel has never been a CPA.  As CFO, Seidel signed the 
+certifications associated with Ener1’s Form 10-K for the year-ended December 31, 2010 and the 
+Form 10-Q for the quarter ended March 31, 2011. 
+4. Robert R. Kamischke (“Kamischke” or “Respondent”), age 61, of Fenton, 
+Michigan, was the Chief Accounting Officer (“CAO”) of Ener1 and CFO of Ener1 subsidiary, 
+EnerDel, Inc., from September 2010 to July 2011.  Kamischke has never been a CPA.  Kamischke 
+had joined Ener1 in November 2008 as Controller of the Ener1 subsidiary, EnerDel, Inc. and 
+focused on implementing project controls, budget, planning, and cost systems.  As CAO, 
+Kamischke signed the certifications associated with Ener1’s Form 10-K for the year-ended 
+December 31, 2010 and the Form 10-Q for the quarter ended March 31, 2011. 
+Other Relevant Parties 
+5. Think Holdings, AS, a private Norwegian limited liability company, was majority 
+owner of Think Global, AS (which are collectively referred to as “Think”).  Think Global was an 
+electric car manufacturer.  Think filed for bankruptcy protection in 2006 and again in 2008.  It 
+emerged from the 2008 bankruptcy in 2009 through a debt settlement entered into by Ener1, a 
+third-party contract manufacturer for Think, a Norwegian government investment fund, and others.  
+After its emergence from bankruptcy, Gassenheimer became a Think Holdings, AS, Director in 
+2009 and Think Holdings Board Chairman in 2010.  On June 22, 2011, Think Global again filed 
+for bankruptcy.   
+FACTS  
+A. The Financial Statements Contained in Ener1’s 2010 Form 10-K Did Not Conform with 
+GAAP 
+6. During the period relevant to this Order, January 1, 2010 through June 22, 2011 
+(“Relevant Period”), Ener1 was a manufacturer of lithium batteries for various purposes including 
+electric cars.  During this time, one of its largest customers was Think, a manufacturer of electric 
+cars.  Ener1 not only supplied batteries to Think but also had voting rights for almost 50% of its 
+equity and held loan and accounts receivables from Think.  In its Form 10-K for the year-ended 
+December 31, 2010 filed on March 10, 2011, Ener1 reported an equity investment in Think of 
+$58.6 million, which represented 15 percent of Ener1’s $396.5 million in total assets, and 48% 
+voting interest in Think; accounts receivable from Think of $13.6 million ($8.5 mm past due), 
+which represented three percent of Ener1’s assets; loans receivable from Think totaling $14.0 
+ 4 
+million, which represented 3.5 percent of Ener1’s assets; and sales to Think of $18.8 million, 
+representing 24% of Ener1’s 2010 revenue of $77 million.  
+7. At December 31, 2010, as described above, Ener1’s investment in Think was $58.6 
+million, Ener1’s accounts receivable from Think was $13.6 million, Ener1’s loans receivable from 
+Think was $14.0 million and sales to Think were $18.8 million.  On March 10, 2011, Ener1 filed 
+its Form 10-K for 2010.  Gassenheimer, Seidel, and Kamischke signed the Form 10-K and 
+provided certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 
+8. The financial statements contained in Ener1’s 2010 Form 10-K did not conform 
+with GAAP in several ways thereby causing material misstatements in the 2010 Form 10-K 
+concerning Ener1’s financial results.  The financial statements did not conform with GAAP 
+because Respondents did not take into account the deteriorating financial condition of Think as 
+detailed below when determining whether to impair the assets associated with Think as well as the 
+revenue derived from sales to Think.    
+1. Think’s Deteriorating Financial Condition 
+9. Ener1 had purchased Think B shares in several tranches at Norwegian Kroner 
+(“NOK”) 10 per share, the last of which had been purchased by May of 2010.  The May 2010 
+financing was projected to “fully finance” Think until the end of 2010.  However, during the third 
+week of September, 2010, Think informed Gassenheimer, who was serving as Think’s Chairman 
+and Ener1’s CEO at the time, that the company’s previous estimates regarding cash and inventory 
+were inaccurate.  Instead of $14.3 million in cash projected to be on hand as of September 2010, 
+Think had negative $2 million, and instead of $13.6 million in inventory, the company had $24.4 
+million due to accounting errors and mistakes in accounting for inventory.   
+10. Due to its cash constraints, Think could not pay creditors.  Think sought immediate 
+funding from prior investors, including Ener1, through two rounds of funding in September and 
+December of 2010, which ultimately fell short of covering Think’s financial needs.  In 2010, Think 
+had also retained an investment firm “to act as its lead placement agent in connection with the sale 
+of its equity or equity-linked securities.”  Due in part to Think’s cash issues, the investment firm 
+postponed its efforts to introduce Think to possible investors until January 2011.     
+11. On January 12, 2011, Ener1 management emailed Think management (copied to 
+Kamischke, Seidel, and Gassenheimer) a memo that required Think to present a “thorough and 
+credible plan” for Think’s immediate operations and cash management.  On January 14, 2011, as 
+the plan Ener1 had requested, the so-called “90 day plan,” was presented to Think’s Board, 
+including Gassenheimer.  The 90 day plan included receiving a $10 million bridge loan from 
+Ener1, selling more cars, cutting expenses, negotiating supplier payment suspensions, and 
+“rais[ing] $50-70 million at whatever valuation it [could] get.”  At that time Seidel and Kamischke 
+agreed that Ener1 could not provide the $10 million in additional financing that Think had 
+requested from Ener1.  On February 11, 2011, a representative of the investment firm addressed 
+Think’s Board at a meeting that both Gassenheimer and Seidel attended, and stated that the 
+probability of raising $50 million would be greater with a low per-share valuation, describing a 
+potential capital raise as “valuation sensitive.” 
+ 5 
+12. By January 20, 2011, Gassenheimer, Seidel, and Kamischke received an interim 
+report by Think’s auditor (“Think Auditor Report”) that described multiple controls and financial 
+reporting deficiencies and stated that Think may “risk threats to the going concern assumption” if 
+management did not continue to “focus on securing the companies’ income, control of expenses 
+and ensuring adequate liquidity.”  On January 21, 2011, Think’s auditor sent a letter to the Think 
+Board, including Gassenheimer, stating that it was aware that the December fundraising efforts had 
+been unsuccessful, and warned the directors that if the company could not make payments when 
+due, and the equity fell to less than half of the capital, the directors had an obligation, with 
+attendant criminal liability, under Norwegian law, to dissolve the company.   
+13. In a January 31, 2011 email drafted by Seidel, Gassenheimer, and the Ener1 COO, 
+the Ener1 board was informed of the following: 1) existing Think investors had not funded Think 
+adequately; 2) Ener1 had sent Think $2.8 million in January 2011 in order for Think to cover its 
+current payroll obligations; and 3) Think had $30 million in payables to Ener1 and other suppliers, 
+and a maximum of $15.5 million potential gross proceeds in finished and near finished goods.  
+Ener1 did not include this information in board minutes provided to its auditors.   
+14. On February 2, 2011, a party related to an existing Think investor submitted a 
+preliminary proposal for a term sheet with a target raise of $20 million of Think B shares at NOK 2 
+per share.  Gassenheimer, Seidel, and Kamischke received a copy of the preliminary term sheet 
+proposal.  During the 2010 year-end audit, Ener1’s auditors were never provided with a copy of the 
+proposal or otherwise made aware of its terms.   
+15. Think’s 90-day plan included obtaining a $10 million bridge loan from Ener1.  
+However, Seidel and Kamischke determined that Ener1 could not provide that additional 
+financing.  During a February 5, 2011 Think Board meeting (a meeting attended by Seidel and 
+Kamischke), Gassenheimer proposed the additional bridge financing.  In response, Seidel 
+explained in an email to Gassenheimer (copied to Kamischke) that Ener1 was not in a financial 
+position to fund a $10 million bridge loan to Think, adding that Think sales had not increased and 
+the car’s bill of materials cost had not decreased.    
+16. By early February 2011, Ener1’s budget projections assumed that Ener1 would not 
+receive payments from Think, and Ener1 would not sell any more batteries to Think in 2011.  On 
+February 15, 2011, the COO and Kamischke presented a revised budget to the Ener1 Board (a 
+meeting attended by Gassenheimer and Seidel), showing “meager Think sales” and an “inability to 
+collect” on Think receivables.   
+17. Because of Think’s inability to pay the third party that actually manufactured its 
+cars (“third-party manufacturer”), at the beginning of February 2011, Think and its third-party 
+manufacturer negotiated a four-week production shut down.  On February 20, Think informed its 
+third-party manufacturer that it was suspending operations and payments to all suppliers for sixty 
+days.  As a result, beginning in early February 2011, although the third-party manufacturer may 
+have completed some cars already in process, it did not manufacture new cars. 
+ 6 
+2. Not Applying Properly Impairment Factors as to Ener1’s Equity Investment in Think 
+Resulted in a $58.6 Million Overstatement.   
+ 
+18. As described above in the Form 10-K filed on March 10, 2011, Ener1 reported an 
+equity investment in Think of $58.6 million.  Ener1 had purchased Think B shares in several 
+tranches recorded at NOK 10 per share, the last of which it purchased in May of 2010.  Ener1’s 
+equity investment in Think B shares was recorded at cost because the form of the investment was 
+not deemed to be equivalent to common stock for accounting purposes.  See FASB Accounting 
+Standards Codification (“ASC”) 325.  As part of preparing its financial statements to be included 
+in its Form 10-K, Ener1’s accounting staff undertook an analysis (“Impairment Memo”) to 
+determine whether, and if so, to what amount Ener1’s $58.6 million equity investment in Think 
+was impaired pursuant to ASC 320, Investments – Debt and Equity Securities.  The accounting 
+staff did so because Ener1’s investment in Think was a material part of the balance sheet. 
+19. Ener1’s equity investment in Think B shares was recorded at cost because the form 
+of the investment was not deemed to be equivalent to common stock for accounting purposes.  For 
+investments held at cost, such as Ener1’s investment in Think, GAAP requires that the reporting 
+entity evaluate whether an event or  change in circumstances has occurred in that period that may 
+have had an adverse effect on the fair value of the investment.  GAAP impairment indicators 
+include, but are not limited to: 1) a significant deterioration in the earnings performance, credit 
+rating, asset quality, or business prospects of the investee; 2) a significant adverse change in the 
+regulatory, economic, or technological environment of the investee; 3) a significant adverse change 
+in the general market condition of either the geographic area or the industry in which the investee 
+operates; 4) a bona fide offer to purchase (whether solicited or unsolicited), an offer by the investee 
+to sell, or a completed auction process for the same or similar security for an amount less than the 
+cost of the investment; and/or 5) factors that raise significant concerns about the investee's ability 
+to continue as a going concern, such as negative cash flows from operations, working capital 
+deficiencies, or noncompliance with statutory capital requirements or debt covenants.2 
+20. In the Impairment Memo, prepared by Ener1’s accounting department and 
+reviewed by Seidel and Kamischke, the company concluded that Ener1’s investment in Think was 
+not impaired as of December 31, 2010 because no impairment factors were present.  Ener1’s 
+accounting staff provided this memorandum to Ener1’s auditors as support of its decision to 
+continue carrying its investment in Think at cost.   
+21. However, contrary to the conclusion in the Impairment Memo, Respondents were 
+aware of information that should have indicated that a change of circumstances had occurred that 
+had an adverse effect on the fair value of Ener1’s investment in Think from the time of purchase 
+such that the equity investment should have been impaired.  In fact, by the time that Ener1 filed its 
+Form 10-K, Think had: 1) softer than expected sales; 2) considered raising funds at “whatever 
+valuation”; 3) a cessation of production of cars; 4) a lack of cash to pay creditors or maintain 
+operations; 4) a preliminary going concern from its auditors; 5) a preliminary offer;  6) failed to 
+pay its loans from Ener1 when due and payable; and 7) failed to pay for batteries shipped to it by 
+                                                 
+2 See FASB Accounting Standards Codification (“ASC”) 320-10-35-27. 
+ 7 
+Ener1.3  These impairment indicators, should have necessitated Ener1 impairing its $58.6 million 
+equity investment in Think as of December 31, 2010, instead of Ener1 incorrectly reporting it as an 
+impairment as of March 31, 2011.4   
+3. Not Conducting an Impairment Analysis as to Loans Receivable Such that Loans 
+Receivable Were Overstated by $ 14 Million at Year-End. 
+ 
+22. In its Form 10-K filed on March 10, 2011, Ener1 reported that its loans receivable 
+from Think totaled $14.0 million, which represented 3.5 percent of Ener1’s assets.  It found that 
+the loans receivable did not require impairment because Ener1 concluded, based on a minimal 
+analysis in the Impairment Memo without any citation to the relevant accounting literature, that the 
+loans receivable were not impaired. 
+23. However, under GAAP, a loss from receivables must be recorded when both of the 
+following conditions are met: 1)”[i]nformation available before the financial statements are issued 
+or are available to be issued… indicates that it is probable that an asset has been impaired at the 
+date of the financial statements,” and 2) “[t]he amount of the loss can be reasonably estimated.5”   
+24. Ener1 made the following loans in late 2010 when Think was already in significant 
+financial distress: 1) an October 1, 2010 $5 million loan, due December 31, 2010 that Think never 
+repaid nor did it make any interest payments required by the terms of the loan; 2) an October €1 
+million loan paid directly to the third-party manufacturer so it would continue producing cars on 
+behalf of Think, which was never repaid; and 3) a November 18, 2010, $5 million line of credit to 
+Think (exhausted by December 2010), due on January 21, 2011 that was never repaid.  Despite 
+Think’s desperate need for cash, and its failure to pay any interest on the outstanding loans 
+receivable, Ener1 did not conduct any analysis as to the likelihood that the loans receivable was 
+impaired.  In fact, Ener1 did not have specific written procedures by which to assess the 
+impairment of loans.  By not impairing the loans receivable as of December 31, 2010, Ener1 
+overstated its assets by $14 million or 3.5 percent of its total assets.   
+4. Not Conducting an Impairment Analysis as to Accounts Receivable Resulted in an 
+Overstatement of $13.6 million in Accounts Receivable.   
+ 
+25. For purposes of the 2010 year-end audited financial statements included in Ener1’s 
+Form 10-K, Ener1’s accounts receivable from Think were recorded at $13.6 million ($8.5 mm past 
+due), which represented 3.4 percent of Ener1’s assets.  Ener1 concluded, based a short analysis in 
+the Impairment Memo without any citation to the relevant accounting literature, that the accounts 
+receivable were not impaired as of December 31, 2010.   
+                                                 
+3 None of these facts were included in the Impairment Memo.  Instead, the Impairment Memo represented that 
+original investment had not deteriorated, car sales were strong, Think continued to sell its shares at NOK 10, and 
+there was no going concern regarding Think because it would be able to raise additional funds through financing. 
+4 As discussed below, the company issued a Form 8-K in August 2011, recognizing that it should have impaired its 
+equity investment in think as of year-end 2010.   
+5 See ASC 310-10-35-8. 
+ 8 
+26. Under GAAP, a loss from receivables must be recorded when both of the following 
+conditions are met: 1)”[i]nformation available before the financial statements are issued or are 
+available to be issued… indicates that it is probable that an asset has been impaired at the date of 
+the financial statements,” and 2) “[t]he amount of the loss can be reasonably estimated.6”  Think 
+made its last payment for batteries received from Ener1 in mid-September 2010, although Ener1 
+continued to ship batteries and record revenue through January 2011.  By November 2010, Think 
+owed Ener1 $4.5 million from batteries already shipped, and Ener1 accounting personnel including 
+Kamischke were concerned regarding the non-payment.  Despite that concern, Ener1’s accounting 
+staff did not perform any collectability analysis as to whether the accounts receivable might be 
+impaired.  In fact, Ener1 did not have specific written procedures by which to assess the 
+impairment of accounts receivable.  By not impairing the accounts receivable as of December 31, 
+2010, Ener1 misstated its assets by over 3 percent. 
+5. Not Determining Whether Fourth Quarter 2010 Think-Related Revenue Should Have 
+Been Recognized Caused 14% Revenue Overstatement  
+27. For purposes of the audited year-end financial statements included in the 2010 
+Form 10-K, Ener1 recognized $18.8 million in revenue in connection with the shipment of 
+batteries to Think.  Although Ener1 lacked a formal written revenue recognition policy, Ener1 
+disclosed in its Form 10-K that to recognize revenue it must determine that that there was 
+reasonable assurance of collectability for revenue to be recognized. 7  Here, because of the 
+deteriorating condition of Think, as detailed above, Ener1 did not perform the analysis for 
+sufficient reasonable assurance that it would be able to collect on the revenue recognized from its 
+shipment of batteries to Think during the fourth quarter of 2010.  By recognizing revenue from that 
+quarter, Ener1’s revenue was overstated by 14% ($77 million reported would become $66 million 
+as adjusted). 
+28. In its year-end 2010 Form 10-K, Ener1 disclosed that as of January 2011, it 
+“temporarily stopped” sending batteries to Think at its direction “until the company rebalanced its 
+overall inventory levels.”  Gassenheimer reiterated this reason in a March 10, 2010 conference call.  
+By the time of the filing of the Form 10-K and the conference call, Think was also experiencing a 
+severe operational and financial deterioration, was undertaking a restructuring plan, and had also 
+negotiated a shutdown with its third-party manufacturer because it could not pay the manufacturer.   
+B. Events Subsequent to the Filing of the 2010 Form 10-K 
+29. Subsequent to the filing of Form 10-K, Think’s financial condition continued to 
+deteriorate.  By the end of March, Think was unable to pay payroll taxes, its investment banker had 
+been unable to find any willing investors, and its CFO, after consulting with Seidel, sent an email 
+to Gassenheimer, among others, recommending that Think seek court-ordered liquidation.  By 
+                                                 
+6 See ASC 310-10-35-8.    
+7 ASC 605-10-25-1 provides that revenue may be properly recognized only when it is both a) realized or 
+recognizable and b) earned.  See also Staff Accounting Bulletin Topic 13, Revenue Recognition, 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.   
+ 9 
+April, Gassenheimer emailed the Ener1 Board indicating that Think was in need of restructuring 
+because its past due payables exceeded $50 million.   
+30. Throughout March and April 2011, Gassenheimer and Seidel, with the assistance of 
+the Ener1 accounting staff, formulated various organization and ownership scenarios, all of which 
+contemplated Ener1 contributing its Think-related assets in exchange for an interest in a joint 
+venture, that would include Think’s third-party manufacturer and Ener1’s largest shareholder, to 
+take ownership of Think.  None of those scenarios provided for Ener1 to recover 100 percent of its 
+reported amount of its equity investment and/or receivables in Think.  The scenarios also failed to 
+account for the payment, either in cash or interest in a joint venture, of Think’s other equity 
+investors or trade creditors other than the third-party manufacturer.   
+31. On April 17, 2011, the Think Board considered a liquidation analysis/going 
+concern analysis performed by Think’s investment banker (“liquidation analysis”).  The analysis 
+concluded that Think would be worth $10-15 million in liquidation and it would require a $135 to 
+$150 million capital investment to remain as a going concern.  Seidel received the liquidation 
+analysis and an invitation to the Board meeting from Gassenheimer.  Seidel sent the liquidation 
+analysis to Kamischke.   
+C. Ener1’s Form 10-Q for the  First Quarter of 2011 Contained Financial Statements that 
+Did Not Conform with GAAP  
+32. Ener1 did not impair its Think loans or accounts receivable, based upon the 
+assertion that those amounts would be recovered in the joint venture.  On April 29, Seidel, in an 
+email to Gassenheimer challenged the recoverability of the receivables given the percentages of 
+ownership in the joint venture, and the amount of financial contribution by other joint venture 
+partners as compared with the total amount of Ener1 receivables.  Gassenheimer replied that the 
+capital commitments from the joint venture partners still needed to be negotiated. 
+33. On May 10, 2011, Ener1 filed its Form 10-Q for the First Quarter of 2011.  
+Gassenheimer, Seidel, and Kamischke each signed and certified the filing.  In its Form 10-Q, 
+although Ener1 disclosed that the Think investment was impaired, and recorded an impairment loss 
+of approximately $59.4 million (100%) during the three months ended March 31, 2011, “primarily 
+due to the uncertainty of when or if Think Global will recommence operations…” it did not impair 
+the accounts receivable or loans receivable.  In the filing, Ener1 stated that impairment was 
+unnecessary because management believed it would realize full value, “which may include our 
+receipt of equity or other value in connection with a potential equity restructuring of Think 
+Holdings.”  
+34. Think filed for bankruptcy on June 22, 2011, and on the same day, Ener1 
+announced that it would take a material charge for the Think receivables.  In a Form 8-K filed on 
+August 10, 2011, Ener1 stated that its year-end 2010 Form 10-K and first quarter 2011 Form 10-Q 
+should not be relied upon, and that Ener1 would restate its filings.  Specifically, the Company 
+stated that it would amend its 2010 year-end Form 10-K and its first quarter 2011 Form 10-Q for 
+the quarter ended March 31, 2011 to restate its financial statements to reflect, as of December 31, 
+2010, the impairments of its investment in Think (which had previously been recorded in the first 
+quarter of 2011), its Think accounts receivable and its Think loans receivable including accrued 
+ 10 
+interest, as well as reflect the corrected accounting for revenue recognized in connection with 
+transactions with Think during the year ended December 31, 2010 and the three months ended 
+March 31, 2011. Ultimately, Ener1 did not file a restatement, and in January 2012, it filed for 
+bankruptcy protection. 
+D. Accounting and Internal Accounting Controls Environment at Ener1 
+35. It was of central importance for those responsible for financial reporting and 
+internal controls at Ener1 to have a command of GAAP.  It was also important that the accounting 
+staff received the requisite information to determine that Think-related assets and revenue were 
+properly stated in accordance with GAAP given the significance of Think to the financial 
+statements of Ener1.   
+36.  Ener1 had numerous deficiencies throughout its system of internal accounting 
+controls that were attributable, in part, to its failure to understand and assess the risks in its control 
+environment.  First, Ener1 lacked procedures to ensure that the geographically dispersed 
+accounting personnel received necessary information generally and specifically, as it related to 
+Ener1’s relationship with Think.8  Second, it did not maintain a sufficient complement of personnel 
+with the requisite level of accounting knowledge, experience, and training in the application of 
+GAAP.  Finally, Ener1 did not have specific documented accounting procedures as to: 1) when and 
+how to conduct an impairment analysis as to any equity held by the company; 2) determining the 
+collectability of loans receivable; 3) determining the collectability of accounts receivable; and 4) 
+the recognition of revenue.  Gassenheimer, Seidel, and Kamischke did not ensure that Ener1 had 
+these requisite procedures in place to ensure that the books and records were properly maintained, 
+and ultimately that the financial statements disclosed in public filings would be in accordance with 
+GAAP.   
+37. Ener1 lacked any specific procedures regarding information distribution to the 
+accounting staff.  Instead, the accounting staff shared information through weekly telephone calls, 
+and some members of the accounting staff routinely received Ener1 board minutes while others did 
+not.  Specifically, as to Think, while Gassenheimer, Seidel and Kamischke received significant 
+information regarding Think such as Think board minutes and Think board presentations, they did 
+not have a specific documented procedure so that the accounting staff responsible for financial 
+reporting received necessary information.  Respondents did not ensure that pertinent information 
+with respect to Ener1’s investment in and transactions with Think were identified, captured, and 
+communicated in a form and time frame sufficient to enable finance and accounting personnel to 
+carry out their responsibilities.    
+38. Respondents Seidel and Kamischke lacked expertise in accounting to assess the 
+information obtained regarding Ener1’s exposure to Think.  Neither Seidel nor Kamischke was a 
+CPA.  Furthermore, Seidel and Kamischke were new to their roles and had never been responsible 
+for a public company’s financial reporting.  Gassenheimer, Seidel, and Kamischke did not ensure 
+                                                 
+8 Ener1’s accounting function was dispersed among three locations located in New York, Florida, and Indiana.  
+Seidel worked in the NY corporate office with Gassenheimer while Kamischke and the Controller worked at a 
+manufacturing and research facility in Indianapolis.  Meanwhile, the Director for Financial Reporting worked in the 
+Florida office and only worked full time during the reporting season.  Also located in the Florida office was the 
+Director of Internal Controls.    
+ 11 
+that Ener1 had a sufficient complement of personnel with the requisite level of accounting 
+knowledge, experience, and training.    
+E. Sales of Ener1 Treasury Securities 
+39. Ener1 sold 2,858,357 shares of Ener1 treasury securities on the open market 
+between January 25, 2011 through June 3, 2011, for gross proceeds of $9,452,577 at a time when 
+Ener1’s financial statements were materially inaccurate, and Think’s operational and financial 
+deterioration had not been disclosed.9  The shares were sold to provide funding for Ener1’s 
+operations and to pay quarterly interest on senior unsecured notes.   
+Violations  
+40. Section 17(a)(2) makes it unlawful to obtain money or property through 
+misstatements or omissions about material facts; and Section 17(a)(3) proscribes any transaction or 
+course of business that operates or would operate as a fraud or deceit upon a purchaser of 
+securities.  SEC v. Softpoint, Inc., 958 F. Supp. 846, 861 (S.D.N.Y. 1997), aff’d, 159 F.3d 1348 (2d 
+Cir. 1998).  Only negligence is required for liability under Sections 17(a)(2) and 17(a)(3).  Aaron v. 
+SEC, 446 U.S. 680, 697 (1980). 
+41. Section 13(a) of the Exchange Act requires issuers to file such periodic and other 
+reports as the Commission may prescribe and in conformity with such rules as the Commission 
+may promulgate.  Exchange Act Rules 13a-1 and 13a-13 require the filing of annual and quarterly 
+reports, respectively.  In addition to the information expressly required to be included in such 
+reports, Rule 12b-20 of the Exchange Act requires issuers to add such further material information, 
+if any, as may be necessary to make the required statements, in the light of the circumstances under 
+which they are made not misleading. “The reporting provisions of the Exchange Act are clear and 
+unequivocal, and they are satisfied only by the filing of complete, accurate, and timely reports.”  
+SEC v. Savoy Industries, 587 F.2d 1149, 1165 (D.C. Cir. 1978) (citing SEC v. IMC Int’l, Inc., 384 
+F. Supp. 889, 893 (N.D. Tex. 1974)).  A violation of the reporting provisions is established if a 
+report is shown to contain materially false or misleading information. SEC v. Kalvex, Inc., 425 F. 
+Supp. 310, 316 (S.D.N.Y. 1975).  No showing of scienter is necessary to establish an issuer’s 
+violation of Section 13(a).  SEC v. Wills, 472 F. Supp. 1250, 1268 (D.D.C. 1978).   
+42. Section 13(b)(2)(A) of the Exchange Act requires issuers to “make and keep books, 
+records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and 
+dispositions of the assets of the issuer.”  Section 13(b)(2)(B) of the Exchange Act requires issuers 
+to devise and maintain a system of internal accounting controls sufficient to provide reasonable 
+assurances that transactions are recorded to permit the preparation of financial statements in 
+conformity with generally accepted accounting principles.  No showing of scienter is necessary to 
+establish violations of Sections 13(b)(2)(A) and 13(b)(2)(B).  SEC v. World-Wide Coin 
+Investments, 567 F. Supp. 724, 749-51 (N.D. Ga. 1983).  
+                                                 
+9 The sales took place pursuant to a Form S-3 shelf registration that Ener1 filed (Gassenheimer signed) and that 
+became effective on February 5, 2009.  Shares were taken off the shelf, and the S-3 was updated with a Form 424 
+filed on January 25, 2010 in connection with an Open Market Sale Agreement with Jefferies & Company, Inc. 
+(“Jefferies”) to sell up to $60 million of treasury securities.  The agreement with Jefferies prohibited sales during 
+blackouts and in the event of material adverse changes based on Ener1’s insider trading policies.   
+ 12 
+43. Exchange Act Rule 13b2-1 prohibits a 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.  Exchange Act Rule 13b2-2(a)(2) provides that no director or officer of an issuer 
+shall, directly or indirectly, omit to state, or cause another person to omit to state, any material fact 
+necessary in order to make statements made, in light of the circumstances under which such 
+statements were made, not misleading, to an accountant in connection with financial-statement 
+audits, reviews, or examinations or the preparation or filing of any document or report required to 
+be filed with the Commission. No showing of scienter is required to establish a violation of Rules 
+13b2-1 or 13b2-2.  World-Wide Coin, 567 F. Supp. at 749; Promotion of the Reliability of 
+Financial Information and Prevention of the Concealment of Questionable or Illegal Corporate 
+Payments and Practices, Exch. Act Rel. No. 15570, 16 SEC Docket 1143 (Feb. 15, 1979). 
+44. Exchange Act Rule 13a-14, Certification of Disclosure in Annual and Quarterly 
+Reports, requires each Form 10-Q and 10-K to include certifications signed by each principal 
+executive and principal financial officer of the issuer (or persons performing similar functions).  
+Among other things, the certifying officers must confirm that the 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 the report.  
+Findings  
+45. Based on the foregoing the Commission finds that Respondent Ener1 violated 
+Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 
+13(b)(2)(B) and Exchange Act Rules 12b-20, 13a-1, and 13a-13. 
+46. Based on the foregoing, the Commission further finds that: (1) Respondents 
+Gassenheimer, Seidel, and Kamischke violated Securities Act Sections 17(a)(2) and (3), and 
+Exchange Act Rule 13a-14; (2) Respondents Seidel and Kamischke violated Exchange Act Rule 
+13b2-1 and Rule 13b2-2; and (3) Respondents Gassenheimer, Seidel, and Kamischke caused 
+Ener1’s violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Exchange 
+Act Rules12b-20, 13a-1, and 13a-13. 
+IV. 
+ 
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
+agreed to in Respondents’ Offer. 
+ 
+A. Accordingly, it is hereby ORDERED that pursuant to Section 8A of the Securities 
+Act and Section 21C of the Exchange Act, Respondents Ener1, Gassenheimer, Seidel and 
+Kamischke 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 13(a), 
+13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20, 13a-1, and 13a-13 thereunder.  Respondents 
+Gassenheimer, Seidel, and Kamischke shall cease and desist from committing or causing 
+any violations and any future violations of Rule 13a-14.  Respondents Seidel and 
+Kamischke shall cease and desist from committing or causing any violations and any future 
+violations of Exchange Rules 13b2-1 and 13b2-2. 
+ 13 
+B. Respondent Gassenheimer shall, within ten (10) days of the entry of this Order, pay 
+a civil money penalty in the amount of $100,000 to the Securities and Exchange 
+Commission for transfer to the general fund of the United States Treasury, subject to 
+Exchange Act Section 21F(g)(3).  If timely payment is not made, additional interest shall 
+accrue pursuant to 31 U.S.C. §3717. 
+C. Respondent Seidel shall, within ten (10) days of the entry of this Order, pay a civil 
+money penalty in the amount of $50,000 to the Securities and Exchange Commission for 
+transfer to the general fund of the United States Treasury, subject to Exchange Act Section 
+21F(g)(3).  If timely payment is not made, additional interest shall accrue pursuant to 31 
+U.S.C. §3717. 
+D. Respondent Kamischke shall, within ten (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 
+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. All payment must be made in one of the following ways:   
+ 
+(1) Respondent may transmit payment electronically to the Commission, which will 
+provide detailed ACH transfer/Fedwire instructions upon request;  
+ 
+(2) Respondent may make direct payment from a bank account via Pay.gov through the 
+SEC website at http://www.sec.gov/about/offices/ofm.htm; or  
+ 
+(3) Respondent may pay by certified check, bank cashier’s check, or United States 
+postal money order, made payable to the Securities and Exchange Commission and 
+hand-delivered or mailed to:  
+ 
+Enterprise Services Center 
+Accounts Receivable Branch 
+HQ Bldg., Room 181, AMZ-341 
+6500 South MacArthur Boulevard 
+Oklahoma City, OK 73169 
+ 
+Payments by check or money order must be accompanied by a cover letter identifying 
+Respondent as a Respondent in these proceedings, and the file number of these 
+proceedings; a copy of the cover letter and check or money order must be sent to Gerald 
+Hodgkins, 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, Respondents Gassenheimer, Seidel, and 
+Kamischke agree that in any Related Investor Action, they shall not argue that they are 
+ 14 
+entitled to, nor shall they benefit by, offset or reduction of any award of compensatory 
+damages by the amount of any part of Respondent Gassenheimer’s, Seidel’s or 
+Kamischke’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 Gassenheimer, Seidel, 
+and Kamischke 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 
+Gassenheimer, Seidel and Kamischke 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 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 Gassenheimer, Seidel and Kamischke and further, any debt for disgorgement, 
+prejudgment interest, civil penalty or other amounts due by Respondents Gassenheimer, Seidel, 
+and Kamischke 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 
+Gassenheimer, Seidel, and/or Kamischke 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 

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+ 
+ 
+ 
+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77646 / April 19, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3767 / April 19, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17214 
+ 
+ 
+ 
+IN THE MATTER OF 
+ 
+ROBERT D. HESSELGESSER, 
+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 Robert D. Hesselgesser, CPA 
+(“Respondent” or “Hesselgesser”) 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 
+ 
+II. 
+                                                 
+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 
+ 
+ 
+  In anticipation of the institution of these proceedings, Respondent has submitted an 
+Offer of Settlement (“Offer”) which the Commission has determined to accept.  Solely for the 
+purpose of these proceedings and any other proceedings brought by or on behalf of the 
+Commission, or to which the Commission is a party, and without admitting or denying the findings 
+herein, except as to the Commission’s jurisdiction over him and the subject matter of these 
+proceedings, which are admitted, 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 
+  
+ At all times relevant herein, Ener1, Inc. (“Ener1”) designed, manufactured and developed 
+car batteries.  Among others, Ener1 sold batteries to a private company, Think Holdings, AS, 
+majority owner of Think Global, AS (collectively referred to as “Think”) which was a Norwegian-
+based electric car manufacturer.  Ener1 held an equity interest in Think and lent money to Think to 
+fund its operations, and Ener1’s interest in Think was material to its year-end 2010 balance sheet.  
+At year-end 2010, Ener1’s equity investment in Think totaled $58.6 million and represented 15 
+percent of Ener1’s $396.5 million in total assets and a 48% voting interest in Think; Ener1’s 
+accounts receivable from Think Global totaled $13.6 million ($8.5 million past due), and 
+represented three percent of Ener1’s assets; Ener1’s loan receivables from Think totaled $14.0 
+million and represented 3.5% of Ener1’s assets; and Ener1’s sales to Think totaled $18.8 million 
+and represented 24% of Ener1’s 2010 revenue of $77 million.    
+ 
+ These proceedings arise out of Robert D. Hesselgesser’s improper professional conduct as 
+the engagement partner for PricewaterhouseCoopers LLP’s audit of Ener1’s 2010 financial 
+statements.  Hesselgesser violated Public Company Accounting Oversight Board (“PCAOB”) 
+Standards by not performing sufficient procedures to support his audit conclusions that Ener1 
+management had appropriately accounted for its Think-related assets and revenue.  Hesselgesser 
+did not obtain sufficient competent evidential matter to support his audit conclusion regarding the 
+reasonableness of Ener1 management’s determination not to recognize an impairment to the book 
+value of Ener1’s Think-related assets, and to continue to recognize revenue from Think.  As 
+Ener1’s Think-related assets were material to Ener1’s financial statements and Think was a related 
+party, these transactions warranted heightened scrutiny.  In addition, Hesselgesser failed to exercise 
+due professional care during the audit by accepting management’s impairment analysis and 
+conclusion that Ener1’s Think-related assets were not impaired without obtaining sufficient 
+                                                 
+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 
+ 
+competent evidential matter.  As engagement partner, Hesselgesser failed to conduct the audit in 
+accordance with PCAOB standards.   
+ 
+ B. RESPONDENT 
+ 
+ Robert D. Hesselgesser is a partner with PricewaterhouseCoopers LLP (“PwC”).  At the 
+time of the relevant conduct, Hesselgesser was licensed as a CPA in Ohio, Nebraska, Indiana, and 
+Kentucky.  His licenses in Indiana and Kentucky have since lapsed, and he has since become 
+licensed in Georgia.  Prior to the conduct described in the order, Hesselgesser was also licensed as 
+a CPA in Tennessee and South Dakota, and had Practice Privileges in Oregon.  During the time- 
+period relevant to this proceeding, Hesselgesser served as the engagement partner for PwC’s audit 
+of Ener1’s financial statements as of, and for, the year ended December 31, 2010.   
+ 
+ C. RELEVANT ENTITIES 
+ 
+1. Ener1, Inc. (“Ener1”), founded in 1985, was at all relevant times a Florida 
+corporation headquartered in NY with offices in Indiana and Florida.  Ener1 designed, 
+manufactured and developed lithium ion batteries for transportation, grid energy, and consumer 
+products.  Until December 2, 2011, Ener1’s stock was registered with the Commission pursuant to 
+Section 12(b) of the Exchange Act.  On January 26, 2012, Ener1 filed a voluntary petition for 
+bankruptcy in the United States Bankruptcy Court for the Southern District of New York seeking 
+relief under the provisions of Chapter 11 of Title 11 of the United States Bankruptcy Code.   
+2. Think Holdings, AS was a private Norwegian limited liability company, which 
+was majority owner of Think Global, AS (collectively referred to as “Think”).  Think Global was 
+an electric car manufacturer.  Think filed for bankruptcy protection in 2008 and it emerged from 
+the 2008 bankruptcy in 2009 through a debt settlement entered into, among others, by Ener1, 
+resulting in Ener1 obtaining an ownership interest in Think.  On June 22, 2011, Think filed for 
+bankruptcy. 
+ D. FACTS 
+ 
+ Background 
+ 
+1. Ener1 designed, manufactured and developed car batteries, which it sold to, among 
+others, Think, a Norwegian-based electric car manufacturer.  Ener1 also held an equity interest in 
+Think, and lent money to Think to fund its operations.  Ener1’s CEO and Board Chair served as 
+Think Board Chair. 
+2. In the fourth quarter of 2010, Ener1’s financial exposure to Think increased: Ener1 
+loaned Think $5 million; provided Think an additional $5 million in the form of a line of credit; 
+directly paid a Think creditor €1 million; and purchased $2.5 million of another Think investor’s 
+Think-related receivables.  Ener1 lacked a formal written policy for performing a collectability 
+analysis on the loans and receivables.  As Think experienced operational problems, its financial 
+4 
+ 
+condition deteriorated.  As a result, Ener1’s Think-related receivables outstanding at the end of 
+2010 went unpaid.   
+3. Hesselgesser and his audit team received Ener1’s impairment analysis of its Think-
+related assets during the year-end 2010 audit.  Ener1’s analysis contained unsupported assertions 
+that: the value of Ener1’s investment, Think’s earnings performance, and vehicle quality had not 
+deteriorated;  Think’s growth plan was delayed, but had not deteriorated; Think continued to sell 
+its shares at the same price Ener1 acquired its shares; and that there were interested investors in 
+Think’s ongoing $50-60 million fund raising effort.  The analysis concluded that the Think-related 
+assets were not impaired but did not include material information regarding Think’s financial 
+condition.  Hesselgesser did not appropriately corroborate the statements and information in 
+Ener1’s impairment analysis given the higher risk of material misstatement related to the 
+transactions and failed to obtain sufficient competent evidential matter. 
+4. Think was experiencing operational and financial distress such that Ener1 should 
+have recognized an impairment of its Think investment4 and receivables5 at year-end 2010.  In 
+addition, in the fourth quarter of 2010, Ener1 overstated its revenues.  Ener1 improperly recorded 
+revenues from Think for which collectability could not be reasonably assured.6  The failure to 
+recognize an impairment of the Think assets caused a material misstatement of Ener1’s assets in its 
+year-end 2010 balance sheet.  The recognition of the fourth quarter revenue from Think caused 
+Ener1’s year-end 2010 revenue to be materially overstated.  In its Form 10-K filed on March 10, 
+2011, Ener1 reported an equity investment in Think of $58.6 million, which represented 15 percent 
+of Ener1’s $396.5 million in total assets, and 48% voting interest in Think; accounts receivable 
+from Think Global of $13.6 million ($8.5 million past due), which represented three percent of 
+Ener1’s assets; loan receivables from Think totaling $14.0 million, which represented 3.5 % of 
+                                                 
+4 Ener1’s equity investment in Think B shares was recorded at cost because the form of the investment was not 
+deemed to be equivalent to common stock for accounting purposes.  See FASB Accounting Standards Codification 
+(“ASC”) 325.  For investments held at cost, such as Ener1’s investment in Think, GAAP requires that the reporting 
+entity evaluate whether an event or change in circumstances has occurred in that period that may have had an 
+adverse effect on the fair value of the investment.  GAAP impairment indicators include, but are not limited to: 1) a 
+significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the 
+investee; 2) a significant adverse change in the regulatory, economic, or technological environment of the investee; 
+3) a significant adverse change in the general market condition of either the geographic area or the industry in which 
+the investee operates; 4) a bona fide offer to purchase (whether solicited or unsolicited), an offer by the investee to 
+sell, or a completed auction process for the same or similar security for an amount less than the cost of the 
+investment; and/or 5) factors that raise significant concerns about the investee's ability to continue as a going 
+concern, such as negative cash flows from operations, working capital deficiencies, or noncompliance with statutory 
+capital requirements or debt covenants.  See ASC 320-10-35-27. 
+5 GAAP requires the recognition of a loss when both of the following conditions are met: 1) “[i]nformation available 
+before the financial statements are issued or are available to be issued… indicates that it is probable that an asset has 
+been impaired at the date of the financial statements”, and 2) “[t]he amount of the loss can be reasonably estimated.”  
+See ASC 310-10-35-8. 
+6 ASC 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 104, 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.   
+5 
+ 
+Ener1’s assets; and sales to Think of $18.8 million, representing 24% of Ener1’s 2010 revenue of 
+$77 million.  These matters were material to Ener1.  
+5. Ener1 recognized an impairment of all of its $59.4 million investment (but not its 
+receivables) in Think as of March 31, 2011.  On June 22, 2011, Ener1 announced that because 
+Think had not been successful in securing long term financing, Think would file for bankruptcy, 
+and as a result,   Ener1 would take a material charge of $35.4 million relating to its Think loans and 
+accounts receivable.  On August 10, 2011, Ener1 filed a Form 8-K stating that its year-end 2010 
+Form 10-K and first quarter 2011 Form 10-Q should not be relied upon, and that Ener1 would 
+restate its filings.  Specifically, Ener1 stated that it would amend its 2010 Form 10-K and its First 
+Quarter 2011 Form 10-Q for the quarter ended March 31, 2011 to restate its financial statements to 
+reflect, as of December 31, 2010: impairments of its investments in Think (which had previously 
+been recorded in the first quarter of 2011); impairments of its Think accounts receivable and its 
+Think loans receivable including accrued interest; and also reflect the corrected accounting for 
+revenue recognized in connection with transactions with Think during the year ended December 
+31, 2010 and the three months ended March 31, 2011. Ultimately, Ener1 did not file a restatement, 
+and in January 2012, it filed for bankruptcy protection. 
+Failure to Exercise Due Professional Care and Skepticism 
+6. PCAOB standards required that Hesselgesser exercise due professional care 
+throughout the audit.  Due professional care requires the auditor to exercise professional 
+skepticism, which is an attitude that includes a questioning mind and a critical assessment of the 
+audit evidence.  See PCAOB Standard AU § 230.07.7 
+7. Despite the fact that members of Ener1’s management did not provide material 
+information regarding Think’s financial condition, Hesselgesser failed to exercise due professional 
+care and professional skepticism during the audit when he inappropriately relied on management’s 
+impairment analysis and associated conclusion not to impair Ener1’s Think assets even though he 
+was aware of certain impairment indicators during the audit.  Among other things, Hesselgesser 
+knew that: in the third quarter 2010, Think ceased to pay its accounts receivables and received 
+funding from Ener1; and in the fourth quarter 2010, Think continued to require funding, and loans 
+owed to Ener1 by Think had been extended multiple times.  The analysis Hesselgesser relied on 
+also did not provide sufficient support that accounts receivable and loans receivable were 
+realizable since management failed to analyze the collectability of these accounts.  In addition, 
+Hesselgesser failed to properly perform procedures to determine whether revenue from Think 
+could be recorded by Ener1, given that Ener1 did not have a formal written revenue 
+recognition policy, had not conducted a collectability analysis, and collectability was not 
+reasonably assured. 
+ 
+ 
+                                                 
+7  References to the PCAOB Standards included herein refer to the standards in effect at the time of the relevant 
+conduct. 
+6 
+ 
+Failure to Obtain Sufficient Competent Evidential Matter with Respect to 
+Transactions with a Related Party  
+8. PCAOB Standards required Hesselgesser to obtain sufficient competent evidential 
+matter by performing audit procedures to afford a reasonable basis for an opinion regarding the 
+financial statements under audit.  See PCAOB Standard AU § 326.01.  Representations from 
+management are part of the evidential matter obtained in an audit, but are not a substitute for the 
+application of auditing procedures necessary to afford a reasonable basis for an audit opinion.  See 
+PCAOB Standard AU § 333.02.  Due to the fact that Think was a related party, PCAOB standards 
+required Hesselgesser to apply necessary procedures to obtain satisfaction concerning the purpose, 
+nature, and extent of Ener1’s transactions with Think and their effect on Ener1’s financial 
+statements.  These procedures should be directed toward obtaining and evaluating sufficient 
+competent evidential matter and should extend beyond inquiry of management.  See PCAOB 
+Standard AU § 334.09. 
+9. Hesselgesser failed to conduct procedures appropriate to evaluate the valuation of 
+Ener1’s investment in, and receivables from Think, a related party, and failed to obtain sufficient 
+competent evidential matter.  Hesselgesser failed to perform procedures to corroborate Ener1’s 
+conclusions that its Think investment and receivables were not impaired.  In addition, Hesselgesser 
+did not properly evaluate the collectability of Ener1’s revenues related to Think.  In large part, 
+Hesselgesser relied on communications with management and an impairment memorandum 
+prepared by Ener1 staff.  Hesselgesser did not sufficiently corroborate management’s 
+representations concerning Think’s performance and prospects to obtain financing.  For example, 
+Hesselgesser did not request or sufficiently review Think documents relating to Think Board 
+meetings; investments made by other Think investors as cited in Ener1’s impairment 
+memorandum; an interim 2010 review conducted by Think’s auditors; and the status of Think’s 
+financing efforts.  These types of documents would have helped Hesselgesser better understand 
+Think’s financial condition and assess for reasonableness the amounts to be recorded in the 
+financial statements. 
+Management Representations 
+ 
+10. PCAOB Standards required Hesselgesser to obtain written representations from 
+management in its representation letter as a part of the audit of Ener1’s financial statements.  See 
+PCAOB Standard AU § 333.01.  The auditor obtains written representations from management to 
+complement other auditing procedures.  See PCAOB Standard AU § 333.03.  The written 
+representations ordinarily confirm representations explicitly or implicitly given to the auditor, 
+indicate and document the continuing appropriateness of such representations, and reduce the 
+possibility of misunderstanding concerning the matters that are the subject of the representations.  
+Even if Hesselgesser believed that management was honest, he was required to obtain persuasive 
+evidence.  See PCAOB Standard AU § 333.02. 
+11. Hesselgesser failed to obtain specific written representations from management in 
+its representation letter concerning key factors management considered in its impairment analysis.   
+7 
+ 
+ Failure to Maintain Adequate Work Paper Documentation 
+ 
+12. The PCAOB Standards establish the general requirements for documentation that 
+an auditor should prepare and retain in connection with audits of financial statements and require 
+that the auditor’s work papers clearly demonstrate that work was, in fact, performed.  See PCAOB 
+Auditing Standard No. 3, paragraphs 1 and 6.  
+13. During the audit, Hesselgesser failed to sufficiently document his oral 
+communications with Ener1 management concerning the accounting treatment of the Think related 
+assets. 
+ Failure to Adequately Plan and Supervise the Audit  
+14. PCAOB standards required that Hesselgesser adequately plan the audit and 
+supervise assistants.  See PCAOB Standard AU § 311.01. 
+15. Hesselgesser failed to supervise properly his assistants because the Ener1 Board 
+minute summaries prepared by assistants in the audit workpapers failed to capture all Ener1 Board 
+meetings during the period and pertinent information from certain Ener1 Board meetings.  Had 
+Hesselgesser reviewed properly prepared Ener1 Board minute summaries or the Ener1 Board 
+minutes, he would have been alerted to issues concerning Think’s financial and operational 
+distress. 
+ Violations 
+ 
+16. Section 4C of the Exchange Act and Rule 102(e)(1)(iv) of the Commission’s Rules 
+of Practice define improper professional conduct.  Section 4C of the Exchange Act and Rule 
+102(e)(1)(iv)(B) of the Commission’s Rules of Practice provide that negligent improper 
+professional conduct includes either (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) “[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.” 
+Findings 
+ 
+17. Based on the foregoing, Hesselgesser engaged in improper professional conduct 
+within the meaning of Section 4C of the Exchange Act and Rule 102(e)(1)(iv)(B)(1)&(2) of the 
+Commission’s Rules of Practice.  Hesselgesser engaged in a single instance of highly unreasonable 
+conduct where heightened scrutiny was warranted, or alternatively, repeated instances of 
+unreasonable conduct indicating a lack of competence to practice before the Commission. 
+ 
+ 
+8 
+ 
+IV. 
+ 
+ On the basis of the foregoing, Commission deems it appropriate to impose the sanctions 
+agreed to in Respondent’s Offer: 
+ 
+Accordingly, it is hereby ORDERED, effective immediately, that: 
+ 
+ A. Respondent Hesselgesser is denied the privilege of appearing or practicing before 
+the Commission as an accountant.   
+ 
+ B. After two years from the date of this order, Respondent may request that the 
+Commission consider his reinstatement by submitting an application (attention: Office of the 
+Chief Accountant) to resume appearing or practicing before the Commission as: 
+      
+       1. a preparer or reviewer, or a person responsible for the preparation or review, 
+of any public company’s financial statements that are filed with the 
+Commission.  Such an application must satisfy the Commission that 
+Respondent’s work in his practice before the Commission will be reviewed 
+either by the independent audit committee of the public company for which 
+he works or in some other acceptable manner, as long as he practices before 
+the Commission in this capacity; and/or 
+ 
+  2.    an independent accountant.  Such an application must satisfy the 
+Commission that: 
+      
+(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 
+9 
+ 
+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 
+ 
+ 
+ 

raw/aaer/2016/AAER-3768.txt

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+ 
+ 
+ UNITED STATES OF AMERICA 
+ before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77657 / April 20, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3768 / April 20, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17215  
+       
+      :  
+ :  
+ :   
+In the Matter of : ORDER INSTITUTING ADMINISTRATIVE 
+      : PROCEEDINGS PURSUANT TO RULE 
+           Laura P. Messenbaugh, 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 Laura P. 
+Messenbaugh (“Respondent” or “Messenbaugh”) pursuant to Rule 102(e)(3)(i) of the 
+Commission’s Rules of Practice.1   
+ 
+ 
+ 
+ 
+                                                 
+1 Rule 102(e)(3)(i) provides, in relevant part, that: 
+ 
+ The Commission, with due regard to the public interest and without preliminary hearing, 
+may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has 
+been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his 
+or her misconduct in an action brought by the Commission, from violating or aiding and abetting 
+the violation of any provision of the Federal securities laws or of the rules and regulations 
+thereunder. 
+ 2 
+II. 
+ 
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
+of Settlement (the “Offer”), which the Commission has determined to accept.  Solely for the 
+purpose of these proceedings and any other proceedings brought by or on behalf of the 
+Commission, or to which the Commission is a party, and without admitting or denying the findings 
+herein, except as to the Commission’s jurisdiction over her and the subject matter of these 
+proceedings, and the findings contained in Section III.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. Messenbaugh, age 51, is and has been a certified public accountant licensed 
+to practice in the State of Washington.  She served as Chief Accounting Officer and Vice President 
+of Finance and Accounting of SMF Energy Corp. (“SMF”) from approximately 2007 until at least 
+March 2012. 
+ 
+ 2. SMF was, at all relevant times, a publicly-held Delaware corporation, 
+headquartered in Fort Lauderdale, Florida, whose primary businesses were commercial mobile-
+fueling and lubricant distribution.  At all relevant times, SMF’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 under the symbol “FUEL”. 
+ 
+ 3. On April 6, 2016, by consent, a Final Judgment was entered against 
+Messenbaugh, permanently enjoining her from future violations of Section 17(a) of the Securities 
+Act of 1933 (“Securities Act”) and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 
+10b-5, 13b2-1, and 13b2-2 thereunder; and from aiding and abetting violations of Sections 13(a), 
+13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 
+thereunder, in the civil action entitled Securities and Exchange Commission v. Laura P. 
+Messenbaugh, et al., Civil Action Number 15-62028-CIV in the United States District Court for 
+the Southern District of Florida.  Messenbaugh was also barred from serving as an officer or 
+director; ordered to pay disgorgement of $11,010 and $1,408 of prejudgment interest thereon; and 
+ordered to pay a $60,000 civil money penalty. 
+ 
+ 4. The Commission’s complaint alleged, among other things, that 
+Messenbaugh, and the other defendants, participated in a fraudulent billing scheme involving SMF.  
+The Commission further alleged that from approximately June 2010 through mid-March 2012 this 
+scheme misled investors by materially overstating SMF’s financial performance and falsely 
+attributing SMF’s purported improved financial results to legitimate business factors, while not 
+disclosing that in reality the purported improvement in its financial results was due to the 
+fraudulent billing scheme.  Additionally, the Commission alleged that this scheme caused SMF to 
+ 3 
+provide financial statements to the investing public that were not in compliance with Generally 
+Accepted Accounting Principles, and that Messenbaugh and other provided false information to 
+SMF’s independent auditors.      
+ 
+IV. 
+ 
+ In view of the foregoing, the Commission deems it appropriate and in the public interest to 
+impose the sanction agreed to in Respondent Messenbaugh’s Offer. 
+ 
+ Accordingly, it is hereby ORDERED, effective immediately, that: 
+ 
+ Messenbaugh is suspended from appearing or practicing before the Commission as an 
+accountant.  
+ 
+ By the Commission. 
+ 
+       Brent J. Fields 
+       Secretary 
+ 

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+UNITED STATES OF AMERICA 
+before the 
+SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77683 / April 21, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT ACT 
+Release No. 3769 / April 21, 2016 
+ 
+Admin. Proc. File No. 3-17134 
+ 
+In the Matter of 
+ 
+Timothy Quintanilla, CPA 
+ 
+ 
+ 
+Petition filed:  March 25, 2016 
+Last brief received: April 1, 2016 
+ORDER DENYING MOTION TO LIFT TEMPORARY SUSPENSION 
+AND DIRECTING THAT A HEARING BE HELD 
+On February 25, 2016, we instituted administrative proceedings against Timothy 
+Quintanilla, CPA, under Commission Rule of Practice 102(e)(3)(i)(A),1 and temporarily 
+suspended him from appearing or practicing before the Commission as an accountant (the 
+“Order”), based on his having been enjoined from violating antifraud and related provisions of 
+the federal securities laws.2  Quintanilla now requests that we lift that suspension for 30 days to 
+give him time to “wind up his public audit practice . . . .”  For the reasons discussed below, we 
+deny Quintanilla’s request.  We will leave the temporary suspension in place and set the matter 
+down for a hearing before an administrative law judge in accordance with Rule of Practice 
+102(e)(3)(iii).3 
+                                                           
+1 17 C.F.R. § 201.102(e)(3)(i)(A) (“The Commission, with due regard to the public interest 
+and without preliminary hearing, may, by order, temporarily suspend from appearing or 
+practicing before it any . . . 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 Timothy Quintanilla, CPA, Exchange Act Release No. 77231, 2016 WL 738057(Feb. 25, 
+2016). 
+3 17 C.F.R. § 201.102(e)(3)(iii) (providing procedure to challenge temporary suspension 
+and authorizing the holding of a related hearing). 
+2 
+ 
+ 
+ 
+I. Facts 
+In November 2012, we brought a civil action against Quintanilla alleging that he violated 
+the securities laws by misrepresenting that the 2006 through 2008 financial statements of 
+Electronic Game Card, Inc. (“EGMI”) were audited in accordance with Public Company 
+Accounting Oversight Board (“PCAOB”) standards, and that those statements “present[ed] 
+fairly, in all material respects,” EGMI’s financial position.4  The civil complaint alleged that 
+Quintanilla and his audit team failed to investigate red flags that would have uncovered fraud in 
+EGMI’s financial statements, and that they failed to audit significant portions of EGMI’s balance 
+sheet.5  The complaint further alleged that, to conceal their audit failures, employees under 
+Quintanilla’s supervision created and backdated documents for the EGMI audit file shortly 
+before a PCAOB inspection.6 
+On December 4, 2015, Quintanilla consented to entry by the district court of a final 
+judgment permanently enjoining him from future violations of Sections 10(b), 10A(a)(1), and 
+10A(b)(1) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5, and 
+Section 17(a) of the Securities Act of 1933.7  Based on that injunction, we issued the Order 
+temporarily suspending Quintanilla, and ordered that the temporary suspension become 
+permanent unless Quintanilla filed a petition to lift it within 30 days after service of the Order.  
+The Order further provided that, if Quintanilla filed such a petition, we would “either lift the 
+temporary suspension, or set the matter down for hearing . . .  or both.”8 
+On March 25, 2016, Quintanilla filed a petition to lift his temporary suspension.  
+Quintanilla does not challenge our authority to impose the temporary suspension and states that, 
+when he consented to the injunction, he “understood that the SEC would subsequently seek a 
+permanent bar . . . which was agreed to during settlement discussions.”  Rather, Quintanilla 
+requests that we lift the temporary suspension for 30 days so that his “issuer client can file [its] 
+quarterly report on Form 10-Q which work [Quintanilla] began performing prior to receiving the 
+Order.”  After the 30 day period, Quintanilla states that “the Commission may enter a permanent 
+bar against” him.  The Division of Enforcement opposes Quintanilla’s petition asserting, among 
+other things, that Quintanilla’s conduct involved egregious fraud over a three year period and 
+that he has offered no “evidence recognizing his wrongdoing” or “any assurances against future 
+violations.” 
+                                                           
+4 Quintanilla, 2016 WL 738057, at *1. 
+5 Id. 
+6 Id. at *2. 
+7 Id. at *1.  Quintanilla consented to the judgment without admitting or denying the 
+allegations of the complaint (except as to jurisdiction).  Final Judgment, SEC v. Cole, et al., No. 
+12-cv-8167 (RJS) (S.D.N.Y. Dec. 4. 2015). 
+8 Quintanilla, 2016 WL 738057, at *2. 
+3 
+ 
+ 
+ 
+II. Discussion 
+Rule 102(e)(3)(iii) provides that, upon receipt of a timely petition to lift a temporary 
+suspension, “the Commission shall either lift the temporary suspension, or set the matter down 
+for hearing at a time and place designated by the Commission, or both, and, after opportunity for 
+hearing, may censure the petitioner or disqualify the petitioner from appearing or practicing 
+before the Commission for a period of time or permanently.”9  We have determined to deny 
+Quintanilla’s request to lift the temporary suspension for 30 days, and to instead set the matter 
+down for a hearing.  In issuing the Order, we found it “appropriate and in the public interest” to 
+temporarily suspend Quintanilla because he had been permanently enjoined from violating the 
+federal securities laws.  Quintanilla has provided no reason to question that conclusion. 
+Instead, Quintanilla contends that, when he consented to the injunction in district court, 
+he was not advised that the Commission would issue a temporary suspension, and understood 
+that he “would have time to wind up his public audit practice and would receive notice when the 
+Commission initiated its permanent bar proceedings.”  But Quintanilla, who continues to be 
+represented by the same counsel who represented him in the district court action,10 does not 
+explain the basis for his understanding, and, in any event, he was on notice of the Rule 102(e)(3) 
+procedures that we follow in imposing the temporary suspension.  Those procedures contemplate 
+entry of a temporary suspension under Rule 102(e)(3)(i) within 90 days of the entry of final 
+judgment.11  Quintanilla’s asserted reason for lifting the suspension is to provide him time to 
+review an issuer’s 10-Q filing; in light of the serious allegations in the civil complaint and his 
+consent to a final judgment in that proceeding, it would be inappropriate to permit him to do so.12  
+Other than stating that he worked on this filing prior to the Order’s entry, he provides no 
+assurances or evidence that his demonstrated inability to properly comply with the securities 
+laws would not impact this issuer or other clients in the remainder of his public audit practice.  
+                                                           
+9 17 C.F.R. § 201.102(e)(3)(iii). 
+10 SEC v. Cole, et al., No. 12-cv-8167 (RJS) (S.D.N.Y.). 
+11 See 17 C.F.R. § 201.102(e)(3) (“No order of temporary suspension shall be entered by the 
+Commission pursuant to paragraph (e)(3)(i) of this rule more than 90 days after 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) has become effective . . . .”).  We temporarily suspended 
+Quintanilla 83 days after the final judgment. 
+12 In its opposition to Quintanilla’s motion, the Division “respectfully submits that the 
+Commission should . . . issue an order permanently barring him from appearing or practicing 
+before the Commission.”  Our rules, however, do not contemplate the imposition of such 
+sanction at this stage, before a hearing has been held and a decision by a law judge issued.  See 
+Rule 102(e)(3)(iii), 17 C.F.R. § 201.102(e)(3)(iii).  We do not mean to suggest any view as to the 
+outcome of this proceeding.  
+4 
+ 
+ 
+ 
+Inconvenience to his ability to wind down his audit practice does not change our view that a 
+temporary suspension remains in the public interest.13 
+Accordingly, IT IS ORDERED that Timothy Quintanilla, CPA’s petition to lift the 
+temporary suspension is denied, and that the temporary suspension will remain in effect pending 
+a hearing and decision in this matter; it is further 
+ORDERED that this proceeding be set down for a public hearing before an administrative 
+law judge in accordance with Commission Rule of Practice 110.  As specified in Rule of Practice 
+102(e)(3)(iii), the hearing shall be expedited in accordance with Rule of Practice 500; and it is 
+further 
+ORDERED that the administrative law judge shall file an initial decision no later than 
+210 days from the date of service of this order. 
+By the Commission. 
+ 
+ 
+ 
+ 
+  Brent J. Fields 
+     Secretary 
+                                                           
+13 R. Scott Peden, Esq., Exchange Act Release No. 75135, 2015 WL 3562620, at *2 (June 
+9, 2015) (denying petition to lift temporary suspension and setting matter down for hearing 
+where petitioner had not provided “any basis to question or revisit” the Commission’s 
+determination that the temporary suspension was in the public interest under Rule 102(e)(3) 
+because of the permanent injunction entered in district court). 

raw/aaer/2016/AAER-3770.txt

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+UNITED STATES OF AMERICA 
+Before the 
+SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77717 / April 26, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3770 / April 26, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17227 
+ 
+ 
+In the Matter of 
+ 
+CABELA’S 
+INCORPORATED and 
+ RALPH W. CASTNER, 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 pursuant to Section 21C of the Securities 
+Exchange Act of 1934 (“Exchange Act”), against Respondents Cabela’s Incorporated (“Cabela’s”) 
+and Ralph W. Castner, CPA (“Castner”).   
+ 
+II. 
+In anticipation of the institution of these proceedings, Respondents have each 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 
+(“Order”), as set forth below.   
+ 
+ 2 
+III. 
+ On the basis of this Order and Respondents’ Offers, the Commission finds1 that:  
+Summary 
+Cabela’s is a specialty retailer and direct marketer of hunting, fishing, camping, and related 
+outdoor merchandise headquartered in Sidney, Nebraska.  In January 2012, Cabela’s entered into a 
+new intercompany agreement (“ICA”) with its wholly-owned bank subsidiary, World’s Foremost 
+Bank (“WFB”), that increased the amount WFB paid to Cabela’s each quarter for WFB’s use of 
+the company’s intellectual property and trademarks and for the cost of bank promotions relating to 
+the Visa credit card that WFB issued (the “promotions fee”).  Contrary to Generally Accepted 
+Accounting Principles (“GAAP”) and statements in Cabela’s periodic filings for each quarter and 
+fiscal year-end for 2012, Cabela’s failed to eliminate the intercompany promotions fee in preparing 
+its consolidated financial statements.  Cabela’s failure to comply with this GAAP requirement 
+resulted in an understatement of merchandise costs and a corresponding understatement of 
+financial services revenue on the company’s consolidated income statement.  This in turn increased 
+Cabela’s merchandise gross margin percentage, a key company-specific financial metric that 
+signaled the profitability of the company and was referenced by the company in earnings releases 
+and analysts calls.  The non-elimination of the promotions fee contributed approximately 47% to 
+100% to a reported year-over-year increase in the metric for the first through third quarters and 
+year-end 2012.2  Cabela’s description of the reasons for the year-over-year increase in merchandise 
+gross margin percentage in its filings3 and its earnings releases failed to disclose the role that the 
+promotions fee played in the year-over-year increase.  This resulted in materially misleading 
+financial disclosures in the company’s 2012 MD&A and earnings releases that were reinforced by 
+Cabela’s incorrect statements in its periodic filings that “[a]ll intercompany accounts and 
+transactions have been eliminated in consolidation.”  During the relevant period, Castner was 
+Cabela’s chief financial officer (“CFO”).  He was aware of the contribution of the promotions fee 
+to Cabela’s reported merchandise gross margin percentage, and he made the decision not to 
+disclose it because of his stated view that the associated promotional costs incurred by Cabela’s 
+offset the impact of the promotions fee on the quarterly increase.  It was materially misleading for 
+Cabela’s and Castner not to disclose the impact of the promotions fee on the year-over-year 
+increase in merchandise gross margin percentage each quarter in 2012. 
+  
+ In the third quarter of 2012, Cabela’s also failed to account properly for various other items 
+in conformity with GAAP.  These accounting errors increased net income for that quarter.  Castner 
+                                                 
+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 Merchandise gross margin is defined in Cabela’s 2012 Form 10-K as merchandise sales less the costs of related 
+merchandise sold and shipping costs.  Cabela��s used the terms merchandise gross margin and merchandise gross 
+profit interchangeably.  Merchandise gross margin percentage reflects Cabela’s gross profit as a percentage of its 
+merchandise sales.   
+3 Cabela’s discussed merchandise gross margin percentage in its Management’s Discussion and Analysis 
+(“MD&A”). 
+ 
+ 3 
+was not involved directly in the accounting failures in the third quarter of 2012 and the underlying 
+accounting decisions were not reported to Castner.  
+  
+Respondents 
+1. Cabela’s is a Delaware corporation, based in Sidney, Nebraska, and a specialty 
+retailer and direct marketer of outdoor merchandise.  Cabela’s became a public company in 2004.  
+Cabela’s stock is registered with the Commission under Section 12(b) of the Exchange Act and 
+trades on the NYSE (Symbol: CAB).  
+ 
+2. Castner, CPA, age 52, resides in Sidney, Nebraska.  Castner has been employed by 
+Cabela’s since 2000 and has served as its CFO since 2003.   He has been a licensed CPA in 
+Nebraska since 1985.  His CPA license has been inactive since 2000.  Before joining Cabela’s, 
+Castner served in various finance positions with First Data Corporation from 1990 to 2000 and was 
+an auditor with Touche Ross & Co. from 1985 to 1990. 
+ 
+Cabela’s Failure to Disclose the Impact of the Promotions Fee 
+3. Since the formation in 2001 of WFB, Cabela’s wholly-owned bank subsidiary, the 
+operating relationship between Cabela’s and WFB has been governed by an ICA.  As part of that 
+relationship, WFB issues and manages Cabela’s Club Visa credit card, which serves as Cabela’s 
+primary customer loyalty rewards program.  Although the ICA has been amended several times 
+since its inception, the ICA generally provides for WFB to compensate or reimburse Cabela’s for 
+WFB’s use of the company’s intellectual property and trademarks and the cost of bank promotions 
+– e.g., club card points, merchandise discounts, and shipping discounts.  The reimbursement 
+provided for in the ICA is called a promotions fee.  Up until January 2012, WFB paid Cabela’s a 
+fixed promotions fee of $2.3 million annually. 
+4. Effective January 1, 2012, Cabela’s entered into a new ICA with WFB.  Under the 
+new ICA, the promotions fee was calculated based on the charge volume on Cabela’s Club Visa 
+credit cards.  If customer charges were greater than $11 billion, WFB paid a fee to Cabela’s of 
+0.10% of the charges.  If customer charges were less than $11 billion, the fee was 0.05% of the 
+charges.  Because customer charges exceeded $11 billion in 2012, WFB paid to Cabela’s 0.10% of 
+the charges or approximately $15.8 million in 2012.  The fee was paid quarterly through 
+intercompany accounts. 
+5. Under the new ICA, Cabela’s recorded the promotions fee as a reduction of WFB’s 
+revenue and a decrease in cost of merchandise sales for Cabela’s.  Under GAAP, intra-entity 
+transactions must be eliminated in the preparation of consolidated financial statements.4  
+Specifically, Cabela’s consolidation entries should have increased WFB revenue and Cabela’s 
+merchandise cost of sales by the amount of the fee each quarter in order to eliminate the impact of 
+                                                 
+4 ASC 810-10-45 requires that “in the preparation of consolidated financial statements, intra-entity balances and 
+transactions shall be eliminated.  This includes intra-entity open account balances, security holdings, sales and 
+purchases, interest, dividends, and so forth … [A]ny intra-entity profit or loss on assets remaining within the 
+consolidated group shall be eliminated; the concept usually applied for this purpose is gross profit or loss.” 
+ 4 
+the promotions fee.  Cabela’s also stated in each of its periodic filings from 2012 through the first 
+quarter of 2014 that “[a]ll intercompany accounts and transactions have been eliminated in 
+consolidation.”  Contrary to GAAP and its representations in its 2012 periodic filings, Cabela’s 
+failed to eliminate the financial impact of the promotions fee in its consolidated financial 
+statements.  As a consequence, Cabela’s income statement understated both financial services 
+revenue and merchandise costs during that period.  Castner knew all intercompany accounts 
+needed to be eliminated in consolidation. 
+6. Cabela’s error in failing to eliminate the promotions fee in consolidation had a 
+material positive impact on Cabela’s merchandise gross margin percentage.  Merchandise gross 
+margin percentage is a key company-specific financial metric signaling the profitability of the 
+company on the sale of its product and is highlighted by Cabela’s in its periodic filings and 
+earnings releases.  Cabela’s calculated this measure by subtracting merchandise costs from 
+merchandise revenue and then dividing that number by total merchandise revenue.  Because 
+Cabela’s merchandise cost was reduced each quarter by the promotions fee, the merchandise gross 
+margin percentage was overstated on a gross basis by approximately 50 to 70 basis points (“bps”) 
+(or .5% to .7%) from 2012 through the first quarter of 2014.5 
+7. Cabela’s focused the investment community on changes in its merchandise gross 
+margin percentage year-over-year.  The most dramatic year-over-year increase in merchandise 
+gross margin percentage was in 2012 because the 2012 quarters were compared to 2011 quarters 
+when the fee was substantially lower.  In fact, the promotions fee contributed approximately 47% 
+to 100% of the year-over-year increase in the merchandise gross margin percentage for each 
+quarter in 2012 and the 2012 year end.6  Analysts reported on Cabela’s merchandise gross margin 
+percentage increase and many analysts cited to the merchandise gross margin percentage as a basis 
+for a favorable view of the company during 2012. 
+8. Cabela’s merchandise gross margin and merchandise gross margin percentage were 
+not separately delineated in the company’s financial statements, but they were discussed in its 
+MD&A in its quarterly filings, in earnings releases, and on earnings calls.  Specifically, in the 
+MD&A section of each of its periodic filings from first quarter 2010 through year-end 2012, 
+Cabela’s reported on its progress in meeting strategic initiatives identified in 2010 in its long term 
+strategic plan commonly referred to as “2012 Vision.”  One of the initiatives was to improve 
+merchandise gross margin or merchandise performance by 200 to 300 bps or 2-3% from 34.6% in 
+2009 to at least 36.6% by year-end 2012.  In each of its periodic filings in 2012, Cabela’s listed the 
+primary contributors to the increase year over year in merchandise gross margin percentage.  
+Cabela’s typically repeated these items in its quarterly earnings releases during 2012 which were 
+filed with the Commission in Forms 8-K. 
+                                                 
+5 Cabela’s failed to disclose the impact of the promotions fee on the merchandise gross margin percentage until the 
+second quarter of 2014 when the company determined that the non-elimination of the promotions fee in the 
+consolidated financial statements was an error.  In Cabela’s second quarter 2014 Form 10-Q, Cabela’s began 
+eliminating the promotions fee in its consolidated financial statements on a going forward basis.   
+ 
+6 The impact of the fee on the year-over-year comparison became less significant in 2013 when comparing the 
+promotions fee paid by WFB to Cabela’s in 2013 to 2012 because the calculation for both years contained the 
+increased fees, $17.6 million and $15.8 million respectively.   
+ 5 
+9. Cabela’s failed to disclose in the MD&A of each periodic filing and its quarterly 
+earnings releases in 2012 the material contribution of the promotions fee to the quarterly 2012 
+increases in the merchandise gross margin percentage.  Moreover, because the filings incorrectly 
+stated that intercompany transactions had been eliminated in consolidation, investors were not 
+aware that an intercompany payment was responsible for a material part of the improvement in the 
+key financial metric. 
+10. In preparation for the earnings call for the first quarter 2012, Castner was provided 
+with an earnings release report (“ER Report”) describing the factors that contributed to that 
+quarter’s increase in merchandise gross margin.  In Q1 2012, Cabela’s merchandise gross margin 
+percentage increased to 34.5%, up from 33% in Q1 2011, or 150 bps year-over-year.  The report 
+showed that the promotions fee was responsible for 70 of the 150 bps increase year over year 
+(almost half of the increase).  If the promotions fee had been eliminated in consolidation, Cabela’s 
+would have only reported an 80 bps increase in the merchandise gross margin percentage year over 
+year. 
+11. In the first quarter 2012, Castner made the decision not to disclose the effect of the 
+promotions fee in the first quarter 2012 Form 10-Q and earnings release and rejected proposed 
+language disclosing the impact of the promotions fee on the metric for inclusion in filing because 
+of his stated view that the associated promotional costs incurred by Cabela’s offset the impact of 
+the promotions fee on the quarterly increase.  Because Castner rejected disclosure in the first 
+quarter of 2012, the issue did not come up again and Cabela’s continued not to disclose the impact 
+of the promotions fee on the reported merchandise gross margin percentage until it filed its second 
+quarter Form 10-Q for the quarter ended June 30, 2014. 
+12. In Cabela’s first quarter 2012 Form 10-Q, Cabela’s highlighted in MD&A that the 
+merchandise gross margin as a percentage of merchandise revenue was increasing, noting that it 
+“increased 150 bps to 34.5% in the three months ended March 31, 2012” comparative year over 
+year.  In the filing, Cabela’s also stated that “[t]his increase was primarily attributable to better 
+inventory management, . . . improvements in vendor collaboration, and advancements in price 
+optimization . . .  .”  Cabela’s failed to mention that the promotions fee was responsible for 70 bps, 
+or almost one-half, of the merchandise gross margin percentage increase year over year.  
+13. Cabela’s earnings release for the second quarter 2012 stated that “Merchandise 
+margin increased 70 basis points [or .7%] to 37.4%, the highest level in more than five years.”7  
+Cabela’s claimed in the release that the increase was attributable to ‘[o]ngoing focus on Cabela’s 
+branded products, improved in-season and pre-season planning, and greater vendor collaboration.”  
+The ER Report for the second quarter that Castner received in preparation for the earnings call, 
+however, showed that the promotions fee contributed 78 bps or 100% of the increase to the metric 
+year over year.  Without the promotions fee, Cabela’s would have reported no change in its 
+merchandise gross margin percentage year over year for the quarter.   Cabela’s made similar 
+misstatements and omissions in the second quarter 2012 Form 10-Q.   
+                                                 
+7 Cabela’s second quarter 2011 merchandise gross margin percentage was 36.7%. 
+ 6 
+14. Cabela’s earnings release for the third quarter stated that “Merchandise gross 
+margin increased 130 basis points to 37.2%.  This is the sixth consecutive quarter of merchandise 
+margin improvement.”8  Both the earnings release and the Form 10-Q attributed the increase to an 
+“[o]ngoing focus on Cabela’s branded products, improved in-season and pre-season planning, and 
+greater vendor collaboration …” which “overcame strong sales of firearms and ammunition, which 
+had a 60 basis point negative impact on merchandise gross margin.”  The third quarter ER Report 
+that Castner received, however, showed an increase of 1.25% year over year for the third quarter 
+(rounded up to the reported 130 basis points increase) to which the promotions fee contributed 66 
+basis points, or over one-half of the increase. 
+15. Moreover, Cabela’s 2012 Form 10-K, addressing year-end rather than quarterly 
+results, stated, “our merchandise gross margin as a percentage of merchandise revenue increased 
+70 basis points to 36.3% in 2012 compared to 35.6% in 2011.”  For the year 2012, the promotions 
+fee contributed approximately 50 basis points to the 70 basis point year-over-year increase.  The 
+Form 10-K attributed the increase to various factors that did not include the promotions fee. 
+Financial Statement, Accounting, and Disclosure Failures in Third Quarter 2012 
+16.   In the third quarter 2012, Cabela’s failed to account properly for several items as 
+required under GAAP in its financial statements.  These errors increased Cabela’s third quarter 
+2012 net income by approximately $2.02 million or 4.72%.  
+17. After the close of the third quarter books, Cabela’s discovered an error in the 
+calculation of Cabela’s current quarter state income tax expense.  The correction of this tax error 
+would have increased third quarter income tax expense by approximately $674,000.  Instead of 
+correcting the tax error, Cabela’s made an adjustment to offset the additional income tax expense 
+by increasing the portion of its revenue characterized as “indefinitely invested foreign earnings” 
+by $5 million, which had the effect of reducing tax expense by approximately $674,000.9  Under 
+GAAP, the presumption that all undistributed earnings of a foreign subsidiary will be transferred 
+to the parent entity generating a deferred tax expense for the anticipated repatriation may be 
+overcome if the subsidiary has invested or evidences an intent and ability to reinvest the 
+undistributed earnings indefinitely, pursuant to ASC 740-30-27-17.  Cabela’s did not have the 
+requisite support for changing (increasing) the amount of indefinitely reinvested foreign earnings 
+as of the end of the third quarter, which is required under GAAP.  Because Cabela’s 
+inappropriately offset its income tax expense, it should have corrected the state income tax error 
+in the third quarter by recording an expense of $674,000 in its financial statements.  This error 
+resulted in a $674,000 decrease in income tax expense and an increase in Cabela’s third quarter 
+net income. 
+                                                 
+8 Cabela’s third quarter 2011 merchandise gross margin percentage was 35.9%.  
+9 “Indefinitely invested foreign earnings” are undistributed earnings of a foreign subsidiary that will not be repatriated 
+to the U.S. parent in the foreseeable future.  Increasing the amount of indefinitely reinvested earnings has the effect of 
+providing a foreign tax benefit.  The foreign tax benefit results from including lower foreign taxes in the consolidated 
+income tax expense without an additional deferred tax expense due to the incremental U.S. taxes that will occur upon 
+repatriation (in cases where the U.S. tax rate is higher than the foreign tax rate).   
+ 
+ 7 
+18. The quarterly calculation of WFB’s allowance for loan loss reserve, the reserve 
+for doubtful credit card receivables, was based on two components – a model reserve and a 
+discretionary management adjustment in which management considered general economic and 
+business conditions affecting key lending areas, credit concentration, changes in origination and 
+portfolio management, and credit quality trends.  In the third quarter 2012, WFB changed the 
+way it determined the pool of delinquent loans underlying the management adjustment by 
+removing from the delinquent pool accounts with credit scores of 691 and above (the loans less 
+likely to be delinquent).  In calculating the adjustment based on this new pool, WFB used the 
+wrong loss rate.  Contrary to GAAP, WFB initially calculated the loss rate for the revised pool 
+(19%) but chose to use the lower rate (17.8%) that it had used when the pool included the less risky 
+accounts as the difference was deemed immaterial to the reserve. 10  This action resulted in an 
+under-accrual of the reserve by $367,784 and a positive impact on net income of $248,990. 
+19. Cabela’s historically booked receivables for overpayments to vendors.  The 
+potential overpayments were first identified by an accounts payable examination company.  They 
+were then verified by Cabela’s, approved by various departments within Cabela’s for collection, 
+and then submitted to the vendor to provide it with the opportunity to object to Cabela’s 
+assessment of the overpayment.  The amount of the receivable booked by Cabela’s for an 
+overpayment depended on where the overpayment was in the lifecycle of investigation.  Vendor 
+overpayment accruals ranged from 0% to 100% of the amount of the overpayment identified, 
+with claims newly submitted to a vendor on the low end of the range and overpayments approved 
+by the vendor for payment on the high end of the range.  In the third quarter, Cabela’s accrued a 
+receivable for the “submitted” category of overpayment, the category in the earliest stage of the 
+lifecycle in which the accounts payable examination company had just identified the potential 
+overpayment.  Cabela’s had historically accrued the submitted category at 0% because Cabela’s 
+had not done any work to assess the validity of the claims nor determined whether to seek 
+reimbursement from the vendors if the claims appeared to be valid.  Instead, in the third quarter 
+of 2012, Cabela’s accrued 73% of the items in the submitted category, increasing the vendor 
+receivable from $547,214 to $939,271.  The 73% was simply based on the number of vendors in 
+the prior year from which Cabela’s had successfully collected overpayments with no regard to the 
+amounts collected.  Cabela’s did not have sufficient evidence as of the third quarter to support its 
+claim to an asset for the submitted category.  Because an insufficient evaluation of the claims had 
+been performed to determine if the claims were valid or if the counterparty would pay, it was 
+improper to accrue the $392,077 for the submitted claims.11  This error decreased cost of goods 
+sold by $392,077 and increased net income by $265,436. 
+20. In the third quarter of 2012, Cabela’s excluded from the pool from which 
+Cabela’s calculated its general obsolescence reserve guns that had been specifically designed to 
+celebrate Cabela’s 50th anniversary in business.  The purpose of Cabela’s obsolescence reserve 
+                                                 
+10 The ASC 250-10-20 Glossary defines an “Error in Previously Issued Financial Statements” as “an error in the 
+recognition, measurement, presentation, or disclosure in financial statements resulting from mathematical mistakes, 
+mistakes in the application of generally accepted accounting principles (GAAP), or oversight or misuse of facts that 
+existed at the time the financial statements were prepared.” 
+11 ASC 250-10-20.  See fn 11. 
+ 8 
+was to reduce Cabela’s merchandise inventory to lower of cost or market.  Cabela’s obsolescence 
+reserve was a general reserve for all items in inventory.  Cabela’s written obsolescence reserve 
+procedures acknowledged that the obsolescence pool used to calculate the reserve included items 
+that would not be sold below cost and vice versa.  No inventory had previously been removed 
+from the pool.  The removal of the 50th anniversary guns totaling $1.4 million from the obsolete 
+inventory pool was done without any analysis of overall inventory levels, but instead based on the 
+belief that the 50th anniversary guns would not be sold below cost.  The impact of removing the 
+$1.4 million of 50th anniversary guns was to reduce the obsolescence reserve by $327,000.  GAAP 
+requires that the reserve must be supported by well-documented analyses and applied 
+consistently from period to period.12  Because Cabela’s changed the pool of inventory in its 
+obsolescence reserve without sufficient analysis, this was an error under GAAP.13  This error 
+decreased the cost of goods sold by $327,000 and increased net income by $221,379. 
+21. In the third quarter 2012, Cabela’s booked an $899,607 receivable correcting an 
+earlier error relating to the overpayment of sales taxes that occurred and was quantified in a prior 
+period.  Cabela’s had previously calculated the amount of the correction and should have booked it 
+in a prior period.  As a result of this error, Cabela’s incorrectly recognized in its third quarter 
+financial statements an $899,607 increase to revenue, which resulted in an increase to net income 
+of $609,034.14 
+Books, Records, and Lack of Internal Controls 
+22. Cabela’s improperly recorded its intercompany accounts and transactions, cost of 
+sales, WFB’s revenue, various receivables and reserves, and tax obligations, and its books, records 
+and accounts did not, in reasonable detail, accurately and fairly reflect its transactions and 
+dispositions of assets. 
+23. Cabela’s failed to implement internal accounting controls relating to its 
+intercompany accounts and transactions; cost of sales; WFB’s revenue; and various receivables, 
+reserves, and tax obligations which were sufficient to provide reasonable assurances that 
+transactions were recorded as necessary to permit the preparation of financial statements in 
+accordance with GAAP. 
+Violations by Cabela’s  
+24. As result of the conduct described above, Cabela’s violated Section 13(a) of the 
+Exchange Act and Rules 13a-1, 13a-13, and 12b-20 thereunder, which require every issuer of a 
+security registered pursuant to Section 12 of the Exchange Act file with the Commission 
+information, documents, and annual and quarterly reports as the Commission may require, and 
+                                                 
+12 ASC 330 requires that inventory be maintained at the lower of cost or market and that the methodology utilized in 
+assessing impairments be applied consistently from year to year. 
+ 
+13 ASC 250-10-20.  See fn 11. 
+ 
+14 ASC 250-10-S99 states “where there is little cost or delay involved in correcting a misstatement, failing to do so is 
+unlikely to be ‘reasonable.’” 
+ 9 
+mandate that periodic reports contain such further material information as may be necessary to 
+make the required statements not misleading. 
+25. As a result of the conduct described above, Cabela’s 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. 
+26. Lastly, as a result of the conduct described above, Cabela’s 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 GAAP 
+and to maintain accountability for assets. 
+Violations by Castner 
+27. As result of the conduct described above, Castner caused Cabela’s violations of 
+Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 thereunder relating to the 
+failure to eliminate the intercompany promotions fee in preparing its consolidated financial 
+statements, 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. 
+28. As a result of the conduct described above, Castner caused Cabela’s violations of 
+Section 13(b)(2)(A) of the Exchange Act relating to the failure to eliminate the intercompany 
+promotions fee in preparing its consolidated financial statements, 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. 
+29. Lastly, as a result of the conduct described above, Castner caused Cabela’s 
+violations of Section 13(b)(2)(B) of the Exchange Act relating to the failure to eliminate the 
+intercompany promotions fee in preparing its consolidated financial statements, 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 and to maintain accountability for assets. 
+IV. 
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
+agreed to in Respondents’ Offers. 
+ Accordingly, it is hereby ORDERED that: 
+ A. Pursuant to Section 21C of the Exchange Act, Respondent Cabela’s cease and desist 
+from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), 
+and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.   
+ 10 
+ B. Pursuant to Section 21C of the Exchange Act, Respondent Castner cease and desist 
+from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), 
+and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. 
+ C. Within 10 days of the entry of this Order:  
+(1) Respondent Cabela’s shall pay a civil money penalty in the amount of 
+$1,000,000 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. 
+(2) Respondent Castner  shall pay a civil money penalty in the amount of 
+$50,000 to the Securities and Exchange Commission  for transfer to the 
+general fund of the United States Treasury, subject to Exchange Act Section 
+21F(g)(3).  If timely payment is not made, addition al interest shall accrue 
+pursuant to 31 U.S.C. §3717. 
+D. Payments must be made in one of the following ways:   
+(1) Respondents may transmit payment electronically to the Commission, 
+which will provide detailed ACH transfer/Fedwire instructions upon 
+request;  
+(2) Respondents may make direct payment from a bank account via Pay.gov 
+through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or  
+(3) Respondents may pay by certified check, bank cashier’s check, or United 
+States postal money order, made payable to the Securities and Exchange 
+Commission and hand-delivered or mailed to:  
+Enterprise Services Center 
+Accounts Receivable Branch 
+HQ Bldg., Room 181, AMZ-341 
+6500 South MacArthur Boulevard 
+Oklahoma City, OK 73169 
+Payments by check or money order must be accompanied by a cover letter identifying 
+either Cabela’s or Castner 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, 
+Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, 
+1961 Stout Street, Suite 1700, Denver, Colorado 80294-1961.   
+ E. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be 
+treated as penalties paid to the government for all purposes, including all tax purposes.  To 
+preserve the deterrent effect of the civil penalty, 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 
+ 11 
+any award of compensatory damages by the amount of any part of Respondents’ payment of a civil 
+penalty in this action ("Penalty Offset").  If the court in any Related Investor Action grants such a 
+Penalty Offset, Respondents agree that they shall, within 30 days after entry of a final order 
+granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of 
+the Penalty Offset to the Securities and Exchange Commission.  Such a payment shall not be 
+deemed an additional civil penalty and shall not be deemed to change the amount of the civil 
+penalty imposed in this proceeding.  For purposes of this paragraph, a "Related Investor Action" 
+means a private damages action brought against either 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 Castner, and further, any debt for disgorgement, prejudgment interest, civil penalty or 
+other amounts due by Respondent Castner 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 Castner 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 

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+1  
+UNITED STATES OF AMERICA 
+Before the 
+SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77745 / April 29, 2016 
+ 
+INVESTMENT ADVISERS ACT OF 1940 
+Release No. 4380 / April 29, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3772 / April 29, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17238 
+ 
+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 Investment 
+Advisers Act of 1940 (“Advisers Act”), and Rule 102(e)(1) of the Commission’s Rules 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 thereunder. 
+ 
+ 
+In the Matter of 
+ 
+ 
+SANTOS, POSTAL & 
+COMPANY, P.C. and 
+JOSEPH A. SCOLARO, CPA, 
+ 
+ 
+Respondents. 
+2  
+Practice,2 against Santos, Postal & Company, P.C. (“SPC”) and Joseph A. Scolaro, CPA (“Scolaro” 
+and collectively, “Respondents”). 
+ 
+II. 
+ 
+In anticipation of the institution of these proceedings, Respondents have submitted Offers 
+of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the 
+purpose of these proceedings and any other proceedings brought by or on behalf of the 
+Commission, or to which the Commission is a party, and without admitting or denying the findings 
+herein, except as to the Commission’s jurisdiction over them and the subject matter of these 
+proceedings, which are admitted, and except as provided herein in Section V as to Respondent 
+Scolaro, 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 
+ 
+This matter involves repeated failures by SPC, an accounting firm, and Joseph A. 
+Scolaro, an SPC partner, in connection with SPC’s examinations of client funds and securities of 
+which a registered investment adviser  has custody (the “Examinations”) pursuant to Section 
+206(4) of the Advisers Act and Rule 206(4)-2 thereunder (the “Custody Rule”).4  In particular, 
+Respondents engaged in improper professional conduct under Section 4C of the Exchange Act 
+and Rule 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice when completing their 
+2010 and 2011 Examinations.  In addition, Respondents twice filed reports on Forms ADV-E 
+that contained untrue statements of material facts regarding the Examinations, thereby violating 
+Section 207 of the Advisers Act.    
+ 
+ 
+ 
+                                                           
+2  Rule 102(e)(1) 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; or to have willfully violated . . . 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  Rule 206(4)-2 was amended on December 30, 2009, effective March 12, 2010.  See Custody of Funds or 
+Securities of Clients by Investment Advisers, Advisers Act Rel. No. 2968 (Dec. 30, 2009).  The relevant conduct 
+described herein occurred after this amendment. 
+3  
+Respondents 
+ 
+1. Santos, Postal & Company, P.C.  (“SPC”) is a Rockville, Maryland based 
+certified public accounting and management consulting firm established in 1971 that has 
+approximately 40 professional staff, including five partners.  SPC primarily provides accounting, 
+tax and auditing services to individuals and private entities and has been registered with the 
+Public Company Accounting Oversight Board since 2010.  Other than SFX, SPC did not provide 
+services to any SEC-registered clients.  SPC has never been subject to any disciplinary or 
+regulatory proceedings.     
+2. Joseph A. Scolaro (“Scolaro”), age 52, resides in Highland, Maryland.  Scolaro 
+has been a certified public accountant licensed in Maryland since 1989.  During the relevant 
+period, Scolaro owned 25% of SPC and has been an SPC partner since 2004.  Scolaro was the 
+only engagement partner for services provided to SFX.  Scolaro has never been subject to any 
+disciplinary or regulatory proceedings.  
+Other Relevant Entities 
+3. SFX Financial Advisory Management Enterprises, Inc. (“SFX”) is a Delaware 
+corporation organized on March 25, 1992, and headquartered in Washington, D.C.  SFX became 
+registered with the Commission as an investment adviser on September 21, 1992, but withdrew 
+its registration on September 12, 2012 due to its failure to maintain eligibility for registration 
+based on the amount of assets under management.  SFX is currently registered in the District of 
+Columbia.  Live Nation Worldwide, Inc., which is owned by Live Nation Entertainment, Inc. 
+(“Live Nation”) (NYSE: LYV), wholly-owns SFX.  SFX assesses its clients fixed fees and fees 
+based on assets under management.  In its most-recent Form ADV filing in March 2015, SFX 
+disclosed that it managed $14 million on a discretionary basis.  On June 15, 2015, the 
+Commission issued an order finding (among other things) that SFX willfully violated Sections 
+206(2) and 206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-7 thereunder, and failed to 
+supervise Brian J. Ourand within the meaning of Section 203(e)(6) of the Advisers Act.  See SFX 
+Financial Advisory Enterprises, Inc., et al., Advisers Act Rel. No. 4116 (June 15, 2015). 
+4. Brian J. Ourand (“Ourand”), age 53, is a resident of Chicago, Illinois.  In 1986, 
+Ourand began working at Professional Services Inc., which SFX acquired in 1999.  From June 
+2003 to March 2007, Ourand served as SFX’s Vice President.  Ourand served as SFX’s 
+President from March 2007 through August 2011.  In August 2011, SFX terminated Ourand for 
+misappropriating client funds.  On June 15, 2015, the Commission instituted an administrative 
+and cease-and-desist proceeding against Ourand alleging violations of Sections 206(1) and 
+206(2) of the Advisers Act.  See Brian J. Ourand, Advisers Act Rel. No. 4115 (June 15, 2015). 
+Background 
+ 
+5. SFX specializes in providing advisory and financial management services to high 
+net-worth individuals.  Clients entered into agreements with SFX to receive, among other 
+services, investment advisory and bill-paying services.  SFX had the power to withdraw from 
+and deposit client assets to both bank and brokerage accounts as part of its bill paying authority.  
+4  
+Consequently, SFX had custody over client assets.5  In particular, at least two individuals at SFX 
+had the authority to withdraw money from client accounts, including Ourand.  Ourand was also 
+identified in SFX’s Form ADV as a control person.   
+6. In 2004, SFX first engaged SPC to perform Examinations.  SPC continued to 
+conduct those Examinations until SFX withdrew its Commission registration in 2012.   
+7. From 2006 through 2011, Ourand misappropriated funds from client accounts.  
+During this time, Ourand wrote unauthorized checks from client bank accounts payable to “cash” 
+or himself, and wired unauthorized amounts to himself for his own personal use.  He also wired 
+money using client credit cards for unauthorized amounts to others for their personal use. 
+8. In October 2011, SFX informed Scolaro that Ourand had been terminated for 
+misappropriating client funds and that SFX had reimbursed the affected clients.   
+SPC’s Engagement and Examination Reports 
+9. From 2010 to 2011, SPC completed three reports for SFX, which were filed with 
+the Commission on Forms ADV-E.  In connection with its 2010 Examination, SPC completed 
+two reports filed on Forms ADV-E: on November 22, 2010, SPC filed a Form ADV-E with the 
+results of its 2010 Examination (the “2010 Report”), and on March 1, 2011, SPC filed a revised 
+report (the “2010 Revised Report”).  In connection with its 2011 Examination, SPC completed a 
+report filed with the Commission on Form ADV-E on February 8, 2012 (the “2011 Report”).      
+10. In the 2010 Report, SPC stated that it had “examined . . . management’s assertion 
+. . . that SFX . . . complied with certain provisions of rules 204-2(b) and 206(4)-2 of the 
+Investment Advisers Act . . .”  SPC further stated that “Our examination was conducted in 
+accordance with attestation standards established by the American Institute of Certified Public 
+Accountants . . .” and then enumerated various tests SPC purportedly performed.  SPC also 
+stated that “We believe that our examination provides a reasonable basis for our opinion . . . In 
+our opinion . . . Management’s assertion that SFX . . . complied with the requirements of 
+subparagraphs (1), (2), (3) and (4) of Rule 206(4)-2(a) . . . is fairly stated in all material 
+respects.”  The 2010 Revised Report and 2011 Report contained similar language.  Scolaro 
+signed each report on SPC’s behalf. 
+11. Two of SPC’s reports regarding its Examinations of SFX contained untrue 
+statements of material facts.  First, the 2010 Revised Report represented that SPC had confirmed 
+with SFX’s clients contributions to and withdrawals from client accounts, when it had not.  The 
+2010 Revised Report also falsely stated that all of the testing procedures were performed for the 
+period ended November 11, 2010, when they were actually performed for the period ended July 
+31, 2010 (over three months earlier).  Second, the 2011 Report included SPC’s unqualified 
+opinion that management’s assertion that SFX complied with the requirements of Advisers Act 
+Rule 206(4)-2(a)(1) as of May 31, 2011, relating to a qualified custodian maintaining client 
+funds and securities, was fairly stated, in all material respects.  Before filing the 2011 Report, 
+                                                           
+5  Under Advisers Act Rule 206(4)-2(d)(2)(ii), an adviser has custody if it has the authority to withdraw client 
+assets maintained with a qualified custodian upon the adviser’s instruction to the custodian.  
+5  
+however, SPC and Scolaro knew that Ourand had misappropriated client funds.  In light of the 
+misappropriation, all client funds were not maintained with a qualified custodian as of May 31, 
+2011.  
+SPC and Scolaro Engaged in Improper Professional Conduct in Performing the 
+Examinations of the Adviser 
+12. Scolaro’s conduct in performing SFX’s 2010 through 2011 Examinations violated 
+the professional standards for certified public accountants set forth in American Institute of 
+Certified Public Accountants’ (“AICPA”) standards for attest engagements (AT § 101) and 
+compliance attestation (AT § 601).  
+Failure to Exercise Due Professional Care and Professional Skepticism 
+13. AT § 101.39 provides that “[t]he fifth general standard is – The practitioner must 
+exercise due professional care in the planning and performance of the engagement and the 
+preparation of the report.”  AT § 101.40 provides that “Due professional care imposes a 
+responsibility on each practitioner involved with the engagement to observe each of the 
+attestation standards.”  AT § 601.38 provides that “[t]he practitioner should exercise (a) due care 
+in planning, performing, and evaluating the results of his or her examination procedures and (b) 
+the proper degree of professional skepticism to achieve reasonable assurance that material 
+noncompliance will be detected.”  As a result of the failures described herein, for the 2010 and 
+2011 Examinations, Scolaro did not exercise due professional care or the proper degree of 
+professional skepticism in the planning and performance of the engagements. 
+14. In planning the 2010 and 2011 Examinations, Scolaro did not adequately consider 
+fraud risk factors related to fraudulent reporting or misappropriation of assets, including (a) 
+deficiencies in the system of internal controls over compliance, (b) ineffective monitoring of 
+management as a result of domination of management by a small group without compensating 
+controls, and (c) significant unusual related party transactions.  See AT § 601.33 (requiring the 
+consideration of factors similar to those in audit standard AU § 316.85 Consideration of Fraud in 
+a Financial Statement Audit).  Scolaro failed to identify any specific attestation risks regarding 
+SFX’s compliance with the Custody Rule.  There were, however, significant risks that Scolaro 
+should have identified.  For example, at least two dominant individuals with significant influence 
+had full signatory power of client bank accounts relating to SFX’s bill-paying services and there 
+was inadequate segregation of duties within the bill-paying process, thereby creating inherently 
+significant risks of misappropriation from client accounts.  Further, Scolaro failed to identify 
+Ourand as a person authorized to disburse funds from client accounts, thereby obstructing his 
+ability to fully assess the risks associated with significant unusual related party transactions.  
+Even after SFX informed SPC in October 2011 that SFX had terminated Ourand for 
+misappropriating client funds, Scolaro did not perform any further assessment of fraud risk 
+factors in conducting the 2011 Examination.  
+15. For the 2010 and 2011 Examinations, Scolaro did not gain an adequate 
+understanding of SFX’s internal controls over compliance as they related to SFX’s compliance 
+with the Custody Rule.  AT §§ 601.45, 601.46 (providing that an accountant conducting an 
+examination is required to perform procedures sufficient to obtain an adequate understanding of 
+6  
+internal controls over compliance).  For example, Scolaro identified only one person at SFX who 
+could authorize payments from or write checks against client accounts – failing to identify 
+Ourand as a person with such authority.  Further, Scolaro did not understand that there was 
+inadequate segregation of duties within SFX for disbursements from client accounts, with a 
+single person at SFX being allowed to authorize a transaction, have custody of documents 
+necessary to initiate a transaction (such as blank checks), and record the transaction in the 
+accounting system without compensating controls.  Further, Scolaro made no additional effort to 
+understand SFX’s internal controls relating to its compliance with the Custody Rule in 
+connection with its 2011 Examination procedures despite learning, in October 2011, that SFX 
+had terminated Ourand for misappropriating client funds. 
+16. Another factor to be considered by a practitioner in planning an attest engagement 
+is conditions that may require extension or modification of attest procedures.  See AT § 101.45.  
+This guidance is supplemented by AT § 101.47, which provides that “. . . as the attest 
+engagement progresses, changed conditions may make it necessary to modify planned 
+procedures.” 
+17. Scolaro did not document his consideration as to whether the 2011 Examination 
+procedures should be extended or modified after SFX informed Scolaro of Ourand’s 
+misappropriation.  Scolaro did not document that the fraud had occurred or perform any 
+additional procedures after learning of Ourand’s misappropriation, including (for example) 
+evaluating the nature and magnitude of the misappropriation, how Ourand stole client funds, or 
+whether the misappropriation should affect the timing and extent of attestation procedures.   
+Failure to Obtain Sufficient Evidence 
+18. AT § 101.51 provides that “[t]he second standard of fieldwork is – The 
+practitioner must obtain sufficient evidence to provide a reasonable basis for the conclusion that 
+is expressed in the report.”  AT § 601.48 provides that “The practitioner should apply procedures 
+to provide reasonable assurance of detecting material noncompliance.”  As described herein, for 
+the 2010 and 2011 Examinations, Scolaro failed to obtain sufficient evidence to provide a 
+reasonable basis for the conclusions expressed in the examination reports or to provide 
+reasonable assurance of detecting noncompliance because he failed to obtain sufficient evidence 
+through effectively designed sampling plans, independent confirmations with clients, or 
+alternative procedures that provide relevant and reliable evidence.  
+19. For the 2010 Examination, Scolaro inadequately planned, performed and 
+evaluated samples.  See AT § 601.48 and AU § 350, Audit Sampling.  The sufficiency of audit 
+evidence is related to the design and size of an audit sample, among other factors.  See AU 
+§ 350.05.  In addition, sample items should be selected in such a way that the sample can be 
+expected to be representative of the population, and all items in the population should have an 
+opportunity to be selected.  See AU § 350.24.  Further, the practitioner should determine which 
+items, if any, should be individually examined and which items, if any, should be subject to 
+sampling.  The practitioner should examine those items for which, in his judgment, acceptance of 
+some sampling risk is not justified.  See AU § 350.21.   
+ 
+7  
+20. In 2010, Scolaro used sampling procedures that were inadequate.  In particular, 
+when confirmations of account balances were not returned by clients, Scolaro sampled client 
+accounts by selecting a single transaction for the entire period for each client (for a total of 26 
+sample items) and reviewing supporting documentation.  Moreover, the single transaction 
+selected was the first transaction in the account in the calendar year regardless of amount, type 
+(credit or debit) or counterparty.  The deficiencies in internal controls over SFX’s bill-paying 
+services and the absence of other effective substantive tests to verify account balances directly 
+with clients are factors that should have resulted in larger sample sizes.  Further, Scolaro did not 
+separately evaluate or examine the significant unusual checks made to Ourand or to cash, which 
+a proper degree of professional skepticism should have dictated were high risk transactions.   
+21. AT § 101.72 provides that “[t]he practitioner should not express an unqualified 
+conclusion unless the engagement has been conducted in accordance with the attestation 
+standards.  Such standards will not have been complied with if the practitioner has been unable 
+to apply all the procedures that he or she considers necessary in the circumstances.”  In its 2010 
+Revised Report, SPC provided an unqualified conclusion that SFX’s assertion that it was in 
+compliance with the Custody Rule was fairly stated.  Moreover, the unqualified conclusion was 
+supported, in part by falsely stating that SPC had confirmed contributions to and withdrawals 
+from client accounts when, in fact, these procedures were not performed and SPC had not 
+performed adequate alternative procedures to obtain sufficient evidence to provide a reasonable 
+basis for these conclusions.  
+22. AT § 601.63 provides that an examination report on an entity’s assertion about 
+compliance should be modified if there is material noncompliance with specified requirements.  
+Scolaro should have known that Ourand’s misappropriation was material to users of the reports.  
+See AT § 101.67.  Accordingly, Scolaro had a responsibility to disclose in SPC’s reports this 
+material noncompliance.  The 2011 Report, however, contained an unqualified opinion and made 
+no mention of Ourand’s misappropriation.   
+Failure to Prepare and Maintain Examination Documentation 
+23. Scolaro failed to prepare and maintain attest documentation sufficient to enable 
+reviewers to understand the nature, timing and extent of attest procedures performed and the 
+information obtained.  See AT § 101.103.  SPC’s work papers for its 2010 and 2011 
+Examinations of SFX did not contain any explanation of why Scolaro used the sampling 
+approach that it did or how such approach provided sufficient evidence.  Further, the work 
+papers did not document the existence of Ourand’s misappropriation, whether Scolaro obtained 
+information to understand the nature and extent of the fraud, or whether Scolaro considered if 
+examination procedures should be extended or modified after learning of Ourand’s 
+misappropriation.  As a result, Scolaro failed to adequately document his Examinations of SFX 
+and significant conclusions reached. 
+Inadequate Training 
+24. SPC and Scolaro did not assign an engagement team that “[had] adequate 
+technical training and proficiency to perform the attestation engagement.”  See AT § 101.19.  See 
+also AT § 601.40.  Scolaro and the SPC senior accountant assigned to the engagements lacked 
+8  
+adequate knowledge and understanding of the Custody Rule, were not aware that the 
+Examination was to be conducted in accordance with the provisions of AT §§ 101 and 601, and 
+were not familiar with the guidance the Commission issued in 2009.  See Commission Guidance 
+Regarding Independent Public Accountant Engagements Performed Pursuant to Rule 206(4)-2 
+Under the Investment Advisers Act of 1940, Advisers Act Rel. No. 2969 (Dec. 30, 2009, effective 
+Mar. 12, 2010). 
+SPC Engaged in Improper Professional Conduct by Not Adhering to Professional 
+Quality Control Standards 
+ 
+25. AT § 101.17 provides that “a firm of practitioners has a responsibility to adopt a 
+system of quality control in the conduct of a firm’s attest practice.”  Although SPC established a 
+system of quality controls, the design and implementation of the firm’s policies and procedures 
+were ineffective, as discussed herein, in providing reasonable assurance that its personnel 
+complied with professional standards and applicable regulatory requirements in conducting the 
+2010 and 2011 Examinations, or that the reports issued by the firm were appropriate in the 
+circumstances.  
+26. The AICPA Quality Control Standards (“QC”)6 provide that the firm should 
+establish policies and procedures requiring that the engagement partner has the appropriate 
+competence, capabilities, and authority to perform the role.  See QC §10.33b.  The firm should 
+establish policies and procedures to assign appropriate personnel with the necessary competence 
+and capabilities to perform engagements in accordance with professional standards and 
+applicable legal and regulatory requirements.  See QC §10.34a.  SPC maintained a policy 
+wherein a management committee was responsible for ensuring that personnel with the necessary 
+competence and capabilities were assigned to engagements.  Nevertheless, SPC assigned the 
+Examinations to Scolaro even though he did not have adequate training and proficiency in 
+Custody Rule compliance requirements or the appropriate competence to perform the 
+engagements.  Accordingly, SPC did not properly monitor compliance with procedures designed 
+to ensure that the appropriate personnel with the necessary competence and capabilities were 
+assigned to perform the Examinations. 
+27. Firms should establish criteria against which engagements should be evaluated to 
+determine whether an engagement quality control review should be performed.  See QC §10.38.  
+Engagement quality control reviews should be performed before release of the engagement 
+report to evaluate the significant judgments made by the engagement team and the related 
+conclusions reached in forming the overall conclusion on the engagement and in preparing the 
+engagement report.  See QC §10.40 - .41.  While SPC maintained policies regarding the 
+foregoing, these policies did not apply to attestation engagements, such as the SFX Examination, 
+unless unusual circumstances or risks were identified relating to the engagement.  SPC did not 
+identify any unusual circumstances or risks relating to the 2010 and 2011 SFX engagements and, 
+consequently, the engagements were not subject to quality control reviews.  SPC was negligent 
+in failing to identify unusual circumstances or risks relating to the 2011 engagement because it 
+                                                           
+6  The AICPA Quality Control Standards (SQCS No. 7) were revised effective January 1, 2012 (SQCS No. 
+8).  The revision changed the numbering of some of the standards but did not change or expand SQCS No. 7 in any 
+significant respect.  References herein to AICPA Quality Control Standards refer to sections in SQCS No. 8. 
+9  
+was aware of Ourand’s misappropriation.  SPC’s policy was inadequate and not properly 
+implemented given that SPC did not conclude that Ourand’s misappropriation constituted an 
+unusual circumstance or risk – thereby not performing a control review – while SPC had direct 
+knowledge of fraud.  
+28. Firms should establish policies and procedures to provide them with reasonable 
+assurance that appropriate consultation takes place on difficult or contentious issues.  See QC 
+§10.37.  This includes consultations on significant technical, ethical, and other matters.  See QC 
+§10.A38.  The nature and scope of consultations should be documented and agreed upon by both 
+the individual seeking consultation and the individual consulted.  See QC §10.37c.  SPC’s 
+policies require documentation of consultations and specify various situations that may require 
+consultations, including situations involving significant issues identified during the client 
+acceptance and continuance process.  The discovery of Ourand’s misappropriation during SPC’s 
+2011 Examination of SFX was a significant issue, although SPC and Scolaro failed to identify it 
+as such, and no consultations were documented in connection with the 2011 Examination.  SPC’s 
+policy was not properly implemented given that SPC did not conclude that Ourand’s 
+misappropriation was a significant issue – thereby not obtaining a consultation – while it had 
+knowledge of this conduct.  
+Violations 
+ 
+29. As a result of the conduct described above, SPC and Scolaro willfully7 violated 
+Section 207 of the Advisers Act, which makes it “unlawful for any person willfully to make any 
+untrue statement of a material fact in any registration application or report filed with the 
+Commission . . . or willfully to omit to state in any such application or report any material fact 
+which is required to be stated therein.” 
+30. As a result of the conduct described above, SPC and Scolaro engaged in improper 
+professional conduct as defined in Section 4C(b) of the Exchange Act and Rule 102(e)(1)(iv) of 
+the Commission’s Rules of Practice. 
+Findings 
+31. Based on the foregoing, the Commission finds that SPC and Scolaro engaged in 
+improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 
+102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice. 
+32. Based on the foregoing, the Commission finds that SPC and Scolaro willfully 
+violated Section 207 of the Advisers Act.  
+ 
+ 
+ 
+                                                           
+7  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)). 
+10  
+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) and (iii) of the Commission’s Rules of Practice, it is hereby 
+ORDERED that: 
+ 
+A. Respondents Scolaro and SPC shall cease and desist from committing or causing any 
+violations and any future violations of Section 207 of the Advisers Act. 
+ 
+B. Respondent Scolaro is denied the privilege of appearing or practicing before the 
+Commission as an accountant. 
+ 
+C. After five years from the date of this Order, Respondent Scolaro 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 Scolaro’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 Scolaro, 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 Scolaro, 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 Scolaro 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 Scolaro acknowledges his responsibility, as long as he appears 
+11  
+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 Scolaro 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 Scolaro’s 
+character, integrity, professional conduct, or qualifications to appear or practice before the 
+Commission. 
+ 
+E. Respondent SPC is denied the privilege of appearing or practicing before the 
+Commission as an accountant. 
+ 
+F. After one year from the date of this Order, Respondent SPC 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 SPC 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 SPC is registered with the Board in accordance with the 
+Sarbanes-Oxley Act of 2002, and such registration continues to be effective; 
+ 
+(b) Respondent SPC 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 SPC’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 SPC’s employees will not receive appropriate 
+supervision.  SPC 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 
+12  
+not enter into any employment, consultant, attorney-client, auditing or 
+other professional relationship with SPC, 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 SPC, 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 SPC 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 SPC 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. 
+ 
+G. The Commission will consider an application by Respondent SPC 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 SPC’s character, integrity, professional conduct, or qualifications to appear or 
+practice before the Commission. 
+ 
+H. Respondent Scolaro shall, within 30 days of the entry of this Order, pay a civil 
+money penalty in the amount of $15,000 to the Securities and Exchange Commission for transfer 
+to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3).  
+Respondent SPC shall, within 30 days of the entry of this Order, pay a civil money penalty in the 
+amount of $15,000 to the Securities and Exchange Commission for transfer to the general fund of 
+the United States Treasury, subject to Exchange Act Section 21F(g)(3).  If 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.  
+ 
+I. Respondent SPC shall, within 30 days of the entry of this Order, pay 
+disgorgement of $25,800, which represents profits gained as a result of the conduct described 
+herein, and prejudgment interest of $3,276.76 to the Securities and Exchange Commission for 
+transfer to the general fund of the United States Treasury, subject to Exchange Act Section 
+13  
+21F(g)(3). If this payment is not made by the date the payment is required by this Order, the 
+entire outstanding balance of disgorgement and prejudgment interest, plus any additional interest 
+accrued pursuant to SEC Rule of Practice 600, shall be due and payable immediately, without 
+further application. 
+ 
+J. Payments described herein 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 the 
+relevant party 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 C. Dabney O’Riordan, 
+Associate Regional Director, Securities and Exchange Commission, Los Angeles Regional 
+Office, 444 South Flower St., Suite 900, Los Angeles, California 90071. 
+ 
+K. 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. 
+ 
+ 
+ 
+14  
+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 Scolaro, and further, any debt for disgorgement, prejudgment interest, 
+civil penalty or other amounts due by Respondent Scolaro 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 Scolaro 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 

raw/aaer/2016/AAER-3773.txt

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+ 
+ 
+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77755 / May 2, 2016  
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3773 / May 2, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17240 
+ 
+ 
+ 
+In the Matter of 
+ 
+MALONEBAILEY, LLP, and 
+JAY PHILLIP NORRIS, 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 
+MaloneBailey, LLP (“MaloneBailey”), and Jay Phillip Norris, CPA (“Norris”) (collectively, 
+“Respondents”) pursuant to Sections 4C1 and 21C of the Securities Exchange Act of 1934 
+(“Exchange Act”) and Rule 102(e)(1)(ii) and 102(e)(1)(iii) of the Commission’s Rules of Practice.2 
+                                                 
+1  Section 4C provides, in relevant part, that:  
+ 
+ The Commission may censure any person, or deny, temporarily or permanently, 
+to any person the privilege of appearing or practicing before the Commission in 
+any way, if that person is found . . . (1) not to possess the requisite qualifications 
+to represent others . . . (2) to be lacking in character or integrity, or to have 
+engaged in unethical or improper professional conduct; or (3) to have willfully 
+violated, or willfully aided and abetted the violation of, any provision of the 
+securities laws or the rules and regulations thereunder. 
+2 
+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, and except as provided herein in Section V with regard to Respondent Norris, 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 finds that:  
+ 
+A. SUMMARY 
+ 
+1. These proceedings arise out of the Respondents’ audit of the financial statements of 
+Left Behind Games, Inc. (“LBG”), a penny-stock public company which sold religious themed 
+video games, for LBG’s fiscal years ended March 31, 2010 and March 31, 2011.  Respondents’ 
+audit report, dated August 3, 2011, was included in LBG’s Form 10-K filed August 4, 2011. 
+ 
+2. Approximately 88% of LBG’s net revenues for its 2011 fiscal year resulted from 
+purported sales of its religious themed video games to Lighthouse Distributors, Inc. (“Lighthouse”).  
+In fact, these revenues were improperly recognized, and were the result of circular sham 
+transactions between LBG and the principal of Lighthouse, Ronald Zaucha (“Zaucha”), a former 
+consultant to LBG and close personal friend of LBG’s principal, Troy Lyndon (“Lyndon”).  As a 
+result of the recognition of these phony revenues, LBG was purportedly profitable, for the first time 
+in its history.  On September 24, 2013, the Commission sued Lyndon and Zaucha alleging 
+                                                                                                                                                             
+ 
+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. 
+ 
+ Rule 102(e)(1)(iii) 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 willfully violated, or willfully aided and abetted the violation of any 
+provision of the Federal securities laws or the rules and regulations thereunder. 
+ 
+3 
+violations of, among other provisions, the securities registration and antifraud provisions of Sections 
+5 and 17(a) of the Securities Act of 1933 (the “Securities Act”), and the antifraud provisions of 
+Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and obtained permanent injunctions 
+and other relief against them.  SEC v. Troy Lyndon and Ronald Zaucha, CV 13-00486 SOM-KSC 
+(D. Hawaii).   
+ 
+3. Respondents’ conduct in auditing LBG for fiscal year 2011 resulted in the violation 
+of applicable professional standards constituting improper professional conduct.  Additionally, the 
+conduct of Respondent MaloneBailey constituted willful violation of Regulation S-X Rule 2-
+02(b)(1), and the conduct of Respondent Norris willfully aided and abetted and caused 
+MaloneBailey’s violation of Regulation S-X Rule 2-02(b)(1).3 
+ 
+B. RESPONDENTS 
+ 
+4. MaloneBailey, LLP is a public accounting firm registered with the Public 
+Company Accounting Oversight Board (“PCAOB”) which is based in Houston, Texas.  It 
+specializes in auditing small public companies.  At all relevant times, MaloneBailey had 
+approximately five audit partners.  It currently has seven audit partners. 
+ 
+5. Jay Phillip Norris, CPA, age 51, was a partner of MaloneBailey from 2009 until 
+December 2015 and is a certified public accountant licensed in the state of Texas.  He was also 
+licensed in Oklahoma from August 6, 1999 until his license was canceled on June 13, 2002.  
+During the time period relevant to this proceeding, Norris served as the engagement partner for the 
+services MaloneBailey performed for LBG.  These services included audits of the financial 
+statements of LBG for its fiscal years ended March 31, 2010 and March 31, 2011. 
+ 
+C. FACTS 
+ 
+1. The Audit Client and its Related Party, Zaucha 
+ 
+6. Left Behind Games, Inc. d/b/a Inspired Media Entertainment was 
+headquartered in Murrieta, California.  It was founded by Lyndon on December 31, 2001, and 
+incorporated in Delaware on August 22, 2002.  LBG became a public company on February 7, 
+2006.  LBG’s stock was registered with the Commission pursuant to Section 12(g) of the Exchange 
+Act, 15 U.S.C. § 78l(g).  During the relevant period, LBG’s stock traded on the OTCQB exchange 
+under the ticker symbol “LFBG.”  LBG terminated all of its employees and closed its office at the 
+end of 2011.  On January 13, 2014, an Initial Decision was issued in In the Matter of Left Behind 
+Games, Inc., AP File No. 3-15522, revoking the registration of the securities of LBG based on 
+LBG’s failure to timely file required periodic reports since it filed a Form 10-Q for the period 
+ended September 30, 2011.  (Initial Decision Release No. 551.)  That decision became final on 
+February 24, 2014.  (Exchange Act Release No. 71603.) 
+ 
+                                                 
+3 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). 
+4 
+7. Between September 2008 and September 30, 2010, LBG hired Zaucha as a 
+“consultant,” pursuant to three successive agreements, which provided that Zaucha would be 
+compensated with LBG stock. 
+ 
+8. The agreements provided that the shares Zaucha received were restricted, 
+and could not be sold pursuant to SEC Rule 144 for six months.  Zaucha completed a 
+“Seller’s Representation Letter” for a “NON-AFFILIATE.”  [Emphasis original.]  In the 
+letter, Zaucha represented that he was not an “affiliate” of LBG.  Zaucha also stated that he 
+was not a “promoter” of the issuer, LBG, and that the stock “has been owned and fully paid 
+for by the undersigned in excess of one (1) year.”  Based on these representations, between 
+November 9, 2009, and September 20, 2011, two attorneys issued at least 22 opinion letters 
+addressed to LBG’s transfer agent opining that the LBG shares issued to Zaucha were 
+permitted to be sold by Zaucha without registration, pursuant to Rule 144. 
+ 
+9. Zaucha’s representations were false.  Zaucha in fact was an “affiliate” because he 
+and LBG were both controlled by Lyndon.  Zaucha had virtually no source of funds except from 
+the sale of LBG shares. 
+ 
+10. Between August 4, 2009, and October 10, 2011, Zaucha sold over 1.74 billion LBG 
+shares after the restrictive legends were removed, realizing over $4.6 million in proceeds.  The 
+sales were made pursuant to Lyndon’s instructions, often in emails, regarding the prices at which 
+to sell the shares, how much of the proceeds LBG, Lyndon and Zaucha would each receive, and at 
+which brokerage firms Zaucha should open accounts.  Pursuant to instructions from Lyndon, 
+Zaucha repaid $3,282,626 of these proceeds to LBG as purported “early sell fees” under the 
+consulting agreements ($871,169), monies paid by Lighthouse for LBG products ($1,385,649), and 
+other payments ($1,025,808); made net payments to Lyndon of $55,000; paid $5,000 to LBG’s 
+auditor, MaloneBailey, and kept $1,278,165 for himself. 
+ 
+11. The sham sales to Lighthouse constituted $1,385,649 in revenues reported by LBG 
+for its fiscal year 2011 ended March 31, 2011.  These sales accounted for 88% of the $1,600,407 in 
+net revenues LBG reported that year, as well as the vast majority of LBG’s reported $1,485,044 
+increase in revenues over the prior year’s revenues of $115,363. 
+ 
+2. MaloneBailey’s Audit of LBG for Fiscal Year 2011 
+ 
+a. MaloneBailey Solicits and Obtains LBG as a Client and Learns 
+Shortly Thereafter that LBG May Have Engaged in Illegal 
+Conduct and Was Under Investigation by the Commission 
+ 
+12. On January 19, 2011, the PCAOB permanently revoked the registration of LBG’s 
+then-auditor.  Norris contacted LBG when he received a notice that LBG’s auditor was 
+deregistered by the PCAOB, and solicited LBG as a client.  LBG engaged MaloneBailey shortly 
+thereafter. 
+ 
+13. On January 26, 2011, Lyndon sent an email to Norris purporting to provide Norris 
+with a “solid snapshot regarding our company.”  Although the email purported to disclose the 
+5 
+company’s leadership, history, and corporate staff, including “Exclusive Contractor Staff,” 
+Zaucha’s consulting arrangement with LBG and his role at the company were nowhere described.  
+Lighthouse is described, however, as LBG’s largest client, but without any disclosure that Zaucha 
+was its principal or in any way connected to it. 
+ 
+14. Shortly after MaloneBailey was engaged, Respondents learned of the consulting 
+arrangement that LBG had with Zaucha, and that Zaucha was compensated with LBG shares.  
+Respondents also learned that Zaucha was giving cash back to LBG, purportedly because he sold 
+“too many” of the LBG shares he received in compensation.  These payments were referred to, 
+variously, as “early sell fees” and “penalties.” 
+ 
+15. The Respondents viewed this transaction as unique because of the provision that 
+Zaucha pay LBG “penalties” for selling too many LBG shares.  The Respondents also viewed the 
+arrangement as a potentially illegal attempt to evade the federal securities laws, including the 
+Commission Rule 144 prohibition against selling “restricted” shares.   
+ 
+16. In questioning at least one of the two attorneys who wrote the opinion letters 
+permitting removal of the Rule 144 restrictive legends from Zaucha’s shares, Norris learned that 
+the attorney was unaware that Zaucha was giving cash back to LBG.  Norris was also unable to 
+obtain an opinion from the company or its attorneys that Zaucha’s payment of cash “penalties” 
+back to LBG was legal.  
+ 
+17. Respondents were unaware of any documentation by Zaucha, such as invoices, of 
+any services he provided to LBG.  Respondents understood that Zaucha’s consulting agreement 
+was the only consulting agreement that resulted in money coming back to LBG. 
+ 
+18. As a result of MaloneBailey’s determination that LBG had understated its expenses 
+in previously filed financial statements, on February 15, 2011, LBG filed a Form 8-K current 
+report announcing its restatement of its financial results previously reported in its Form 10-K for its 
+fiscal year ended March 31, 2010, and its Forms 10-Q for its quarters ended June 30, 2009, 
+September 30, 2009, December 31, 2009, June 30, 2010, and September 30, 2010.  LBG explained 
+that the prior financial reports “should no longer be relied [upon] due to errors in the accounting for 
+certain share-based compensation arrangements with consultants,” because LBG failed to 
+recognize the fair value of the share-based awards in accordance with GAAP, resulting in an 
+understatement of general and administrative expenses.  This restatement related primarily to the 
+consulting arrangement that LBG had with Zaucha.   
+ 
+19. After learning about the consulting arrangement, and Zaucha’s payments to LBG of 
+“early-sell” fees or penalties derived from the proceeds of his sales of LBG stock, on February 22, 
+2011, Norris included MaloneBailey’s now-retired founding partner on an email exchange 
+regarding whether MaloneBailey should resign from the LBG engagement.  The founding partner 
+stated in response, in part, that with regard to whether the firm should resign:  
+ 
+I view the email you sent to me from Troy Lyndon as both threatening and 
+confusing – he doesn’t know what he is doing.  His actions are highly illegal 
+and best case is his attorney talked him into it.  I really hate resigning (as 
+6 
+you know) – I regard such as a challenge.  However, I’d resign before 
+compromising where such a problem exists.  I haven’t read the disclosure 
+you proposed and so don’t have an opinion, but your situation sounds very 
+bleak. 
+ 
+Norris responded: 
+ 
+I think we’re okay on the disclosure and [sic].  The only question is whether 
+this guy is a nut job we are ready to issue barring any intervention.  If you 
+don’t have a problem, then we should issue. 
+ 
+The founding partner responded to Norris, copying MaloneBailey’s partner who had been the 
+quality control partner for several years until about February 14, 2011, and another audit partner.  
+The only MaloneBailey audit partner not included on the email chain was the engagement quality 
+review partner assigned to the LBG audit who had joined the firm on February 14, 2011 as its new 
+quality control partner.  The founding partner’s response stated: 
+ 
+This isn’t my job and you haven’t kept me informed.  Troy [Lyndon] isn’t 
+rational on this issue and the question is when and how he’ll get taken 
+down.  I request and assume you’ll have clear and explicit disclosures and 
+resign if not. 
+ 
+20. Norris responded to all of the recipients:  “No Okay. Disregard my request.”  The 
+engagement quality review partner, who had recently been hired by MaloneBailey, was unaware of 
+any discussions regarding MaloneBailey resigning from the LBG engagement.  Moreover, the 
+engagement quality review partner had limited experience in auditing microcap companies.   
+ 
+21. Subsequently, on March 25, 2011, after consulting with MaloneBailey, LBG sent a 
+letter to the Commission, purportedly pursuant to Section 10A of the Exchange Act, 15 U.S.C. § 
+78j-1, stating that “certain transactions between the Company and a former Consultant [Zaucha] 
+between September 28, 2009 and June 29, 2010, resulting in $871,169 proceeds which were 
+provided back to the Company as settlement regarding a contractual issue, may have constituted a 
+[Securities Act] Section 5 violation. . . .” 
+ 
+22. Norris subsequently learned that Zaucha was an ex-convict.   
+ 
+23. On May 3, 2011, Commission staff served a subpoena concerning LBG on the 
+founding partner in his capacity as custodian of records of MaloneBailey.  Norris became aware of 
+the Commission investigation no later than May 4, 2011.  The engagement quality review partner 
+became aware of the investigation no later than May 8, 2011, when he provided a written response 
+to the Commission subpoena, copying Norris.   
+ 
+7 
+b. LBG Engages in Sales to Lighthouse, Which Respondents 
+Identify as Potential Sham Circular Transactions 
+ 
+24. After the consulting arrangement between LBG and Zaucha ended, Lyndon and 
+Zaucha came up with a new scheme, which was intended to generate purported LBG revenue.   
+ 
+25. In December 2010, Zaucha formed Lighthouse, which purportedly “purchased” 
+LBG product.  LBG and Lighthouse entered into a distribution agreement during the period 
+MaloneBailey was questioning the payment of early-sell “penalties” by Zaucha to LBG.  
+Specifically, pursuant to instructions by Lyndon in a February 8, 2011 email, and orally from 
+Zaucha, in order to conceal Zaucha’s control over Lighthouse, including from MaloneBailey, a 
+Lighthouse employee signed the agreement as the purported “general manager” of Lighthouse.  As 
+a result, Zaucha’s control of Lighthouse was not disclosed.  The agreement was also backdated, 
+stating that it was effective “as of” July 2010.  The Respondents never spoke with the employee 
+who signed the document on behalf of Lighthouse.   
+ 
+26. During LBG’s fiscal year 2011, Lighthouse “purchased” LBG product using 
+$1,385,649 of Zaucha’s LBG stock sale proceeds, in sham roundtrip related party transactions. 
+ 
+27. Lighthouse was, by far, LBG’s largest customer.  In the fiscal year ended March 31, 
+2011, Lighthouse’s $1,385,649 in purchases were 88% of LBG’s $1,600,407 in net revenues, 
+which LBG touted in its Form 10-K as an increase of $1,485,044 over its prior year’s revenues of 
+$115,363. 
+ 
+28. Rather than re-selling the LBG products, in most instances, Lighthouse distributed 
+them for free.  That Lighthouse was giving away LBG product was not disclosed in LBG’s 
+financial statements or its Forms 10-Q, 10-Q/A or 10-K, even though MaloneBailey’s manager 
+assigned to the engagement was aware that Lighthouse was likely giving away at least some LBG 
+product.   
+c. Respondents’ Audit Failures Regarding LBG’s Purported Sales 
+to Lighthouse 
+ 
+i. Lighthouse Materially Modifies a Third-Party Written 
+Confirmation that Respondents Sought and Respondents 
+Fail to Review it or Consider its Contents Consistent 
+with PCAOB Standards 
+ 
+29. Notwithstanding Lyndon’s and Zaucha’s attempts to conceal Zaucha’s ownership 
+of Lighthouse, by at least March 27, 2011, MaloneBailey nevertheless did discover the relationship 
+between Lighthouse and Zaucha.  Respondents did not inquire of Lyndon why he did not inform 
+MaloneBailey that Zaucha owned and controlled Lighthouse. 
+ 
+30. Once they discovered Zaucha’s role with Lighthouse, Respondents were concerned 
+that Zaucha may have used the proceeds from his sales of LBG stock to fund Lighthouse’s 
+purchases of LBG product in a transaction that merely consisted of a “circle of cash.”   
+ 
+8 
+31. Norris was aware by at least May 5, 2011 that Zaucha was potentially a related 
+party to LBG, notwithstanding that Lyndon had told him that Zaucha was not a related party, and 
+Norris was further aware that he needed to determine whether Zaucha was, in fact, a related party. 
+ 
+32. The only step that MaloneBailey took to determine whether Lighthouse was a real 
+entity was that Norris reviewed its website, which contained a mission statement and a form for 
+potential suppliers to complete.  The identity of Lighthouse’s principal, Zaucha, was not disclosed 
+on the website.  Respondents did not attempt to obtain financial statements from Lighthouse.   
+ 
+33. Respondents did not detect that Lighthouse was in the same building as LBG. 
+ 
+34. Moreover, Respondents failed to detect that Lighthouse was not incorporated until 
+December 2010, five months after the distribution agreement was purportedly entered into in July 
+2010 and LBG’s sales to Lighthouse purportedly began.  Respondents also reviewed entries in 
+LBG’s books purporting to represent sales to Lighthouse.  Those entries indicate sales beginning in 
+July 2010, well before Zaucha incorporated Lighthouse in December 2010. 
+ 
+35. Respondents determined that they did not have sufficient audit evidence to support 
+the transaction between LBG and Lighthouse, and they therefore sought a written third-party 
+confirmation from Lighthouse.  
+ 
+36. Accordingly, on July 27, 2011, Norris caused MaloneBailey to send an email to 
+Zaucha attaching a confirmation request Norris had written.  That request asked Zaucha to confirm 
+that:   
+ 
+(1) the sale and purchase transactions between Lighthouse Distributors 
+(“Lighthouse”) and Left Behind Games Inc. (“LBG”) were “real 
+transactions” whereby Lighthouse purchased and LBG sold copies of LBG 
+video games 
+ 
+(2) the sale and purchase transactions were not in any way connected with the 
+consulting arrangement whereby Ron Zaucha performed consulting services 
+for LBG and received shares of LBG common stock 
+ 
+(3) whether or not the proceeds from the sale of LBG’s stock were used to 
+purchase the video games from LBG [and] 
+ 
+(4) there were no side agreements related to the consulting agreement or the 
+sale/purchase transactions[.]   
+ 
+Prior to sending the request, Norris emailed two of MaloneBailey’s four partners, including the 
+engagement quality review partner, advising them of the evidence obtained, his concerns over the 
+nature of the relationship between Zaucha and LBG, and explaining that a consultant who had 
+provided cash back to the company was also the owner of the company that was buying substantial 
+amounts of LBG product and contributing a significant amount of the company’s revenue.  The 
+only suggestion in response to the email was made by the engagement quality review partner, who 
+9 
+suggested that Lighthouse should confirm there was no right of return.  This suggestion did not 
+address, however, the adequacy of the confirmation for determining whether Lighthouse or Zaucha 
+was a related party to LBG, or whether the sale of product by LBG to Lighthouse was part of a 
+“circle of cash,” as suspected by Norris. 
+ 
+37. On or about July 29, 2011, Zaucha transmitted to MaloneBailey a letter he signed 
+on behalf of Lighthouse which confirmed each of the above points, except that rather than 
+confirming the key point of whether the proceeds from the sale of LBG stock were used to 
+purchase the video games from LBG, Zaucha merely stated that “[a]ll decisions to invest monies 
+into my distribution company were independent from any sale of LBG common stock.”  No one at 
+MaloneBailey inquired of Zaucha what he meant by this statement or why he altered the language 
+provided to him by MaloneBailey in the original proposed confirmation letter. 
+ 
+38. In particular, Norris did not discuss the confirmation response with anyone.  Nor 
+did he notice that the confirmation was differently worded than his confirmation request.  Norris 
+also never attempted to obtain access to Lighthouse’s financial statements to verify its source of 
+funds for purchasing over $1.3 million of games from LBG, or whether Lighthouse ever generated 
+any revenue. 
+ 
+39. Notwithstanding that Zaucha had altered the wording of the confirmation and did 
+not confirm that proceeds from the sale of LBG stock were not used to purchase the video games 
+from LBG, MaloneBailey stated in its Engagement Completion Document, prepared by the audit 
+manager and included in the audit work papers, that the confirmation “specifically” confirmed that 
+Lighthouse’s sales to LBG were “completely unrelated” to the consulting arrangements and there 
+were no side agreements “indicating that Ron Zaucha would use proceeds from sales of LBG stock 
+to re-purchase games from the Company.”  
+ 
+40. All of the representations Zaucha made were materially false.  As described above, 
+the transaction between LBG and Lighthouse was, in fact, a “circle of cash” and a sham, as 
+Respondents suspected.  Had Respondents known Zaucha’s representations were false, they would 
+likely not have viewed the $1.38 million in sales to Lighthouse as legitimate revenue.  In fact, 
+MaloneBailey likely would not have certified the financial statements and would have resigned if it 
+had learned that Zaucha was transferring proceeds from his sale of LBG shares directly to Lyndon 
+or LBG. 
+ii. Respondents Rely on LBG’s CEO’s Representation that 
+He Did Not Have the Necessary Information to Make a 
+Requested Management Representation  
+ 
+41. Norris caused MaloneBailey to request that Lyndon sign a management 
+representation letter confirming, among other things, many of the same facts Respondents had 
+asked Zaucha to confirm. 
+ 
+42. Lyndon made various standard representations in the management representation 
+letter, which he signed on August 3, 2011.  Lyndon’s representations included that the financial 
+information was recorded consistent with GAAP and that there were no material transactions that 
+had not been properly recorded, and that LBG management had no knowledge of any fraud 
+10 
+affecting the company which involved management.  Additionally, Lyndon confirmed that 
+transactions involving “related parties,” as defined by GAAP provision FASB ASC 850-10, were 
+properly recorded or disclosed. 
+ 
+43. Regarding LBG’s transactions with Lighthouse, Lyndon made the following 
+specific representations in the August 3rd management representation letter:  (1) the sale and 
+purchase transactions between Lighthouse and LBG were “real transactions whereby Lighthouse 
+purchased and LBG sold copies of LBG video games”; (2) the sale and purchase transactions 
+“were not in any way connected with the consulting arrangement whereby Ron Zaucha performed 
+consulting services for LBG and received shares of LBG common stock”; and (3) “there were no 
+side agreements related to the consulting agreement or the sale and purchase transactions.”  
+ 
+44. Each of Lyndon’s representations was false and consequently the purported sales to 
+Lighthouse should not have been recognized as revenue in accordance with GAAP.  These 
+improperly recognized sales, constituting about 88% of LBG’s reported 2011 revenues, were 
+material to LBG’s financial statements.  Moreover, when he signed the management representation 
+letter, Lyndon removed the representation requested by the Respondents that the consulting fees 
+paid by LBG to Zaucha were not a source of funds for Lighthouse’s purchases from LBG, falsely 
+claiming that “I do not have access to the information that would be necessary to make a 
+determination regarding the source of funds regarding Lighthouse’s purchases.”  
+ 
+45. Upon MaloneBailey’s receipt on August 4, 2011, of Lyndon’s email making the 
+above representation and attaching the signed management representation letter, a senior auditor on 
+the engagement team inquired of the audit manager in an email “Is it OK that he took that line out 
+of the rep letter?”  There is no record that the audit manager responded to this inquiry. 
+ 
+46. Norris had requested that Lyndon make the specific representations regarding the 
+transactions with Lighthouse because, in his view, revenue recognition of the Lighthouse 
+purchases from LBG was dependent on the answers to some of the questions asked of Lyndon. 
+Respondents nevertheless relied on the management representation letter provided by Lyndon and 
+accepted Lyndon’s omission of the representation that the consulting fees paid by LBG were not a 
+source of funds for Lighthouse’s purchases from LBG without taking further audit steps, 
+notwithstanding that one of the engagement team members had specifically inquired whether 
+omission of the representation from the letter was all right.  In particular, Respondents took no 
+steps to obtain financial information from Lighthouse or its bank regarding its source of funds to 
+purchase LBG products.   
+ 
+iii. Certain Language Proposed by Respondents for 
+Inclusion in the 10-K that Would Have Disclosed that the 
+True Source of Funds for Lighthouse to Purchase Games 
+from LBG was Zaucha’s LBG Stock Sale Proceeds, was 
+Not Included in the Form 10-K 
+ 
+47. During the audit of LBG for fiscal year 2011 ended March 31, 2011, Respondents 
+identified management override, revenue recognition and the consulting agreements with Zaucha 
+including share-based compensation as audit risks requiring heightened scrutiny.  Respondents also 
+11 
+identified the transactions between Lighthouse and LBG as warranting additional scrutiny because 
+of the share-based compensation arrangement and consulting agreement that had existed between 
+Zaucha and LBG. 
+ 
+48. On or about July 29, 2011, Respondents presented Lyndon the following draft 
+language as a proposed audit adjustment to be inserted into the footnotes to the financial statements 
+contained in LBG’s Form 10-K.  The proposed language would have disclosed that Lighthouse 
+had, in fact, purchased video games from LBG with proceeds from sales of LBG stock originally 
+issued to Zaucha: 
+ 
+During the year ended March 31, 2011, the company recorded $1,385,649 
+of revenues from Lighthouse Distributors, Inc., a Company owned by 
+Consultant # 1.  Lighthouse Distributors, Inc. purchased the video games 
+from the Company with the proceeds from sales of the Company’s common 
+stock originally issued under the consulting arrangements described above.  
+These sales transactions were not related to the original consulting 
+agreements and were not contemplated at the time the consulting 
+agreements were entered into. 
+ 
+[Emphasis added.]  Norris believed that it was appropriate to disclose these facts, if true, as part of 
+the relationship between LBG and Zaucha in the Form 10-K.   
+ 
+49. The Form 10-K was nevertheless filed with the Commission on August 4, 2011, 
+without the italicized language, rendering the Form 10-K materially false and misleading.  Prior to 
+the Form 10-K being filed, Respondents possessed a draft with Respondents’ proposed language 
+clearly marked as deleted. 
+ 
+d. LBG Files a False and Misleading Form 10-K 
+ 
+50. Among other results, LBG’s financial statements included in its Form 10-K 
+reported net revenues of $1,600,407 for the fiscal year ended March 31, 2011, compared to 
+$115,363 in restated net revenues for its fiscal year ended March 31, 2010.  These revenues 
+included approximately $1,385,649 in revenues purportedly earned from sales to Lighthouse which 
+were, in fact, the result of the sham transactions described above.  Additionally, the Form 10-K 
+stated that LBG’s $1,600,407 in annual revenues “represented an increase in our revenues of 
+$1,485,044,” and that “The revenue level increased primarily due to sales of $1,427,091 in the year 
+ended March 31, 2011 without comparable sales in the prior fiscal year, primarily because such 
+sales were to a new customer which focuses on distribution to non-profit organizations,” and that 
+customer accounted for approximately 88% of LBG’s revenues. 
+ 
+51. These reported revenue figures were false and misleading because they were 
+generated mostly from sham transactions using the proceeds of the sale of Zaucha’s stock.  Also, 
+the Form 10-K did not disclose that the sales to the distributor, Lighthouse, were sham transactions 
+for which revenues were not in fact properly recognized. 
+52. The Form 10-K failed to disclose that the transactions between LBG and 
+Lighthouse were related party transactions.  Instead, the “Transactions with Related Persons” 
+12 
+portion of Item 13 of LBG’s Form 10-K, entitled “Certain Relationships and Related Transactions, 
+and Director Independence,” falsely stated “We have not entered into any arrangements which are 
+considered transactions with related persons.”  Nor was the related party nature of the transactions 
+disclosed anywhere else in the annual report, including in the financial statements and notes 
+thereto. 
+ 
+53. Notwithstanding that Norris was concerned by at least May 5, 2011 that Zaucha 
+might be a related party, the only audit step Respondents took to determine if Zaucha was in fact a 
+related party was to review an LBG stock ledger to determine whether Zaucha owned more than 
+5% of LBG stock.  Although during the audit MaloneBailey transmitted a “Related Party 
+Worksheet” to Lyndon which stated in part that related parties were defined as “affiliates,” 
+Respondents had no discussions with Lyndon as to what constituted an “affiliate.”  Nor did 
+Respondents discuss with Lyndon whether Lighthouse or Zaucha met another definition of “related 
+party” included in the worksheet – “other parties with which the company may deal with if one 
+party controls or can significantly influence management or operating policies of the other to an 
+extent that one of the transacting parties might be prevented from fully pursuing its own separate 
+interests.”  Instead, Respondents simply accepted Lyndon’s representation on the form he signed 
+on or about July 13, 2011, that the number of transactions with related parties was “none.”  They 
+did so even though they were aware that Lyndon represented to Norris in a March 28, 2011 email 
+that Zaucha was not a related party merely “because he is not an officer, director, family member 
+or 5% owner of the company,” and Norris knew that this definition of related party was too 
+narrow. 
+ 
+54. On or about November 9, 2011, Zaucha wired $5,000 to MaloneBailey in partial 
+payment of LBG’s audit fee.  Norris was unaware that Zaucha paid part of LBG’s audit fee; had he 
+known, it would have raised concerns in his mind that Zaucha was a related party.  MaloneBailey, 
+however, had no internal controls that would cause the audit partner to be notified if someone other 
+than the client is paying the audit fee.  This is so even though it is not uncommon for MaloneBailey 
+clients to have “funding sources [that] are not traditional.”  
+55. MaloneBailey’s audit report contained an opinion in which it represented that it had 
+conducted its audit of LBG’s fiscal 2011 financial statements in accordance with standards of the 
+PCAOB.  In fact, as set forth below, Respondents’ audit was not conducted in accordance with 
+PCAOB standards. 
+3. Respondents Engaged In Improper Professional Conduct 
+56. In performing the audit of LBG for fiscal year 2011, the Respondents engaged in 
+improper professional conduct that resulted in a violation of applicable professional standards, as 
+set forth below. 
+ 
+a. Numerous “Red Flags” were Present, Indicating Heightened 
+Scrutiny was Warranted 
+ 
+57. Respondents identified revenue recognition as an area requiring heightened 
+scrutiny, and further identified the sales to Lighthouse, which accounted for 88% of LBG’s 
+13 
+revenues, as potential related party transactions and/or circular sham transactions.  Numerous 
+additional “red flags” were present, including: 
+ 
+a. Early in the audit process, Respondents learned a number of facts which 
+indicated that Lyndon had made misrepresentations and omissions of 
+material fact to other professionals and that Respondents therefore could not 
+rely on management representations, including that: (1) at least one of two 
+attorneys who wrote the opinion letters that the restrictions on Zaucha’s 
+shares should be lifted was unaware of LBG stock sale proceeds being paid 
+back by Zaucha to LBG as purported “early sell” fees or penalties, and 
+would not opine that the “penalties” were legal; (2) the attorney retained by 
+LBG as an independent counsel to conduct an internal investigation 
+resigned shortly after being hired by LBG, prior to Respondents 
+commencing the audit. 
+ 
+b. Respondents also learned early in the audit process facts which indicated 
+that Lyndon had made misrepresentations and omissions to the Respondents 
+themselves, including that: (1) Lyndon failed to disclose or identify Zaucha 
+as a major contractor, or explain his relationship to Lighthouse, in his 
+January 26, 2011 email to Norris describing the company; and (2) in early 
+February 2011, Lyndon provided a distribution agreement between LBG 
+and Lighthouse which did not identify Zaucha as its principal, a fact 
+Respondents learned during the course of the audit. 
+ 
+c. Respondents learned in May 2011 that the Commission was conducting an 
+investigation of LBG. 
+ 
+d. The consulting agreement with Zaucha was the only consulting agreement 
+LBG had where monies were paid back to LBG by the consultant. 
+ 
+e. Zaucha was an ex-convict, a fact which Norris learned during the course of 
+the audit. 
+ 
+f. There was little documentation supporting the sales by LBG to Lighthouse. 
+ 
+g. Lyndon and Zaucha altered language proposed by Respondents for 
+inclusion in three major documents regarding Lighthouse’s source of funds 
+to purchase LBG products: (i) the third-party confirmation which was to be 
+signed by Zaucha on behalf of Lighthouse; (ii) the management 
+representation letter signed by Lyndon; and (iii) LBG’s Form 10-K. 
+  
+14 
+b. Respondents Violated Applicable Professional Standards 
+ 
+i. Respondents Failed to Act with Due Professional Care or 
+Exercise Professional Skepticism 
+ 
+58. PCAOB standards require that “[d]ue professional care is to be exercised in the 
+performance of the audit and the preparation of the report.”  AU 150.  Additionally, “[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.  The 
+auditor uses the knowledge, skill, and ability called for by the profession of public accounting to 
+diligently perform, in good faith and with integrity, the gathering and objective evaluation of 
+evidence.”  AU 230.07.  Furthermore, “[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 230.09.  Exercise of due professional care also requires that an auditor obtain reasonable 
+assurance about whether the financial statements are free from material misstatement, whether 
+caused by error or fraud.  AU 230.10.  PCAOB standard AU 230.12 also provides that 
+“Characteristics of fraud include (a) concealment through collusion among management. . . or 
+third parties; (b) withheld, misrepresented, or falsified documentation; and (c) the ability of 
+management to override or instruct others to override what otherwise appears to be effective 
+controls.” 
+ 
+59. Respondents failed to act with due professional care because, in spite of the 
+materiality of the revenue from Lighthouse – it was 88% of LBG’s total revenue, representing a 
+1,287% revenue increase over the prior year – and the many “red flags” presented that neither LBG 
+management nor Lighthouse’s principal, Zaucha were, in fact, being truthful, Respondents 
+nevertheless accepted a confirmation, management representation letter, and Form 10-K which did 
+not make the representations they themselves had requested regarding Lighthouse’s source of 
+funds to purchase LBG product.  Respondents accepted the deficient documentation as adequate 
+even after they themselves: (1) identified revenue recognition as an area requiring heightened 
+scrutiny because of the risk of fraud and (2) identified Zaucha as a potential related party.  
+ 
+60. Moreover, all three “characteristics of fraud” described in AU 230.12 were present.  
+Respondents were: (1) aware of the potential for collusion between management (Lyndon) and 
+third party Zaucha; (2) presented with documentation that withheld key representations 
+Respondents themselves had sought, specifically the confirmation from Lighthouse, the 
+management representation letter and the Form 10-K; and (3) aware that LBG had ineffective 
+internal controls over financial reporting, as disclosed in LBG’s Form 10-K. 
+ 
+61. Additionally, Respondents detected possible illegal acts by LBG, as evidenced by 
+large payments by LBG for unspecified services to a consultant, Zaucha, and the fact that the 
+Commission was conducting an investigation of LBG.  AU 317.09.  Although Respondents did 
+identify LBG’s illegal acts to the extent that they caused LBG to issue a letter to the Commission 
+purportedly pursuant to Section 10A of the Exchange Act, and considered whether other similar 
+transactions or events may have occurred, Respondents failed to act with due care in that they 
+failed to apply adequate procedures to identify potential additional illegal acts, as required by AU 
+317.11.  Nor did Respondents consider the implications of LBG’s prior illegal acts in relation to 
+15 
+other aspects of the audit.  Among other things, Respondents failed to consider the reliability of 
+representations by management, as required by AU 317.16, in light of “the relationship of the 
+perpetration and concealment, if any, of the illegal act to specific control procedures and the level 
+of management or employees involved.”  In particular, Respondents were aware that Lyndon, 
+LBG’s CEO, had failed to disclose Zaucha’s role as a consultant when initially describing major 
+company contractors, and had failed to disclose Zaucha’s relationship to Lighthouse.  Respondents 
+nevertheless relied on Lyndon’s representations in the management representation letter and Form 
+10-K, and Zaucha’s representations in the confirmation.  Moreover, Respondents were aware that 
+LBG had disclosed that its internal control over financial reporting was ineffective. 
+ 
+ii. Respondents Failed to Obtain Sufficient Competent 
+Evidence 
+ 
+62. The PCAOB standards require that an auditor obtain sufficient competent evidential 
+matter concerning the assertions in an issuer’s financial statements, and state that an auditor’s 
+substantive procedures “must include reconciling the financial statements to the [underlying] 
+accounting records.” AU 326.19.   
+ 
+63. Respondents did not obtain sufficient evidential matter concerning the sales by 
+LBG to Lighthouse.  In particular, because there was little or no underlying documentation 
+supporting these sales, Respondents viewed a confirmation from Zaucha as essential, but then 
+failed to obtain a confirmation which, as Respondents requested, confirmed whether the source of 
+funds for Lighthouse to make the purchases was proceeds from Zaucha’s sales of LBG stock. 
+iii. Respondents Failed to Evaluate the Confirmation 
+Received from Lighthouse 
+ 
+64. The PCAOB standards require that “the auditor should evaluate the combined 
+evidence provided by the confirmations and the alternative procedures to determine whether 
+sufficient evidence has been obtained about all the applicable financial statement assertions.”  AU 
+330.33.  In particular, the auditor should consider: (a) the reliability of the confirmation; (b) the 
+nature of any exceptions; (c) the evidence provided by other procedures and (d) whether additional 
+evidence is needed.  AU 330.33.   
+ 
+65. Respondents failed to consider that the confirmation provided by Lighthouse was 
+differently worded from the confirmation they requested, in that the confirmation provided did not 
+clearly state whether Lighthouse’s source of funds for the purchases of LBG products was, in fact, 
+the proceeds from Zaucha’s LBG stock sales.  They further failed to consider that the same 
+omission was made by Lyndon from the management representation letter he signed on behalf of 
+LBG. 
+ 
+iv. Respondents Improperly Relied on Management 
+Representations 
+ 
+66. PCAOB standards require that the independent auditor obtain written 
+representations from management as part of an audit, and provide guidance concerning the 
+16 
+representations to be obtained.  AU Section 333.01.  Among other things, management’s refusal to 
+furnish a written representation constitutes a limitation on the scope of the audit.  AU 333.13. 
+ 
+67. Respondents failed to consider whether Lyndon’s purported inability to furnish a 
+written representation that Zaucha’s LBG stock sale proceeds did not constitute a source of funds 
+for Lighthouse to purchase LBG products was a limitation on the scope of the audit.  Instead, they 
+simply relied on Lyndon’s representation that he did not have access to information regarding the 
+source of funds used by Lighthouse to make the purchases.  This failure was significant because 
+Zaucha’s similar failure to explicitly confirm that the sales proceeds were not a source of funds 
+meant that Respondents had no evidence confirming that LBG’s sales to Lighthouse were not 
+circular sham transactions, as Respondents suspected. 
+ 
+v. Respondents Failed to Properly Audit the Related Party 
+Transactions Between LBG and Zaucha and Lighthouse 
+ 
+68. PCAOB standards require that an auditor seek to identify related party relationships 
+and transactions and to satisfy himself concerning the required financial statement accounting and 
+disclosure.  AU 334.01.  The standards caution that “[t]he auditor should . . . be aware of the 
+possibility that transactions with related parties may have been motivated solely, or in large 
+measure” by certain conditions, including lack of sufficient working capital to continue the 
+business, and dependence on a single or relatively few customers or transactions for the continuing 
+success of the company.  AU 334.06. 
+ 
+69. Although Respondents identified the transactions with Lighthouse as potential 
+related party transactions, they failed to take adequate steps and gather sufficient competent 
+evidence to determine the true nature of these transactions and ensure their disclosure.  In 
+particular, the only audit step Respondents took was to ask Lyndon to complete and sign a form 
+identifying related parties.  Lyndon identified no related parties.  PCAOB standards provide that, 
+when necessary to fully understand a particular transaction, certain additional procedures should be 
+considered, including confirming the transaction amount and terms, inspecting evidence in 
+possession of the other party to the transaction, and confirming or discussing significant 
+information with intermediaries, such as banks, to obtain a better understanding of the transaction.  
+AU 334.10.  In this case, the only step Respondents took was to prepare and transmit a 
+confirmation request to Lighthouse, which they failed to detect was materially modified by Zaucha 
+in his confirmation response.  Notwithstanding that Zaucha had modified the key portion of the 
+confirmation so that it did not state whether the source of Lighthouse’s funds to purchase LBG 
+product was Zaucha’s LBG stock sale proceeds, Respondents did not seek bank or other records to 
+determine Lighthouse’s source of funds. 
+ 
+vi. Respondents Failed to Follow PCAOB Reporting 
+Standards 
+ 
+70. PCAOB standards require that the auditor can determine that he or she is able to 
+express an unqualified opinion only if the audit has been conducted in accordance with generally 
+accepted auditing standards and the auditor has been able to apply all the procedures the auditor 
+considers necessary in the circumstances.  AU 508.22.  Restrictions on the scope of the audit, 
+17 
+whether imposed by the client or by circumstances, including the inability to obtain sufficient 
+competent evidential matter, or an inadequacy in the accounting records, may require the auditor to 
+qualify or disclaim an opinion.  AU 508.22. 
+ 
+71. Respondents failed to properly qualify or disclaim an opinion notwithstanding their 
+inability to gather sufficient competent evidence that the funds used by Lighthouse to purchase 
+LBG product in transactions constituting 88% of LBG’s net revenue did not consist of proceeds 
+from Zaucha’s stock sales.   
+vii. Respondent MaloneBailey Failed to Comply with 
+PCAOB Quality Control Standards 
+ 
+72. PCAOB standards require that each CPA firm have a system of quality control for 
+its auditing practice.  QC 20.01.  Among other requirements, policies and procedures should be 
+established for deciding whether to accept or continue a client relationship and whether to perform 
+a specific engagement for that client.  QC 20.14.  “Such policies and procedures should provide the 
+firm with reasonable assurance that the likelihood of association with a client whose management 
+lacks integrity is minimized.”  QC 20.14.  Such policies and procedures should also provide 
+reasonable assurance that the audit firm appropriately considers the risks associated with providing 
+professional services in the particular circumstances.  QC 20.15(b). 
+73. MaloneBailey did not have procedures that provided reasonable assurance that 
+minimized the likelihood of association with a client whose management lacked integrity, 
+particularly where the client’s prior audit firm had had its PCAOB registration revoked.   
+74. MaloneBailey’s lack of adequate quality control procedures is also evident from the 
+email chain between Norris, MaloneBailey’s founding partner, and every other MaloneBailey audit 
+partner except the engagement quality review partner.  PCAOB standards require that policies and 
+procedures be established to provide reasonable assurance that audit personnel consult with 
+individuals within or outside the firm when appropriate, including when dealing with complex, 
+unusual or unfamiliar issues.  QC 20.19.  Although Norris attempted to consult with the founding 
+partner regarding whether or not to resign from the LBG engagement, and the founding partner 
+specifically stated that what Lyndon was doing was “highly illegal,” the founding partner left it to 
+Norris to decide whether to resign, while appearing to in fact discourage resignation, thus 
+undermining the attempt by Norris to consult consistent with quality control standards.  Norris in 
+fact did then tell his partners to “Disregard my request” for advice.   
+75. MaloneBailey also failed to prepare appropriate documentation to demonstrate 
+compliance with any policies and procedures designed to provide reasonable assurance that the 
+likelihood of association with a client whose management lacks integrity is minimized, as required 
+by PCAOB standards.  QC 20.25.  MaloneBailey failed to document the above email 
+communications in the work papers.  Accordingly, the engagement quality review partner was 
+unaware that resignation from the engagement had ever been considered.   
+76. MaloneBailey also did not have monitoring procedures in place which would have 
+enabled it to obtain reasonable assurance that its system of quality control was effective, as 
+required by PCAOB standards.  QC 30.03.  Among other things, MaloneBailey did not have 
+18 
+procedures which included analysis and assessment of decisions related to acceptance and 
+continuance of client relationships and engagements.  QC 30.03. 
+77. Finally, the firm’s procedures shielded the engagement partner from knowledge of 
+who was paying the client’s audit fee, even though, as Norris knew, MaloneBailey’s clients often 
+had “funding sources [that] are not traditional.”  As explained above, Lighthouse paid part of 
+LBG’s audit fee.  Had Norris been aware of this fact, it would have raised concerns in his mind 
+about the relationship of LBG and Lighthouse. 
+4. MaloneBailey Violated Regulation S-X Rule 2-02(b)(1) and Norris 
+Willfully Aided and Abetted and Caused MaloneBailey’s Violation of 
+Rule 2-02(b)(1) 
+ 
+78. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state whether 
+the audit was made in accordance with generally accepted auditing standards.  “Thus, an auditor 
+violates Regulation S-X Rule 2-02(b)(1) if it issues a report stating that it had conducted its audit in 
+accordance with PCAOB Standards when it had not.”  See In re Andrew Sims, CPA, Rel. No. 34-
+59584, AAER No. 2950 (Mar. 17, 2009). 
+ 
+79. As a result of the conduct described above, MaloneBailey violated Rule 2-02(b)(1) 
+of Regulation S-X by issuing an audit report stating that it had conducted its audit in accordance 
+with PCAOB Standards when it had not, and Norris willfully aided and abetted and caused 
+MaloneBailey’s violation of Rule 2-02(b)(1) of Regulation S-X. 
+ 
+D. FINDINGS 
+ 
+80. Based on the foregoing, the Commission finds that the Respondents engaged in 
+improper professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and 
+Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. 
+ 
+81. Based on the foregoing, the Commission finds that MaloneBailey willfully violated 
+and Norris willfully aided and abetted and caused MaloneBailey’s violation of Rule 2-02(b)(1) of 
+Regulation S-X within the meaning of Section 4C(a)(3) of the Exchange Act and Rule 
+102(e)(1)(iii) of the Commission’s Rules of Practice. 
+E. UNDERTAKINGS 
+ 
+82. Review of Written Policies and Procedures.  MaloneBailey shall, within sixty 
+(60) days after the entry of this Order, evaluate its existing audit and interim review written 
+policies and procedures and shall make such revisions as may be necessary in order to adopt, 
+implement, and enforce written policies and procedures to provide reasonable assurance that 
+MaloneBailey’s audits are conducted in compliance with (a) the relevant Commission regulations 
+and (b) audit standards relevant to appearing and practicing before the Commission.  MaloneBailey 
+shall review and revise as necessary its written policies and procedures in the following areas: (i) 
+client and engagement acceptance and client retention; (ii) contact with and requests for 
+information from prior auditors; (iii) performing proper risk assessment; (iv) obtaining sufficient 
+appropriate audit evidence; (v) third-party confirmations; (vi) work paper review and signoff by 
+19 
+engagement partners and engagement quality reviewers; (vii) related-party transactions and 
+relationships; (viii) detection of fraud; (ix) scrutiny of management representations; (x) exercise of 
+due care; and (xi) documentation in audit work papers of consultations among MaloneBailey audit 
+personnel concerning any of the above areas with regard to any audit MaloneBailey conducts, 
+including personnel not specifically assigned to the audit who the audit team formally or 
+informally consults regarding any of the above issues. 
+ 
+83. Retention of an Independent Consultant.  MaloneBailey shall retain, within sixty 
+(60) days after entry of this Order, an independent consultant (“Independent Consultant”), not 
+unacceptable to the Commission staff.  MaloneBailey will require the Independent Consultant to 
+review and evaluate the audit and interim review policies and procedures of MaloneBailey 
+including but not limited to those set forth in paragraph 82 above.  MaloneBailey will require that 
+the Independent Consultant’s review and evaluation assess the foregoing areas to determine 
+whether MaloneBailey’s policies and procedures are adequate and sufficient to ensure compliance 
+with (a) the relevant Commission regulations and (b) audit standards relevant to appearing and 
+practicing before the Commission.  MaloneBailey 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.  MaloneBailey will provide the Commission staff a copy of the engagement letter 
+detailing the scope of the Independent Consultant’s responsibilities. 
+ 
+84. Within ninety (90) days of being retained, MaloneBailey will require the 
+Independent Consultant to issue a report (“Report”) to MaloneBailey:  (a) summarizing the 
+Independent Consultant’s review and evaluation; and (b) making recommendations, where 
+appropriate, reasonably designed to ensure that audits conducted by MaloneBailey comply with 
+Commission regulations and relevant audit standards.  At MaloneBailey’s direction, the 
+Independent Consultant shall provide a copy of the Report to the Commission staff when the 
+Report is issued. 
+ 
+85. MaloneBailey shall adopt, as soon as practicable, all recommendations of the 
+Independent Consultant in the Report.  Provided, however, that within thirty (30) days of issuance 
+of the Report, MaloneBailey may advise the Independent Consultant in writing of any 
+recommendation that it considers to be unnecessary, outside the scope of this Order, unduly 
+burdensome, or impractical.  MaloneBailey 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.  MaloneBailey 
+and the Independent Consultant shall engage in good-faith negotiations in an effort to reach 
+agreement on any recommendations objected to by MaloneBailey.  In the event that the 
+Independent Consultant and MaloneBailey are unable to agree on an alternative proposal within 
+thirty (30) days, MaloneBailey shall abide by the determinations of the Independent Consultant. 
+ 
+86. Undertakings Regarding Audit Training.  MaloneBailey shall require each audit 
+and attest professional to complete successfully, within 180 days of entry of this Order:  
+ 
+a.  A Minimum of 24 Hours of Audit-Related Training. The audit-related training 
+requirement shall cover the topics specified in paragraph 82 above, with no less than four 
+20 
+hours being devoted to related party identification and testing.  The audit-related training 
+requirement may be fulfilled by completing course(s) conducted in accordance with the 
+applicable state boards of accountancy. 
+ 
+b.  A Minimum of Eight (8) Hours of Fraud-Detection Training.  The training shall 
+include techniques in detecting and responding to possible fraud in the course of public 
+company audits by audit clients or by employees, officers or directors of audit clients. 
+ 
+87. To ensure the independence of the Independent Consultant, MaloneBailey: (1) shall 
+not have the authority to terminate the Independent Consultant or substitute another independent 
+compliance consultant for the initial Independent Consultant, without the prior written approval of 
+the Commission staff; and (2) shall compensate the Independent Consultant and persons engaged 
+to assist the Independent Consultant for services rendered pursuant to this Order at their reasonable 
+and customary rates.  
+ 
+88. MaloneBailey shall require the Independent Consultant to enter into an agreement 
+that provides that for the period of engagement and for a period of two years from completion of 
+the engagement, the Independent Consultant shall not enter into any employment, consultant, 
+attorney-client, auditing or other professional relationship with MaloneBailey, or any of its present 
+or former affiliates, directors, officers, employees, or agents acting in their capacity.  The 
+agreement will also provide that the Independent Consultant will require that any firm with which 
+he/she is affiliated or of which he/she is a member, and any person engaged to assist the 
+Independent Consultant in performance of his/her duties under this Order shall not, without prior 
+written consent of the Commission’s Los Angeles Regional Office, enter into any employment, 
+consultant, attorney-client, auditing or other professional relationship with MaloneBailey, 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.  
+ 
+89. Provision of a Copy of this Order to New Public Company Audit Clients.  
+MaloneBailey undertakes that it shall forthwith provide a copy of this Order to any new public 
+company audit client which engages it between the date this Order is issued and the date that the 
+Independent Consultant certifies in writing that the undertakings discussed herein have been 
+completed to the satisfaction of the Independent Consultant.  
+ 
+90. Certification of Compliance.  MaloneBailey 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, including the certification by the Independent Consultant described 
+above in paragraph 89.  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 Karen Matteson, Senior Trial Counsel, Los Angeles Regional Office, 
+with a copy to the Office of Chief Counsel of the Enforcement Division, no later than sixty (60) 
+days from the date of the completion of the undertakings.   
+  
+21 
+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. MaloneBailey shall cease and desist from committing or causing any violations and 
+any future violations of Rule 2-02(b)(1) of Regulation S-X. 
+ 
+B. MaloneBailey is censured. 
+ 
+C. MaloneBailey shall comply with the undertakings set forth in Section III.E. above. 
+ 
+D. Norris shall cease and desist from committing or causing any violations and any 
+future violations of Rule 2-02(b)(1) of Regulation S-X. 
+ 
+E. Norris 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 Norris may request that the 
+Commission consider his reinstatement by submitting an application (attention: Office of the Chief 
+Accountant) to resume appearing or practicing before the Commission as: 
+ 
+       1. a preparer or reviewer, or a person responsible for the preparation or 
+review, of any public company’s financial statements that are filed with 
+the Commission.  Such an application must satisfy the Commission that 
+Respondent’s work in his practice before the Commission will be 
+reviewed either by the independent audit committee of the public company 
+for which he works or in some other acceptable manner, as long as he 
+practices before the Commission in this capacity; and/or 
+ 
+  2.    an independent accountant.  Such an application must satisfy the 
+Commission that: 
+      
+           (a) Respondent, or the public accounting firm with which he is 
+associated, is registered with the PCAOB in accordance with the 
+Sarbanes-Oxley Act of 2002, and such registration continues to be 
+effective; 
+ 
+   (b) Respondent, or the registered public accounting firm with which he 
+is associated, has been inspected by the PCAOB and that 
+inspection did not identify any criticisms of or potential defects in 
+the Respondent’s or the firm’s quality control system that would 
+indicate that the respondent will not receive appropriate 
+supervision; 
+22 
+   (c) Respondent has resolved all disciplinary issues with the PCAOB, 
+and has complied with all terms and conditions of any sanctions 
+imposed by the PCAOB (other than reinstatement by the 
+Commission); and 
+ 
+   (d) Respondent acknowledges his responsibility, as long as 
+Respondent appears or practices before the Commission as an 
+independent accountant, to comply with all requirements of the 
+Commission and the PCAOB, including, but not limited to, all 
+requirements relating to registration, inspections, concurring 
+partner reviews and quality control standards.   
+ 
+G. The Commission will consider an application by Respondent Norris 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. MaloneBailey shall, within 14 days of the entry of this Order, pay disgorgement of 
+$54,000 and prejudgment interest of $7,519.35, totaling $61,519.35, 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. 
+ 
+I. MaloneBailey shall, within 14 days of the entry of this Order, pay a civil money 
+penalty in the amount of $100,000 to the Securities and Exchange Commission for transfer to the 
+general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely 
+payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717.   
+ 
+J. Respondent Norris shall, within 14 days of the entry of this Order, pay a civil 
+money penalty in the amount of $10,000 to the Securities and Exchange Commission for transfer 
+to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If 
+timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717.   
+ 
+K. Payments ordered in paragraphs H through J above must be made in one of the 
+following ways:   
+ 
+(1) Respondent may transmit payment electronically to the Commission, which 
+will provide detailed ACH transfer/Fedwire instructions upon request;  
+ 
+(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  
+ 
+23 
+(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 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 Karen Matteson, 
+Senior Trial Counsel, Los Angeles Regional Office, Securities and Exchange Commission, 444 
+South Flower Street, Suite 900, Los Angeles, CA 90071.   
+ 
+ L. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be 
+treated as penalties paid to the government for all purposes, including all tax purposes.  To 
+preserve the deterrent effect of the civil penalty, Respondents agree that in any Related Investor 
+Action, they shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of 
+any award of compensatory damages by the amount of any part of Respondents’ payment of a civil 
+penalty in this action (“Penalty Offset”).  If the court in any Related Investor Action grants such a 
+Penalty Offset, Respondents agree that they shall, within 30 days after entry of a final order 
+granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of 
+the Penalty Offset to the Securities and Exchange Commission.  Such a payment shall not be 
+deemed an additional civil penalty and shall not be deemed to change the amount of the civil 
+penalty imposed in this proceeding.  For purposes of this paragraph, a “Related Investor Action” 
+means a private damages action brought against Respondent by or on behalf of one or more 
+investors based on substantially the same facts as alleged in the Order instituted by the 
+Commission in this proceeding. 
+ 
+V. 
+It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section 
+523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by 
+Respondent Norris, and further, any debt for disgorgement, prejudgment interest, civil penalty or 
+other amounts due by Respondent Norris 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 

raw/aaer/2016/AAER-3774.txt

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+ UNITED STATES OF AMERICA 
+ before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77882 / May 20, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3774 / May 20, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No.  3-15168 
+____________________________________ 
+: 
+                   In the Matter of   : 
+: CORRECTED ORDER SCHEDULING  
+John J. Aesoph, CPA and   : ORAL ARGUMENT 
+Darren M. Bennett, CPA   : 
+____________________________________: 
+ 
+IT IS ORDERED that this matter is scheduled for oral argument at 1:00 p.m. on Tuesday, 
+July 12, 2016, at 100 F Street, NE, Washington, DC, in the Auditorium (L-0002). 
+ 
+A total of 40 minutes has been allocated for the argument, 20 minutes to counsel for 
+Respondents and 20 minutes to counsel for the Division of Enforcement.  The parties will argue 
+in the above order, and counsel for Respondents may reserve time for rebuttal.  Counsel for the 
+Respondents may determine among themselves how to divide the 20 minutes allotted jointly to 
+them and shall report their determination to the Office of the Secretary at least one week prior to 
+the argument. 
+  
+Rule 451 of the Commission’s Rules of Practice provides that a member of the 
+Commission not present at the oral argument may participate in the Commission’s decision, 
+subject to the understanding that he or she will review the transcript of the argument. 
+ 
+For the Commission, by its Secretary, pursuant to delegated authority. 
+ 
+ 
+ 
+Lynn M. Powalski 
+Deputy Secretary 
+ 

raw/aaer/2016/AAER-3775.txt

@@ -0,0 +1,600 @@
+ 
+ 
+  
+UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+ 
+SECURITIES ACT OF 1933 
+Release No. 10081 / May 24, 2016 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77887 / May 24, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3775 / May 24, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17257 
+ 
+In the Matter of 
+ 
+          SWISHER HYGIENE 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 Swisher Hygiene Inc. (“Swisher” 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 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 the Respondent’s Offer, the Commission finds1 that: 
+ 
+SUMMARY 
+ 
+1. Swisher reported materially misstated financial results to the investing public and 
+in filings with the Commission during the first three quarters of 2011.  The filings with the 
+Commission included Registration Statements, Forms 8-K and quarterly reports on Forms 10-Q. 
+ 
+2. The improper accounting involved, among other things, the accounting for 
+business combinations in a manner that was not in conformity with Generally Accepted 
+Accounting Principles (“GAAP”), as well as the improper use of reserve accounts to reduce 
+losses.  
+ 
+3.  In addition, beginning in the second quarter of 2011 and continuing through the 
+remainder of that year, Swisher engaged in a scheme to manage reported financial results to 
+predetermined Adjusted EBITDA targets.2  The scheme, orchestrated by one or more senior 
+officers of Swisher, occurred during the financial statement closing process for each of the 
+relevant periods and involved the manipulation and recording of accounting entries that were not 
+in conformity with GAAP in order to achieve a predetermined target.  Once the desired target 
+was achieved, the financial statement closing process would cease with no further analysis of 
+other significant accounts.  Accounting entries that were utilized in furtherance of the scheme 
+included those related to earnout accruals, compensation for employees of acquired entities, 
+unfavorable contracts, insurance reserves and the allowance for doubtful accounts receivable. 
+ 
+4. As a result of the improper accounting, on February 19, 20 and 21, 2013, 
+respectively, Swisher filed amended and restated quarterly reports on Forms 10-Q/A for the 
+quarterly periods ended March 31, 2011, June 30, 2011 and September 30, 2011.   
+ 
+                                                 
+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  EBITDA is a non-GAAP measure that generally denotes earnings before interest, taxes, depreciation and 
+amortization.  In its September 30, 2011 Form 10-Q, Swisher defined “Adjusted EBITDA” as follows: 
+ 
+We define Adjusted EBITDA as net loss excluding the impact of income taxes, depreci ation and 
+amortization expense, interest expense and income, foreign currency gain, net gain/loss on debt related fair 
+value measurements, stock based compensation and third party costs directly related to mergers and 
+acquisitions. 
+  
+ 
+ 
+3 
+ 
+ 
+5. Swisher also acknowledged in its Form 10-K for the fiscal year ended December 
+31, 2011, filed on February 26, 2013, and in its amended Forms 10-Q for 2011 that as of those 
+reporting periods, Swisher’s internal control over financial reporting and disclosure controls and 
+procedures were not effective as a result of material weaknesses in the company’s internal 
+control over financial reporting. 
+ 
+RESPONDENT 
+ 
+6. Swisher Hygiene, Inc. is a Delaware corporation headquartered in Charlotte, 
+North Carolina. Swisher’s stock is registered pursuant to Section 12(b) of the Exchange Act and 
+commenced trading on the NASDAQ Stock Market LLC on February 2, 2011.  Swisher’s 
+common stock was also previously listed on the Toronto Stock Exchange until Swisher 
+voluntarily delisted the stock on April 30, 2014. Swisher became a public company in November 
+2010.  
+ 
+                                                       FACTS 
+ 
+A. Overview 
+ 
+7.   Swisher acquired 63 franchises and independent businesses during 2011.  
+Swisher financed some of these acquisitions and its operations, in part, with a bank line of credit 
+entered into on March 30, 2011.  Swisher’s loan covenants under its line of credit required it to 
+periodically reach certain consolidated EBITDA targets.  Swisher reported Adjusted EBITDA, 
+which is a Non-GAAP financial measure, in its public filings with the Commission and to its 
+Board of Directors.  According to Swisher’s public filings, Adjusted EBITDA is an important 
+supplemental measure of the company’s operating performance and is frequently used by 
+securities analysts, investors and other interested parties in evaluating the company’s results. 
+ 
+8. Beginning in the first quarter of 2011 and continuing throughout the remainder of 
+that year, Swisher did not comply with GAAP with regard to numerous accounting 
+determinations, including those related to (i) the treatment of prepayment penalties incurred in 
+connection with the extinguishment of debt in connection with an acquisition, (ii) earnout 
+accruals, (iii) compensation for employees of acquired entities, (iv) unfavorable contracts, (v) 
+insurance reserves and (vi) the allowance for doubtful accounts receivable. 
+ 
+ B. Swisher Failed to Account Properly for a Debt Prepayment Penalty in the  
+  First Quarter of 2011 
+ 
+ 9. In March 2011, Swisher paid off a $39.2 million debt of one of the companies that 
+it acquired.  In paying off the debt, Swisher incurred a prepayment penalty of $1.5 million. 
+ 
+ 10. Swisher accounted for the prepayment penalty as part of the purchase price, 
+resulting in an increase in recorded goodwill prior to the filing of the Form 10-Q for the first 
+ 
+ 
+4 
+ 
+ 
+quarter of 2011.  In support of this accounting determination, a senior Swisher officer told the 
+company’s outside auditor that the debt could not be assumed and had to be paid off 
+contractually.  That information was not accurate.  In fact, the debt was legally assumable by 
+Swisher and thus the prepayment penalty should have been expensed by Swisher and not 
+included as a part of the purchase price, and therefore goodwill.  Swisher should have instead 
+expensed the prepayment penalty on its income statement rather than recording it as an asset on 
+its balance sheet.  (Accounting Standards Codification (“ASC”) 805-10-55-18). 
+ 
+ 11. Swisher’s improper accounting for the prepayment penalty resulted in a $1.5 
+million increase in income in the company’s original Form 10-Q for the first quarter of 2011. 
+ 
+ 12. Swisher’s restated financial statements reflect that this entry was reversed in its 
+entirety. 
+ 
+ C. Swisher Engaged in an Earnings Management Scheme during the Second,  
+  Third and Fourth Quarters of 2011 
+ 
+ 13. During the financial statement closing process for the second, third and fourth 
+quarters of 2011, a Swisher senior officer exerted pressure on the accounting staff to record 
+improper accounting entries to achieve pre-determined Adjusted EBITDA targets.  
+ 
+ 14. Swisher’s earnings management scheme involved (i) the determination and 
+communication of an Adjusted EBITDA target by a Swisher senior officer; (ii) the recording of 
+inappropriate accounting entries to achieve the target; and (iii) the immediate cessation of the 
+closing process once the target was achieved.  After achieving the Adjusted EBITDA target, the 
+Swisher senior officer would advise the team that additional entries would not be recorded. 
+ 
+15. During the closing process for the last three quarters of 2011, after the initial 
+financial statement closing for the quarter revealed that the Adjusted EBITDA was less than the 
+targeted number, a Swisher senior officer communicated with the corporate accounting team 
+regarding suggested areas and amounts for adjustments.  Corporate level accounting personnel 
+were asked to get “into the weeds” and contribute ideas as to how to improve earnings results.  A 
+list of potential adjustments was compiled and the positive entries or “good guys” were recorded.  
+Accounting personnel were encouraged to find offsets for negative entries or “bad guys.” 
+ 
+ 16.  Senior officers contacted divisional CFOs and instructed them how much 
+Adjusted EBITDA was required by their division beyond their initially reported figures to the 
+corporate accounting department.  In some instances, the divisional CFOs were given specific 
+accounts to examine.   With respect to the second and third quarters, after several days of 
+additional analysis, Swisher achieved its Adjusted EBITDA target.  At that point, the financial 
+statement closing process concluded, and the finance team was advised of the result and the fact 
+that additional entries would not be recorded. 
+ 
+ 
+ 
+5 
+ 
+ 
+ 17. For the second quarter of 2011, Swisher needed $3 million of Adjusted EBITDA 
+to meet its predetermined target.  After the initial closing process for the quarter, which 
+concluded on July 23, 2011, the Adjusted EBITDA for the second quarter was $2.3 million.  A 
+senior officer instructed relevant accounting staff to make adjustments to achieve the $3 million 
+targeted amount, and by July 26, 2011, Swisher’s Adjusted EBITDA for the second quarter was 
+$3 million.  Similarly, Swisher’s forecasted Adjusted EBITDA for the third quarter was $5.2 
+million.  On October 14, 2011, following the initial closing process for the quarter, Swisher 
+computed its Adjusted EBITDA at $4.1 million.  Swisher staff were again instructed to make 
+accounting entries to increase the Adjusted EBITDA.   For example, a senior officer sent an 
+email to a division officer stating “I need to talk to you about your Q3 numbers. I need you to go 
+back and squeeze them for an additional $220k of EBITDA.”   By October 19, 2011, Swisher 
+had achieved its target of $5.2 million of Adjusted EBITA for the third quarter.  To achieve the 
+targeted Adjusted EBITDA for the second and third quarters of 2011, Swisher made accounting 
+adjustments which did not comply with GAAP. 
+ 
+Purchase Accounting and Measurement Period Adjustments 
+ 
+18. In a business combination, the acquirer must generally recognize and measure 
+identifiable assets and liabilities assumed at fair value in the financial statements.  (ASC 805-20-
+30-1 through 30-2).  Fair Value is defined as “the price that would be received to sell an asset or 
+paid to transfer a liability in an orderly transaction between market participants at the 
+measurement date.” (ASC 805-10-20)  At the acquisition date (or closing date), the fair values 
+are considered provisional and can be adjusted throughout the “measurement period,” which is 
+up to one year after acquisition (ASC 805-10-25-13 through 19). 
+19.  During the measurement period, the acquirer is required to “retrospectively adjust 
+the provisional amounts recognized at the acquisition date to reflect new information obtained 
+about facts and circumstances that existed as of the acquisition date that, if known, would have 
+affected the measurement of the amounts recognized as of that date.”  (ASC 805-10-25-13).   
+The change in the provisional asset or liability amounts, to reflect these new facts, should be 
+increased or decreased, which generally results in a corresponding change to goodwill. If the 
+facts and circumstances that come to light did not exist as of the acquisition date, the acquirer 
+needs to account for changes in its post-combination financial statements in conformity with 
+other applicable GAAP.  
+20. As discussed in more detail below, Swisher used a variety of accounts, including 
+many associated with purchase accounting and measurement period adjustments, to carry out the 
+earnings management scheme.  Some of the specific accounts included, for example, those 
+related to earnouts, certain contracts acquired in acquisitions, insurance reserves, and the 
+allowance for doubtful accounts receivable.  Those accounts constitute some, but not all, of the 
+accounts utilized in furtherance of the scheme.  The improper accounting entries that Swisher 
+recorded in furtherance of the earnings management scheme did not comply with GAAP, and the 
+improper entries recorded in the second and third quarters of 2011 were ultimately reversed and 
+ 
+ 
+6 
+ 
+ 
+restated.  The improper accounting entries recorded in the fourth quarter of 2011, although 
+reversed, did not require restatement because they were discovered prior to year-end and were 
+not reflected in any financial statements that were filed with the Commission. 
+ 
+Earnouts 
+ 
+ 21. Swisher made adjustments to its accounting for earnouts in order to achieve 
+targeted results in the third and fourth quarters of 2011.  An earnout is a contractual obligation 
+whereby the purchaser of a business agrees to pay the seller additional future consideration based 
+on the acquired business achieving certain future financial goals.  The appropriate accounting 
+treatment for an earnout, also referred to as “contingent consideration,” is to reflect it at fair 
+value on the balance sheet at the time of acquisition.  An earnout is recognized at fair value as of 
+the acquisition date.  Changes in the fair value of the earnout that are a result of additional 
+information about facts and circumstances that existed at the acquisition date, but are obtained 
+after that date, are recorded as measurement period adjustments.  (ASC 805-10-25-13 through 
+25-18 and ASC 805-30-35-1). 
+ 
+22. In one instance, Swisher posted a $1 million earnout liability in January 2011, 
+which could potentially require payments over three years if gross margin targets on specified 
+contracts were realized.  The targets were not realistic, based on the historical performance of the 
+specified contracts, suggesting that the earnout lacked substance and that the initial valuation was 
+not recorded at fair value and was thus not in accordance with GAAP.   By the end of the third 
+quarter of 2011, Swisher was well short of meeting its Adjusted EBITDA targets and determined 
+that since the acquiree had not been achieving its gross margin targets for the past quarter, 
+Swisher would adjust the earnout accrual downward by $500,000, thus increasing earnings for 
+the quarter.  Such an adjustment was not in accordance with GAAP because there was no new 
+information post acquisition justifying the adjustment.  A change in fair value resulting from 
+information existing at the acquisition date should have resulted in a retrospective change to the 
+provisional balance sheet amount recorded to goodwill and the earnout accrual.  Swisher, having 
+no new information since the acquisition date, to achieve targeted Adjusted EBITDA, 
+nevertheless reduced the earnout accrual by 50% of its original value.  Swisher continued to 
+reduce this earnout accrual (and other similarly established earnout accruals) in the fourth quarter 
+of 2011. 
+ 23. Swisher’s restated financial statements reflect that the accruals were reversed in 
+their entirety. 
+ 
+Failure to Expense Employment Contracts 
+ 
+24. In certain instances during 2011, Swisher acquired a company, kept its employees 
+in the continuing entity and subsequently terminated them.  Swisher then tallied the terminated 
+employees’ salary expense since acquisition, which expense was not contingent compensation as 
+ 
+ 
+7 
+ 
+ 
+part of the business combination, reversed the expense, and improperly reclassified the expense 
+to the opening balance of goodwill, thereby increasing earnings in the relevant quarter.  
+ 
+25. For example, Swisher recorded approximately $600,000 in additional income by 
+firing an employee of a company acquired by Swisher, after the employee had worked for 
+Swisher post-acquisition, and improperly reversed the expense with a corresponding increase to 
+goodwill.  During the second quarter closing process, on July 26, 2011, a Swisher senior officer 
+sent an email to accounting personnel, stating:   
+ 
+“We currently are at $2.370 million of adjusted EBITDA.  I would like to get the 
+final entries booked and believe based on what I see right now we can close at 
+slightly above $3.0 million.”   
+ 
+26. The email then listed a number of open items that would result in an 
+Adjusted EBITDA number of $3,046,684, including the item described in paragraph 25. 
+ 
+ 27. Although contingent payments to employees may be included as part of the 
+business combination exchange, it requires a determination that the contingent consideration was 
+part of the business combination, and existed at the date of acquisition, rather than a separate 
+transaction. (ASC 805-10-55-24 to 25)   At the time of acquisition, Swisher did not have a 
+severance agreement or other specific restructuring plans in place and did not communicate to 
+the employee that there was a plan to sever employment.  Accordingly, because of the 
+employee’s continued employment, the employee’s payroll or severance post-acquisition should 
+have been recorded as an expense. 
+ 
+ 28. Swisher’s restated financial statements reflect that this entry was reversed in its 
+entirety. 
+ 
+Purportedly Unfavorable Contract 
+ 
+29. An “unfavorable contract” is one that has terms that are unfavorable relative to 
+market terms.  (ASC 805-20-55-31)  Swisher treated one of the contracts that it acquired in an 
+acquisition as unfavorable even though the contract had favorable terms based on comparison to 
+market terms at the date of acquisition and, at the time of acquisition, had been recently entered 
+into at arm’s length by the acquiree.  By improperly classifying the contract as unfavorable, 
+Swisher was able to recognize an unfavorable contract liability that could be amortized over the 
+life of the contract, resulting in a benefit to the profit and loss statement.  This purportedly 
+“unfavorable contract” was one of several mechanisms used to achieve a pre-determined 
+Adjusted EBITA target in the second, third and fourth quarters of 2011. 
+ 
+ 30. Swisher’s restated financial statements reflect that the entry was reversed in its 
+entirety. 
+ 
+ 
+ 
+8 
+ 
+ 
+Insurance Reserves 
+ 
+31. Swisher also manipulated insurance reserves to reach Adjusted EBITDA targets. 
+For example, the owner of one company acquired by Swisher was instructed by Swisher, prior to 
+the acquisition, to record an additional $300,000 of reserve for worker’s compensation expense. 
+There was no analysis performed and no documentation for the change was prepared to identify 
+if this increase would be in conformity with GAAP. (ASC 450-20-25-2)  During the closing 
+process for the third quarter, that reserve was arbitrarily reduced to meet Adjusted EBITDA 
+targets. 
+ 
+32. Specifically, during the financial statement closing process, a Swisher senior 
+officer sent an email to a divisional CFO stating, under the subject line:  “URGENT-Call me 
+asap” 
+ 
+ Please call me as soon as possible.  I need to talk to you about your Q3 numbers.   
+I need you to go back and squeeze them for an additional $220K of EBITDA.  I suspect 
+that you should have room in some of your reserves.  You should have $300K of 
+Workers comp accruals we set up on the operating balance sheet that should still be there.  
+ 
+33. The divisional CFO responded, with regard to the Workers Comp reserve, that 
+“we just had the audit and haven’t got the results …so we didn’t want to touch it yet…but if we 
+are at the “rainy day” then maybe we take it now.  Besides those 2 items…we scrubbed the hell 
+out of our #s this month hoping to get closer to budget.  Overall I think I can take the $225 out of 
+reserves…but I will leave me naked on reserves after this.”    
+ 
+34. The Swisher senior officer responded:  “Do your best to get $200K.  We need to 
+stretch a bit to get to the numbers in Q3.  I think we all will be a bit bare. At the end of the day if 
+we get to the number I will let some come back your way.”  The $225,000 subtracted from the 
+insurance reserves included $175,000 taken out of the worker’s compensation reserve to meet the 
+Adjusted EBITDA target. The senior officer then sent an email to another member of the 
+accounting staff indicating that Swisher would “refill the cookie jar” using items to be found in a 
+monthly operating review. 
+ 
+ 35. Swisher’s restated financial statements reflect that the insurance reserve accrual 
+was reversed in its entirety. 
+ 
+Allowance for Doubtful Accounts Receivable 
+ 
+36. During 2011, Swisher improperly used the Allowance for Doubtful Accounts 
+Receivable to increase earnings.  Throughout 2011, Swisher disclosed in its filings that “We 
+estimate the allowance for doubtful accounts by considering a number of factors, including 
+overall credit quality, age of outstanding balances, historical write-off experience and specific 
+ 
+ 
+9 
+ 
+ 
+account analysis that projects the ultimate collectability of the outstanding balances.  Actual 
+results could differ from these assumptions.” 
+ 
+37. During the second quarter of 2011, a senior Swisher officer instructed accounting 
+staff to change its methodology for calculating the Allowance for Doubtful Accounts Receivable.  
+This revised methodology was contrary to Swisher’s continuing disclosure in that it did not 
+consider overall credit quality, age of outstanding balances and the historical write-off 
+experience of its largest acquisition. (ASC 310-10-35-7 through 11).  Further, the revised 
+methodology did not result in an allowance for doubtful accounts that was in compliance with 
+GAAP. (ASC 310-10-35-4(c)). 
+ 
+38. Based on this new methodology, in the second and third quarters of 2011, 
+accounting staff were instructed to adjust the allowance for doubtful accounts by $580,000 
+($250,000 first entry and $330,000 second entry) and $150,000, respectively, amounts which 
+were designed to help Swisher reach specific Adjusted EBITDA targets.  These adjustments 
+allowed Swisher to increase income by those amounts.   
+ 
+39. During the second quarter closing process, a senior accounting officer sent the 
+following email to accounting personnel:   
+ 
+“We currently are at $2.370 million of adjusted EBITDA.  I would like to get the final 
+entries booked and believe based on what I see right now we can close at slightly above 
+$3.0 million.”  The senior officer then listed a number of entries or “open items” that 
+would get them to an Adjusted EBITDA number of $3,046,684.”  One of the open items 
+is “Bad debt reserve adjustment” for $330,000 that accounting personnel “has entry 
+prepared.”    
+ 
+40. Later in the second quarter close process, a senior accounting officer, in an email 
+exchange with accounting personnel discussing another accounting issue, stated: 
+ 
+“Do we have anything left we can capitalize in installs or FSA?  It seems like we 
+didn’t pick up everything we could have.  I need about $250K in income to get to 
+3MM.”  
+ 
+“Let’s work up the number.  If we are short.  (sic)We will get it in bad debt.  
+Good work.  Can we get it today?”  
+ 
+ 41. During the third quarter closing process, a senior accounting officer sent 
+an email detailing the September adjusting entries which would take EBITDA from $2.5 
+million to $3.445 million.  One of the entries is “Lower bad debt to calculated 
+requirement.” 
+ 
+ 
+ 
+10 
+ 
+ 
+ 42. Swisher’s restated financial statements reflect that these entries were reversed in 
+their entirety. 
+ D. The Earnings Management Scheme Unraveled in the Fourth Quarter of 2011 
+ 43. Swisher continued to manage earnings into the fourth quarter of 2011.  During 
+that quarter, Swisher determined that there was an approximate $700,000 shortfall in the 
+allowance for doubtful accounts receivable, which if accounted for in accordance with GAAP 
+(ASC 310-10-35-8), would have required a large expense to correct.  After a senior member of 
+the accounting staff refused the Swisher senior officer’s request to fix this “hole” in a manner 
+that did not require a large negative adjustment to earnings, the senior officer instructed another 
+Swisher employee (the “second employee”) to find a solution.  The second employee was not 
+responsible for accounts receivable and generally did not handle purchase accounting.  Even 
+though he felt under-qualified to do so, the second employee devised an analysis to address the 
+shortfall through purchase accounting, thereby avoiding a large expense that would negatively 
+affect Swisher’s profit and loss statement.  Specifically, the second employee’s analysis 
+recalculated the acquisition balances of the allowance for doubtful accounts receivable for some 
+acquisitions.  This analysis improperly applied Swisher’s purported bad debt historical 
+percentage to the receivable balances of the acquired companies at acquisition.  The Swisher 
+senior officer approved the reserve shortfall entry prepared by the second employee even though 
+the entry was not in accordance with GAAP, and the senior officer directed that the entry be 
+recorded in Swisher’s books and records. 
+ 
+44. Swisher’s earnings management scheme unraveled in early 2012 when, as part of 
+the year-end financial statement closing process, a Swisher senior officer fired a senior employee 
+in the accounting department after the employee refused to record an accounting entry for which 
+the employee thought there was no plausible justification other than to hit a target, and requested 
+permission to raise the issue with Swisher’s outside auditor.   Specifically, in connection with 
+one third party agreement with a company acquired by Swisher in May 2011, the third party 
+earned monthly rebates of approximately $50,000 per month.   The senior officer instructed the 
+employee to reverse $100,000 of rebates for 2011 and record the amounts as prepaid expenses to 
+be amortized in 2012.  
+ 
+45. The senior officer advised Swisher’s Audit Committee and outside auditor, 
+falsely, that the accounting employee had been fired for poor performance. In fact, one week 
+prior to the firing, the senior officer had prepared a performance rating for the employee, and the 
+overall rating was “exceeds expectations.”  
+ 
+46. Subsequent to the employee’s termination, the employee met with Swisher’s 
+general counsel and outside auditor and raised certain accounting issues.  These issues were 
+brought to the attention of the Audit Committee. 
+ 
+ 
+ 
+11 
+ 
+ 
+47. Swisher’s Audit Committee then commenced an internal investigation in March 
+2012.   On March 28, 2012, Swisher announced that the quarterly reports for 2011 should no 
+longer be relied upon and might require restatement. 
+ 
+E. The Restatement 
+ 
+48.  On February 19, 20 and 21, 2013, respectively, Swisher filed amended quarterly 
+reports on Form10-Q/A for the quarterly periods ended March 31, 2011, June 30, 2011 and 
+September 30, 2011.  As a result of Swisher’s earnings management, the company understated 
+its net loss before income taxes in the first and second quarters of 2011 by 36% and 11.6%, 
+respectively.  In the third quarter of 2011, Swisher overstated its net loss before income taxes by 
+42% because it failed to originally recognize a gain from bargain purchase related to one of its 
+acquisitions for over $4 million.  Excluding this one-time gain, which was not related to earnings 
+management, Swisher’s originally reported net loss before income taxes was understated by 46% 
+for the third quarter of 2011.  Swisher also acknowledged in its Form 10-K for the fiscal year 
+ended December 31, 2011, filed on February 26, 2013, and in its restated Forms 10-Q for 2011 
+that as of those reporting periods, Swisher’s internal control over financial reporting and 
+disclosure controls and procedures were not effective, as a result of material weaknesses in the 
+company’s internal control over financial reporting. Among other deficiencies Swisher identified 
+were placing an undue emphasis on internal anticipated financial results in communications 
+during the financial statement close process and allowing for overrides of entity-level controls 
+during the financial reporting close process resulting in a number of journal entries having either 
+insufficient or no support. 
+ 
+VIOLATIONS 
+ 
+ 49. As a result of the conduct described above, during at least the second and third 
+quarters of 2011, Swisher violated Section 17(a) of the Securities Act, which prohibits fraudulent 
+conduct in the offer or sale of securities, and Exchange Ac t Section 10(b) and Rule 10b -5 
+thereunder, which prohibit fraudulent conduct in connection with the purchase or sale of 
+securities. 
+ 
+ 50. As a result of the conduct described above, during the first, second and third 
+quarters of 2011, Swisher violated Section 13(a) of the Exchange Act and Rules 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 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.   
+ 
+ 51. As a result of the conduct described above, during the first, second, third and 
+fourth quarters of 2011, Swisher violated Section 13(b)(2)(A) of the Exchange Act, which 
+requires reporting companies  to make and keep books, records and accounts which, in 
+ 
+ 
+12 
+ 
+ 
+reasonable detail, accurately and fairly reflect  Swisher’s transactions and dispositions of its 
+assets. 
+  
+ 52. As a result of the conduct described above, during the first, second, third and 
+fourth quarters of 2011, Swisher violated Sections 13(b)(2)(B) of the Exchange Act, which 
+requires all reporting companies to devise and maintain a system of internal accounting controls 
+sufficient to provide reasonable assurances that transactions are recorded as necessary to permit 
+preparation of financial statements in accordance with generally accepted accounting principles.  
+   
+ 
+SWISHER’S REMEDIAL EFFORTS 
+ 
+ In determining to accept the Offer, the Commission considered remedial acts promptly 
+undertaken by Respondent and cooperation afforded the Commission staff. 
+ 
+UNDERTAKINGS 
+ 
+ 53. Swisher undertakes as follows:   
+ 
+ Ongoing Cooperation by Swisher.  Swisher undertakes to cooperate fully with the 
+Commission in any and all investigations, litigations or other proceedings relating to or arising 
+from the matters described in this Order. In connection with such cooperation, Swisher has 
+undertaken:  
+  
+ To produce, without service of a notice or subpoena, any and all documents and other 
+information reasonably requested by the Commission’s staff and within the possession, custody 
+or control of Swisher, with a custodian declaration as to their authenticity, if requested;  
+  
+ To use its best efforts to cause its employees and former employees to be interviewed by 
+the Commission’s staff, at the option of the staff with representatives of other government 
+agencies present, at such times and places as the staff reasonably may direct.  
+  
+ To use its best efforts to cause its employees to appear and testify truthfully and 
+completely without service of a notice or subpoena in such investigations, depositions, hearings 
+or trials as may be requested by the Commission’s staff; and  
+  
+In connection with any interviews of Swisher employees to be conducted pursuant to this 
+undertaking, requests for such interviews may be provided by the Commission’s staff to 
+Swisher’s counsel. 
+ 
+In determining whether to accept the Offer, the Commission has considered these 
+undertakings.   
+ 
+ 
+ 
+13 
+ 
+ 
+DEFERREED PROSECUTION AGREEMENT 
+ Respondent has entered into a Deferred Prosecution Agreement in connection with 
+United States v. Swisher Hygiene Inc., Crim. No. 3:15cr237 (W.D.N.C.) (“Deferred Prosecution 
+Agreement”), which agreement is incorporated by reference herein.  As part of the Deferred 
+Prosecution Agreement, Respondent has paid a monetary penalty of $2,000,000 to the United 
+States. 
+ 
+IV. 
+ 
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
+agreed to in Respondent’s Offer.   Although a civil penalty is appropriate for the conduct at issue 
+herein, in light of the monetary penalty already paid by Respondent as part of the Deferred 
+Prosecution agreement, no penalty is being ordered. 
+ 
+ Accordingly, it is hereby ORDERED that, pursuant to Section 8A of the Securities Act and 
+Section 21C of the Exchange Act, Respondent Swisher 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-11and 13a-13 
+thereunder.    
+ 
+ By the Commission.   
+ 
+    
+ 
+ 
+      Brent J. Fields 
+      Secretary 

raw/aaer/2016/AAER-3776.txt

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+UNITED STATES OF AMERICA 
+ before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES ACT OF 1933 
+Release No. 10085 / June 1, 2016 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 77967 / June 1, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3776 / June 1, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17268
+       
+      :  
+ :  
+ :   
+In the Matter of : ORDER INSTITUTING ADMINISTRATIVE 
+      : PROCEEDINGS PURSUANT TO RULE 
+  JANE E. STARRETT,          : 102(e) OF THE COMMISSION’S RULES OF 
+  CPA,    : PRACTICE, MAKING FINDINGS, AND 
+      : IMPOSING REMEDIAL SANCTIONS 
+  Respondent.   :  
+      :  
+      :  
+____________________________________ :  
+ 
+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 Jane E. 
+Starrett, CPA (“Respondent” or “Starrett”) pursuant to Rule 102(e)(3)(i) of the Commission’s 
+Rules of Practice.1   
+ 
+ 
+                                                 
+1 Rule 102(e)(3)(i) provides, in relevant part, that: 
+ 
+ The Commission, with due regard to the public interest and without preliminary hearing, 
+may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has 
+been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his 
+or her misconduct in an action brought by the Commission, from violating or aiding and abetting 
+the violation of any provision of the Federal securities laws or of the rules and regulations 
+thereunder. 
+ 2 
+II. 
+ 
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
+of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 
+purpose of these proceedings and any other proceedings brought by or on behalf of the 
+Commission, or to which the Commission is a party, and without admitting or denying the findings 
+herein, except as to the Commission’s jurisdiction over her and the subject matter of these 
+proceedings, and the findings contained in Section III.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. Starrett, age 62, is a resident of Flagstaff, Arizona.  From April 2007 to 
+July 2008, Starrett served as chief accounting officer for Thornburg Mortgage, Inc. (“Thornburg”) 
+and helped prepare Thornburg’s financial statements and public filings such as quarterly and 
+annual SEC reports.  Starrett also served as one of Thornburg’s principal contacts with its outside 
+auditor.  Starrett became a certified public accountant in California in 1976, but her license has 
+been inactive since 1989. 
+ 
+ 2. Thornburg was, at the time of Starrett’s employment, a Maryland 
+corporation with its principal place of business in Santa Fe, New Mexico.  Thornburg was a single-
+family residential mortgage lender focused primarily on the prime segment of jumbo and super-
+jumbo adjustable rate mortgage loans.  Thornburg was a reporting company that had five classes of 
+securities, including its common stock, registered with the Commission under Section 12(b) of the 
+Securities Exchange Act of 1934 (“Exchange Act”).  Its common stock was listed on the New 
+York Stock Exchange under the ticker symbol “TMA.”  Thornburg filed for Chapter 11 
+bankruptcy and ceased operations in 2009.   
+ 
+ 3. On March 13, 2012, the Commission filed a Complaint against Starrett in 
+SEC v. Larry A. Goldstone, et al., Civil Action No. 1:12-cv-00257 (D.N.M).  On May 31, 2016, 
+the Court entered an order permanently enjoining Starrett, by consent, from future violations of 
+Section 17(a)(3) of the Securities Act of 1933 (“Securities Act”) and Exchange Act Rule 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 Rules 12b-20 and 13a-1 thereunder.   
+ 
+ 4. The Commission’s Complaint alleged, among other things, that due to the 
+acts and omissions of Starrett and two other senior Thornburg executives, Thornburg made 
+material misstatements concerning its other-than-temporary impairment (“OTTI”) conclusion in its 
+annual report on Form 10-K for the fiscal year ended December 31, 2007.  According to the 
+Complaint, in the weeks leading to the filing of its 2007 Form 10-K, Thornburg received more than 
+$300 million in margin calls and was late in meeting margin calls from at least three lenders and 
+ 3 
+therefore subject to being declared in default of its lending agreements.  The Complaint also 
+alleged that given Thornburg’s severe liquidity crisis, Thornburg improperly failed to recognize on 
+its income statement over $400 million in losses associated with its impaired assets serving as 
+collateral for the company’s loans, and also incorrectly reported that it had returned to profitability 
+in the fourth quarter of 2007. 
+ 
+IV. 
+ 
+ In view of the foregoing, the Commission deems it appropriate and in the public interest to 
+impose the sanction agreed to in Respondent Starrett’s Offer. 
+ 
+ Accordingly, it is hereby ORDERED, effective immediately, that: 
+ 
+ A. Starrett 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 her reinstatement by submitting an application (attention: Office of the 
+Chief Accountant) to resume appearing or practicing before the Commission as: 
+      
+       1. a preparer or reviewer, or a person responsible for the preparation or 
+review, of any public company’s financial statements that are filed with the Commission.  Such 
+an application must satisfy the Commission that Respondent’s work in her practice before the 
+Commission will be reviewed either by the independent audit committee of the public company 
+for which she works or in some other acceptable manner, as long as she practices before the 
+Commission in this capacity; and/or 
+      
+  2.    an independent accountant.  Such an application must satisfy the 
+Commission that: 
+      
+           (a) Respondent, or the public accounting firm with which she is 
+associated, is registered with the Public Company Accounting Oversight Board (“Board”) in 
+accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; 
+ 
+   (b) Respondent, or the registered public accounting firm with which 
+she is associated, has been inspected by the Board and that inspection did not identify any 
+criticisms of or potential defects in the Respondent’s or the firm’s quality control system that 
+would indicate that the Respondent will not receive appropriate supervision; 
+   (c) Respondent has resolved all disciplinary issues with the Board, and 
+has complied with all terms and conditions of any sanctions imposed by the Board (other than 
+reinstatement by the Commission); and 
+ 
+   (d) Respondent acknowledges her responsibility, as long as 
+Respondent appears or practices before the Commission as an independent accountant, to 
+comply with all requirements of the Commission and the Board, including, but not limited to, all 
+ 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 provided that her state CPA license is 
+current and she has resolved all other disciplinary issues with the applicable state boards of 
+accountancy.  However, if state licensure is dependent on reinstatement by the 
+Commission, the Commission will consider an application on its other merits.  The 
+Commission’s review may include consideration of, in addition to the matters referenced 
+above, any other matters relating to Respondent’s character, integrity, professional conduct, 
+or qualifications to appear or practice before the Commission. 
+ 
+ By the Commission. 
+ 
+ 
+ 
+       Brent J. Fields 
+       Secretary 
+ 

raw/aaer/2016/AAER-3778.txt

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+  UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES ACT OF 1933  
+Release No. 10089 / June 7, 2016 
+ 
+SECURITIES EXCHANGE ACT OF 1934  
+Release No. 78007 / June 7, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No. 3778 / June 7, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-16729 
+ 
+ 
+ 
+ 
+In the Matter of 
+ 
+MILLER ENERGY 
+RESOURCES, INC., PAUL W. 
+BOYD, CPA, DAVID M. HALL, 
+AND CARLTON W. VOGT, III, 
+CPA 
+ 
+Respondents. 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ORDER MAKING FINDINGS AND 
+IMPOSING REMEDIAL SANCTIONS 
+PURSUANT TO SECTION 8A OF THE 
+SECURITIES ACT OF 1933, SECTIONS 4C 
+AND 21C OF THE SECURITIES 
+EXCHANGE ACT OF 1934 AND RULE 
+102(e) OF THE COMMISSION’S RULES 
+OF PRACTICE AS TO PAUL W. BOYD, 
+CPA  
+ 
+   
+ 
+I. 
+ 
+ On August 6, 2015, the Securities and Exchange Commission (“Commission”) instituted 
+proceedings 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) 
+                                                 
+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 
+continued . . .  
+ 
+2 
+ 
+ of the Commission’s Rules of Practice2 against Paul W. Boyd (“Boyd” or “Respondent”). 
+ 
+II. 
+ 
+ Respondent has submitted an Offer of Settlement (the “Offer”) which the Commission has 
+determined to accept. Solely for the purpose of these proceedings and any other proceedings 
+brought by or on behalf of the Commission, or to which the Commission is a party and without 
+admitting or denying the findings herein, except as to the Commission's jurisdiction over him and 
+the subject matter of these proceedings, which are admitted, and except as provided herein in 
+Section V, Respondent consents to the entry of this Order Making Findings and Imposing 
+Remedial Sanctions Pursuant to Section 8A of the Securities Act of 1933, Sections 4C and 21C 
+of the Securities Exchange Act of 1934 and Rule 102(e)(1)(iii) of the Commission’s Rules of 
+Practice as to Paul W. Boyd, CPA (the “Order”), as set forth below. 
+ 
+III. 
+ 
+ On the basis of this Order and Respondent’s Offer, the Commission finds3 that: 
+ 
+SUMMARY 
+ 
+1. This case involves financial accounting and reporting fraud, as well as audit 
+failures, related to the valuation of certain oil and gas assets in Alaska (“the Alaska Assets”) 
+acquired by Miller Energy Resources, Inc. (“Miller Energy” or “the Company”).  Miller Energy, 
+an oil and gas company headquartered in Houston, Texas, purchased these assets for $2.25 million 
+in cash – along with the assumption of certain liabilities it valued at approximately $2 million – 
+during a competitive bid in a bankruptcy proceeding in December 2009. 
+ 
+2. The Company subsequently reported those assets at an overstated value of $480 
+million and recognized a one-time “bargain purchase” gain of $277 million for its fiscal third 
+quarter ended January 2010 and fiscal year ended April 2010.   
+ 
+                                                                                                                                                             
+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 in this or any other proceeding. 
+ 
+3 
+ 
+3. Boyd, who was the Chief Financial Officer of Miller Energy at the time, failed to 
+account for the acquisition in accordance with generally accepted accounting principles (“GAAP”).  
+Accounting Standards Codification (“ASC”) 805, Business Combinations, required Miller Energy 
+to record the value of its acquired Alaska Assets at “fair value.”  However, contrary to authoritative 
+accounting guidance, Boyd was at least reckless in setting fair value based on a reserve report that 
+was prepared by a petroleum engineer firm using the rules for supplemental oil and gas disclosures.  
+As set forth in GAAP, the numbers used in these supplemental disclosures do not reflect fair value.  
+Boyd knew or, at the very least, should have known that the reserve report did not purport to 
+represent fair value.  The reserve report, which he received and reviewed, expressly disclaimed that 
+the numbers therein represented the engineer firm’s opinion of fair value.  The reserve report Boyd 
+used also contained expense numbers that were understated by the CEO of Miller Energy’s Alaska 
+operations (“the Alaska CEO”).   
+ 
+4. In addition, Boyd caused Miller Energy to overstate materially the value of the 
+Alaska Assets because he knew or should have known that he had double counted $110 million of 
+certain fixed assets that were already included in the reserve report.  
+ 
+RESPONDENT 
+5. Paul W. Boyd, CPA, resides in Knoxville, Tennessee.  From 2008 until 2011, Boyd 
+was the CFO and Treasurer at Miller Energy.  He was the director of risk management from 2011 
+until April 2015.  He is no longer employed by Miller Energy.   He has been a licensed CPA in 
+Tennessee since 1993.   
+ 
+THE COMPANY 
+ 
+6. Miller Energy Resources, Inc. is a Tennessee corporation with its principal place 
+of business in Houston, Texas.  It was founded in 1967 as an oil and gas exploration and 
+production company, and went public via a reverse merger in 1996.  It changed its name from 
+Miller Petroleum to Miller Energy Resources in April 2011.  The Company operated oil and gas 
+assets in the Appalachian region of east Tennessee until selling them in November 2014 for $3.3 
+million in cash.   Miller Energy’s securities, registered pursuant to Exchange Act Section 12(b), 
+were listed on the NYSE until September 2015, when the securities were delisted.  Between early 
+2002 and December 2009, Miller Energy’s stock price regularly traded below one dollar per share, 
+falling to a low of $0.04 per share in December 2007.  On October 1, 2015, Miller Energy filed a 
+voluntary petition for reorganization under chapter 11 of title 11 of the U.S. Code in the United 
+States Bankruptcy Court for the District of Alaska (the “Bankruptcy Case”).    
+FACTS 
+Miller Energy Acquires and Overvalues the Alaska Assets 
+7. In the fall of 2009, Miller Energy became aware of certain oil and gas properties in 
+Alaska that were in the process of being “abandoned” as part of the bankruptcy proceedings of a 
+California-based energy company.   
+ 
+ 
+4 
+ 
+8. Unable to service its heavy debt and pay the significant monthly costs required to 
+operate the properties, the bankrupt entity unsuccessfully sought for almost a year to sell its Alaska 
+Assets.  Beginning in December 2008, months before it filed for bankruptcy, the former owner of 
+the assets marketed the same group of assets that Miller Energy ultimately bought to 40 potential 
+buyers.  This process failed to attract any bidders, and the assets were auctioned by the bankruptcy 
+court in July 2009, with the winning bidder agreeing to a total purchase price of $8 million for the 
+assets.  A second entity, who bid $7 million, was designated as the back-up purchaser.  Neither 
+bidder closed.    
+ 
+9. As a result, the former owner of the assets sought in August 2009, and was granted 
+in September, an order from the bankruptcy court allowing it to abandon title to the assets due to a 
+lack of interest.   
+ 
+10. Due to renewed interest in the assets from Miller Energy following their 
+abandonment, the bankruptcy court permitted the debtor to reacquire the Alaska Assets and sell 
+them to Miller Energy in a competitive auction for $2.25 million in cash and the assumption of 
+certain limited liabilities.  The transaction closed on December 10, 2009.   
+ 
+11. On March 22, 2010, Miller Energy filed its quarterly report on Form 10-Q for its 
+fiscal third quarter ended January 31, 2010 and reported a value of $480 million for the Alaska 
+acquisition.  That amount was comprised of $368 million for oil and gas properties and $110 
+million for fixed assets.  Miller Energy also reported an after-tax $277 million “bargain purchase 
+gain” which boosted net income for the quarter to $272 million – an enormous increase over the 
+$556,097 loss reported for the same period the year before. 
+ 
+12. As detailed below, these inflated balance sheet and income statement numbers were 
+repeated in numerous documents subsequently filed with the Commission.   
+ 
+13. The newly-booked value of the Alaska acquisition, which resulted in a nearly 
+5,000% increase in Miller Energy’s total assets, had a significant impact on Miller Energy’s stock 
+price.  On December 10, 2009, the date of the transaction, Miller Energy’s stock closed at $0.61 
+per share.  By March 31, 2010, Miller Energy’s stock closed 982% higher at $6.60 per share.  
+Weeks later, its stock began trading on NASDAQ and, after moving to the NYSE a year later, 
+reached an all-time high price on December 9, 2013 of $8.83 per share.   
+ 
+14. As described in detail below, Miller Energy materially overstated the value of its 
+Alaska Assets by more than four hundred million dollars. 
+ 
+Under GAAP, Miller Energy Was Required 
+ to Record the Alaska Acquisition at Fair Value 
+15. ASC 805, Business Combinations – formerly Statement of Financial Accounting 
+Standards (“SFAS”) 141(R) – became effective in December 2008.  Among its principal revisions, 
+ASC 805 requires acquisitions that result in a “bargain purchase,” e.g., entities purchased at fire 
+ 
+5 
+ 
+sales prices in non-orderly transactions, to be measured at fair value, with any resulting gain 
+recorded on the income statement. 
+ 
+16. ASC 820, Fair Value Measurements (formerly SFAS 157), provides the framework 
+for measuring fair value.  “Fair value” is defined in ASC 820 as “the price that would be received 
+to sell an asset or paid to transfer a liability in an orderly transaction between market participants at 
+the measurement date.”  A reporting entity must determine an appropriate fair value using one or 
+more of the valuation techniques described in accounting literature. 
+ 
+17. ASC 820 outlines three broad approaches to measure fair value: the market 
+approach, income approach, and cost approach.  Under the market approach, prices and other 
+relevant information generated by market transactions involving identical or comparable assets or 
+liabilities are used to measure fair value.  The income approach utilizes valuation techniques to 
+convert future amounts to a single discounted present value amount.  Finally, the cost approach is 
+based on the amount that currently would be required to replace the assets in service, i.e., current 
+replacement cost. 
+ 
+18. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-
+specific measurement, and should be determined based on the assumptions market participants 
+would use in pricing the asset or liability. 
+ 
+19. ASC 820 emphasizes that when a price for an identical asset or liability is not 
+observable entities should use a “valuation technique that maximizes the use of relevant observable 
+inputs and minimizes the use of unobservable inputs” and entities may not ignore assumptions 
+market participants would use.4 
+ 
+20. As described below, Boyd purported to value the Alaska Assets using the income 
+approach for the oil and gas reserves and the cost approach for certain fixed assets.  When 
+computing their estimate of fair value, Boyd acted at a minimum recklessly when he failed to 
+consider the existence of numerous, readily apparent data points strongly indicating that the assets 
+were worth substantially less than the $480 million value Miller Energy recorded.  In failing to do 
+so, Boyd caused Miller Energy to overstate materially the value of the newly acquired Alaska 
+Assets  
+  
+                                                 
+4  ASC 820 defines “unobservable inputs” as “inputs that reflect the reporting entity’s own 
+assumptions about the assumptions market participants would use in pricing the asset or liability 
+developed based on the best information available in the circumstances” and “observable inputs” as 
+“inputs that reflect the assumptions market participants would use in pricing the asset or liability 
+developed based on market data obtained from sources independent of the reporting entity.”  
+ 
+6 
+ 
+The Valuation of the Acquired Oil and Gas Properties 
+Was Based Upon a Reserve Report That Did Not Represent Fair Value 
+21. Reserve reports are commonly used in the oil and gas industry to estimate quantities 
+of oil and gas (the reserves) expected to be recovered from existing properties.5  Generally, these 
+reports list reserves in categories based on a minimum estimated percentage probability of eventual 
+recovery and production, i.e., proved, probable, and possible.  Information in reserve reports that 
+are prepared in accordance with Commission regulations is frequently used, among other purposes, 
+to satisfy supplemental accounting disclosure requirements concerning estimates of future oil and 
+gas production.  However, the numbers used in reserve reports for this purpose are expressly not 
+considered “an estimate of fair market value.”6 
+ 
+22. Shortly after acquiring the Alaska Assets, Boyd asked the Alaska CEO – who was a 
+non-accountant with no formal accounting training -- to obtain a reserve report for the Alaska 
+properties in order to determine the fair value of the acquired assets to be reported on Miller 
+Energy’s Form 10-Q for the quarter ended January 31, 2010.  Boyd instructed the Alaska CEO that 
+the reserve report should use a pretax present value of net cash flows discounted at 10% (“PV-
+10”). 
+23. On January 5, 2010, the Alaska CEO hired a petroleum engineer firm to prepare the 
+requested reserve report.   
+24. The reserve report was finalized in February 2010 and reflected PV-10 of $368 
+million. The reserve report itself clearly stated that the numbers therein were not an estimate of fair 
+market value.  Specifically, on page 3 of the report, it states that “[t]he discounted values shown 
+                                                 
+5  Oil and gas reporting companies are subject to two principal authoritative pronouncements 
+governing financial accounting and reporting for oil and gas activities: Rule 4-10 of Regulation S-X (17 
+C.F.R. 210.4-10), Financial Accounting and Reporting for Oil and Gas Producing Activities Pursuant to 
+the Federal Securities Laws and the Energy Policy and Conservation Act of 1975 (“Rule 4-10”); and 
+ASC 932-235-50-29 through 33 (formerly SFAS 19, Financial Accounting and Reporting by Oil and Gas 
+Producing Companies and SFAS 69, Disclosures About Oil and Gas Producing Activities).  ASC 932 
+establishes disclosure requirements for significant oil and gas activities, including disclosure of the 
+“standardized measure,” which is the future after-tax net cash flows discounted at 10%. A non-GAAP 
+measure known as “PV-10” is similar to the standardized measure but is typically presented on a pretax 
+basis.  The FASB has noted that the standardized measure supplies investors with useful information, 
+however, they also noted their concern “that users of financial statements understand that it is neither fair 
+market value nor the present value of future cash flows. It is a rough surrogate for such measures, a tool to 
+allow for a reasonable comparison of mineral reserves and changes through the use of a standardized 
+method that recognizes qualitative, quantitative, geographic, and temporal characteristics.”  Paragraph 83 
+of the Basis for Conclusions of SFAS 69.     
+6  See Paragraph 77 of the Basis for Conclusion of  SFAS 69 (“Although it cannot be considered an 
+estimate of fair market value, the standardized measure of discounted net cash flows should be responsive to 
+some of the key variables that affect fair market value, namely, changes in reserve quantities, selling prices, 
+production costs, and tax rates.”).   
+ 
+7 
+ 
+are for your information and should not be construed as our estimate of fair market value.”  Boyd 
+received and reviewed that report and therefore knew that it disclaimed to represent fair value.  
+Yet, upon receiving the reserve report, Boyd, without undertaking any additional analysis, merely 
+recorded as the fair value of the acquired oil and gas properties the sum of the PV-10 estimates for 
+100% of the proved, probable, and possible reserves, which increased the book value of Miller 
+Energy’s oil and gas properties on its balance sheet by $368 million. 
+ 
+25. Before recording as fair value in Miller Energy’s accounting records the values 
+contained in the reserve report, Boyd never reviewed or questioned any of the reserve report’s 
+assumptions or calculations, nor did he communicate with the engineer firm about the reserve 
+report.   
+26. The $368 million reserve report value did not represent fair value for several 
+reasons. 
+27. First, the $237 million of projected operating and capital expenses that the Alaska 
+CEO provided the petroleum engineer were unrealistically low, resulting in an overstated 
+valuation.   
+28. In fact, when the Alaska CEO contacted the petroleum engineer firm that the prior 
+owners of the Alaska Assets had used, that firm advised that the expected level of expenses made a 
+significant portion of the acquisition unprofitable.  Specifically, that firm told the Alaska CEO that 
+it would not assign any value to one of the largest fields acquired, the Redoubt Shoal field, because 
+it was uneconomical – i.e., expected future expenses exceeded expected future cash flows – and 
+explained that it would not put its “name on a report that implies value exists where it likely does 
+not.”7   
+29. Boyd was aware that Miller Energy chose the new firm because the prior firm 
+would not assign any value to the Redoubt Shoal field.  The Redoubt Shoal field – which 
+represented $291 million of the $368 million in fair value recorded by Miller Energy for the 
+reserves – showed positive future cash flows in the reserve report that was ultimately generated 
+primarily because the Alaska CEO of the Alaska operations gave the new engineer firm 
+understated and unsubstantiated expense numbers.               
+30. The Alaska CEO provided expense projections that, in many cases, were 
+significantly lower than past actual experience.  For example, internal documents maintained by 
+the Alaska CEO indicate that the cost to drill a new well in the Redoubt field was roughly $13 
+million.  However, the Alaska CEO told the petroleum engineer firm to use a cost of $4.6 million 
+per well in its reserve report.  And instead of using recent expense data, the Alaska CEO gave the 
+                                                 
+7  Unique among the oil and gas properties purchased by Miller Energy, Redoubt Shoal is an 
+offshore field in Cook Inlet, Alaska, which requires the use of an offshore platform that sits in seventy 
+feet of water, is accessible only by boat or helicopter, and drills to depths in excess of 12,000 feet.  
+Offshore drilling presents risks and costs not associated with onshore operations.           
+ 
+8 
+ 
+engineer firm nearly three year old operating expense data, which he revised down on the pretext 
+that Miller Energy could run a leaner operation than former operators of the properties.   
+31. Overall, the reserve report implied operating expenses of $4 per barrel of oil 
+equivalent (“boe”) for all categories of reserves.  That level of operating expenses was 
+unreasonable in light of its predecessor’s actual operating expenses of $32.50/boe in 2008 and 
+$55.42/boe in the first half of 2009, before the wells were shut-in.  Boyd was at least reckless in 
+using as fair value in Miller Energy’s financial statements a report that relied on such 
+unrealistically low expenses.    
+32. In late December 2009, the Company’s outside auditors cautioned Boyd that the 
+lack of any controls over the Alaska CEO’s expense estimates was a “concerning void.” 
+Notwithstanding his having been made aware of this concern, Boyd knowingly failed to implement 
+any controls relating to the expense estimates. 
+33. By understating the expense numbers, Miller Energy overvalued its oil and gas 
+properties by tens of millions of dollars. 
+34. Second, the reserve report did not include amounts for certain asset retirement 
+obligations, i.e., the legal obligations associated with the retirement of tangible long-lived assets.   
+ 
+35. Third, despite showing years of net profit that market participants would expect to 
+be taxable, the reserve report did not make any adjustments for income taxes. 
+36. Fourth, at Boyd’s request, the reserve report used a 10% discount rate that was 
+inappropriate under GAAP for determining fair value.  In a discounted cash flow model, a discount 
+rate is used to account for the uncertainties associated with risk and the time value of money.  A 
+discount rate is the required rate of return that an investor would demand – based on the risks 
+associated with the benefit stream under consideration – to induce the investor to make an 
+investment.  By failing to consider the discount rate using assumptions market participants would 
+use for the Alaska Assets, Miller Energy materially overstated the value of the acquired oil and gas 
+properties. 
+37. Finally, the valuation also overstated cash flows from certain categories of reserve 
+estimates (e.g., “probable” and “possible” reserves) by failing to apply any risk weight to such 
+reserves and the resulting cash flows.  Given the high degree of uncertainty associated with cash 
+flows from these reserve estimate categories, they are required to be risk weighted in order to 
+reflect an appropriate valuation. 
+Miller Energy Misstated the Value of the Fixed Assets 
+38. In addition to the $368 million value recorded for the oil and gas properties, Boyd 
+caused Miller Energy to also erroneously record a separate value of $110 million for acquired fixed 
+assets, such as facilities and pipelines ancillary to the oil and gas reserves.   
+ 
+9 
+ 
+39. In a February 8, 2010 email, Boyd informed the Alaska CEO that Boyd needed an 
+amount to use as fair value for the fixed assets obtained as part of the Alaska acquisition.  Boyd 
+noted that, ideally, the value should be what a willing buyer would pay for the assets, but “[i]n the 
+absence of that, replacement values or something similar would probably work.”  Two days later, 
+Boyd was sent an “asset replacement cost study” purportedly provided by an independent 
+insurance broker, which appeared to list the replacement cost for the assets as $110 million.  The 
+“study” was dated September 5, 2008, but “revised” on February 9, 2010.   
+40. Boyd caused the $110 million amount reported in the revised insurance study to be 
+recorded on Miller Energy’s balance sheet.   
+41. Boyd’s use of the insurance study’s replacement cost estimates for valuing Miller’s 
+fixed assets was, at a minimum, reckless.  The reserve report Miller Energy had relied on to value 
+the Alaska Assets used a discounted cash flow model.  Valuation specialists use such models to 
+estimate the value of an enterprise’s “operating assets” – i.e., the assets employed to generate 
+future cash flows – by converting future benefit streams into a net present value.  The fixed assets 
+in the insurance study were the very same operating assets that were expected to generate the 
+future cash flows in the reserve report.  Accordingly, Boyd knew or was reckless in not knowing 
+that adding the replacement cost estimates to Miller’s estimated value of “operating assets” would 
+result in double counting the value of such assets. 
+42. Moreover, the “asset replacement cost study” relied upon to support the $110 
+million fair value was actually a preexisting insurance study created by an insurance broker.  It had 
+been refashioned at the direction of the Alaska CEO and Boyd to appear as if a third party had 
+derived the $110 million value.  In truth, the numbers in the study had been given to the insurance 
+broker, and its predecessor, by its clients (i.e., Miller Energy and the previous owners of the fixed 
+assets) as far back as 2007 and had been used as starting points for other types of estimates, such as 
+estimates for possible losses resulting from fire or natural disasters.  The two employees at the 
+insurance broker who were most familiar with the original “Loss Estimates Study,” including the 
+engineer who authored it, confirmed that no one at the broker ever tested or in any way double-
+checked the values given to them.   
+43. At the direction of the Alaska CEO, Miller Energy’s Alaska personnel contacted a 
+separate consulting firm and sent it the insurance broker’s original 2008 insurance report.  Late on 
+February 8, the consulting firm informed Miller Energy that the insurance study it sent was a 
+“good reference” but the report did not state “value or replacement cost.”  The firm offered to 
+conduct its own analysis, but advised that the estimate would take “approximately 2-3 weeks to 
+complete” and “cost around $15,000-$18,000.”   
+44. Upon hearing the news that a new report might take two to three weeks, Alaska 
+personnel called Boyd.  According to one participant on this call, Boyd said he could not wait 
+weeks for a new report.  He “needed it quickly and he needed to base it on something . . . a 
+professional had to sign off on it, not us, some third party. . . .”  During the call, Boyd and the 
+Alaska CEO decided to rely on numbers in the insurance report as replacement costs, despite the 
+Alaska CEO having been told by the broker that it could not provide Miller Energy with 
+ 
+10 
+ 
+replacement costs and despite Boyd knowing that the numbers in the study were prepared for a 
+purpose other than fair value.   
+45. By using the reserve report and the “asset replacement cost study,” as a proxy for 
+fair value, Boyd caused Miller Energy to overvalue the Alaska Assets by more than $400 million.  
+Consequently, Miller Energy filed with the Commission financial reports that materially misstated 
+the value of its assets, as follows:  Forms 10-Q for the third quarter of fiscal year 2010 and all three 
+quarters of fiscal years 2011 through 2015; Forms 10-K for fiscal years ended 2010 through 2014; 
+the Form S-1 filed on August 8, 2010; the Forms S-3 filed on September 6, 2012 and October 5, 
+2012; and prospectuses filed between August 25, 2010 through August 21, 2014 pursuant to Rule 
+424.   
+46. In addition, the following financial reports that Miller Energy filed with the 
+Commission materially misstated the Company’s net income: Forms 10-Q for the third quarter of 
+fiscal year 2010, all three quarters of fiscal 2011, and the first two quarter of 2012; Forms 10-K for 
+fiscal years ended 2010 through 2012; the Form S-1 filed on August 8, 2010; the Forms S-3 filed 
+on September 6, 2012 and October 5, 2012; and prospectus supplements filed between August 25, 
+2010 through August 21, 2014 pursuant to Rule 424.  In addition, the improper valuation of the 
+Alaska Assets rendered no fewer than 15 Forms 8-K filed between March 2010 through at least 
+December 2014 materially false and misleading.  
+VIOLATIONS 
+ 
+47. As a result of the conduct described above, Boyd willfully violated Section 17(a) of 
+the Securities Act, which prohibits fraudulent conduct in the offer or sale of securities.   
+48. As a result of the conduct described above, Boyd willfully aided and abetted and 
+caused Miller Energy to violate 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 to file with the Commission, among other things, annual, current, and quarterly 
+reports as the Commission may require.     
+49. As a result of the conduct described above, Boyd willfully aided and abetted and 
+caused Miller Energy 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.   
+50. As a result of the conduct described above, Boyd willfully aided and abetted and 
+caused Miller Energy to violate 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 GAAP.  
+ 
+51. As a result of the conduct described above Boyd willfully violated Section 13(b)(5) 
+of the Exchange Act and Rule 13b2-1 thereunder, which prohibit any person from knowingly 
+ 
+11 
+ 
+circumventing or knowingly failing to implement a system of internal accounting controls or 
+knowingly falsifying any book, record, or account described in Section 13(b)(2) of the Exchange 
+Act. 
+ 
+52. As a result of the conduct described above, Boyd willfully aided and abetted and 
+caused Miller Energy to violate Rule 12b-20 under the Exchange Act, which requires that, in 
+addition to the information expressly required to be included in a statement or report filed with the 
+Commission, there shall be added such further material information, if any, as may be necessary to 
+make the required statements, in light of the circumstances under which they are made not 
+misleading.  
+53. As a result of the conduct described above, Boyd willfully violated Rule 13a-14 of 
+the Exchange Act which requires that an issuer’s principal executive and principal financial 
+officers certify each periodic report.  
+Disgorgement  
+54. Boyd has submitted a sworn Statement of Financial Condition dated February 1, 
+2016 and other evidence and has asserted his inability to pay disgorgement plus prejudgment 
+interest. 
+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 Boyd cease and desist from committing or causing any violations and 
+any future violations of Section 17(a) of the Securities Act, Sections 13(a), 13(b)(2)(A), 
+13(b)(2)(B) and 13(b)(5) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, 13a-13, 13a-14 
+and 13b2-1 thereunder.  
+B.  Respondent Boyd 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. Boyd is denied the privilege of appearing or practicing before the Commission as 
+an accountant. 
+ 
+ D. After five years from the date of this Order, Boyd 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:  
+ 
+ 
+12 
+ 
+  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 Boyd’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)  Boyd, or the public accounting firm with which he is associated, is 
+registered with the PCAOB in accordance with the Sarbanes-Oxley Act of 2002, and such 
+registration continues to be effective; 
+ 
+   (b)   Boyd, 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 Boyd’s or the firm’s quality control system that would indicate that the 
+respondent will not receive appropriate supervision; 
+ 
+   (c) Boyd 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) Boyd acknowledges his responsibility, as long as Boyd appears or 
+practices before the Commission as an independent accountant, to comply with all requirements 
+of the Commission and the PCAOB, including, but not limited to, all requirements relating to 
+registration, inspections, concurring partner reviews and quality control standards. 
+ 
+ E. The Commission will consider an application by Boyd 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 Boyd’s character, integrity, 
+professional conduct, or qualifications to appear or practice before the Commission. 
+ 
+F. Respondent Boyd shall pay a civil money penalty in the amount of $125,000 to the 
+Securities and Exchange Commission for transfer to the general fund of the United States 
+Treasury, subject to Exchange Act Section 21F(g)(3).  Payment shall be made in the following 
+installments: $10,000 paid within 10 business days following entry of this Order, followed by 
+$10,000 quarterly payments (i.e. 90 days) for three years, with the final payment being $5,000.  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 
+ 
+13 
+ 
+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 
+Paul W. Boyd 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. 
+ 
+G. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be 
+treated as penalties paid to the government for all purposes, including all tax purposes.  To 
+preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor 
+Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any 
+award of compensatory damages by the amount of any part of Respondent’s payment of a civil 
+penalty in this action ("Penalty Offset").  If the court in any Related Investor Action grants such a 
+Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting 
+the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the 
+Penalty Offset to the Securities and Exchange Commission.  Such a payment shall not be deemed 
+an additional civil penalty and shall not be deemed to change the amount of the civil penalty 
+imposed in this proceeding.  For purposes of this paragraph, a "Related Investor Action" means a 
+private damages action brought against Respondent by or on behalf of one or more investors based 
+on substantially the same facts as alleged in the Order instituted by the Commission in this 
+proceeding. 
+ 
+H. Respondent Boyd shall, within 10 days of the entry of this Order, pay disgorgement 
+of $158,000 and prejudgment interest of $11,800, but payment of such amount is waived based 
+upon Respondent’s sworn representations in his Statement of Financial Condition dated April 1, 
+2016 and other documents submitted to the Commission.  
+ 
+ 
+14 
+ 
+I.  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. 
+ 
+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 

raw/aaer/2016/AAER-3779.txt

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+ 
+ 
+  UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES ACT OF 1933  
+Release No. 10090 / June 7, 2016 
+ 
+SECURITIES EXCHANGE ACT OF 1934  
+Release No. 78008 / June 7, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No. 3779 / June 7, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-16729 
+ 
+ 
+ 
+ 
+In the Matter of 
+ 
+MILLER ENERGY 
+RESOURCES, INC., PAUL W. 
+BOYD, CPA, DAVID M. HALL, 
+AND CARLTON W. VOGT, III, 
+CPA 
+ 
+Respondents. 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ORDER MAKING FINDINGS AND 
+IMPOSING REMEDIAL SANCTIONS 
+PURSUANT TO SECTION 8A OF THE 
+SECURITIES ACT OF 1933 AND SECTION 
+21C OF THE SECURITIES EXCHANGE 
+ACT OF 1934 AS TO DAVID M. HALL 
+ 
+   
+ 
+I. 
+ 
+ On August 6, 2015, 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 David M. Hall (“Hall” or 
+“Respondent”). 
+ 
+  
+ 
+2 
+ 
+II. 
+ 
+ Respondent has submitted an Offer of Settlement (the “Offer”) which the Commission has 
+determined to accept. Solely for the purpose of these proceedings and any other proceedings 
+brought by or on behalf of the Commission, or to which the Commission is a party and without 
+admitting or denying the findings herein, except as to the Commission's jurisdiction over 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 Making Findings and Imposing 
+Remedial Sanctions Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the 
+Securities Exchange Act of 1934 as to David M. Hall (the “Order”), as set forth below. 
+ 
+III. 
+ 
+ On the basis of this Order and Respondent’s Offer, the Commission finds1 that: 
+ 
+SUMMARY 
+ 
+1. This case involves financial accounting and reporting fraud related to the valuation 
+of certain oil and gas assets in Alaska (“the Alaska Assets”) acquired by Miller Energy Resources, 
+Inc. (“Miller Energy” or “the Company”).  Miller Energy, an oil and gas company headquartered 
+in Houston, Texas, purchased these assets for $2.25 million in cash – along with the assumption of 
+certain liabilities it valued at approximately $2 million – during a competitive bid in a bankruptcy 
+proceeding in December 2009.   
+  
+2. The Company subsequently reported those assets at an overstated value of $480 
+million and recognized a one-time “bargain purchase” gain of $277 million for its fiscal third 
+quarter ended January 2010 and fiscal year ended April 2010.   
+ 
+3. Miller Energy failed to account for the acquisition in accordance with generally 
+accepted accounting principles (“GAAP”).  Accounting Standards Codification (“ASC”) 805, 
+Business Combinations, required Miller Energy to record the value of its acquired Alaska Assets at 
+“fair value.”  However, contrary to authoritative accounting guidance, Miller Energy used as fair 
+value a reserve report that was prepared by a petroleum engineer firm using the rules for 
+supplemental oil and gas disclosures.  The reserve report materially overstated the value of the oil 
+and gas reserves in part because it contained expense projections that were materially understated 
+by Hall.   
+ 
+4. In addition, Hall caused the Company to misstate the fair value of certain fixed 
+assets by altering an insurance report to make it appear as if it were a third party report on the 
+replacement value of those assets.     
+                                                 
+1  The findings herein are made pursuant to Respondent’s Offer of Settlement and are not 
+binding on any other person in this or any other proceeding. 
+ 
+3 
+ 
+ 
+RESPONDENT 
+5. David M. Hall resides in Anchorage, Alaska.  Hall has degrees in Industrial and 
+Electrical Engineering from Rochville University.  He served as a director of the Company and as 
+CEO of Miller Energy’s Alaska subsidiary from December 2009 until around August 2015, and as 
+Miller Energy’s Chief Operating Officer between July 2013 and August 2015.  He worked with the 
+acquired Alaska Assets since at least the mid-1990s, when Miller Energy’s predecessors began 
+compiling the assets.  Prior to joining Miller Energy, Hall served from January 2008 to December 
+2009 as Vice President and General Manager of Alaska Operations for the immediate past owner 
+of the acquired assets.  In this capacity, Hall was the most senior employee in Alaska responsible 
+for the day-to-day operations of the oil and gas properties.   
+THE COMPANY 
+6. Miller Energy Resources, Inc. is a Tennessee corporation with its principal place 
+of business in Houston, Texas.  It was founded in 1967 as an oil and gas exploration and 
+production company, and went public via a reverse merger in 1996.  It changed its name from 
+Miller Petroleum to Miller Energy Resources in April 2011.  The Company operated oil and gas 
+assets in the Appalachian region of east Tennessee until selling them in November 2014 for $3.3 
+million in cash.   Miller Energy’s securities, registered pursuant to Exchange Act Section 12(b), 
+were listed on the NYSE until September 2015, when the securities were delisted.  Between early 
+2002 and December 2009, Miller Energy’s stock price regularly traded below one dollar per share, 
+falling to a low of $0.04 per share in December 2007.  On October 1, 2015, Miller Energy filed a 
+voluntary petition for reorganization under chapter 11 of title 11 of the U.S. Code in the United 
+States Bankruptcy Court for the District of Alaska (the “Bankruptcy Case”).    
+FACTS 
+Miller Energy Acquires and Overvalues the Alaska Assets 
+7. In the fall of 2009, Miller Energy became aware of certain oil and gas properties in 
+Alaska that were in the process of being “abandoned” as part of the bankruptcy proceedings of a 
+California-based energy company.   
+ 
+8. Unable to service its heavy debt and pay the significant monthly costs required to 
+operate the properties, the bankrupt entity unsuccessfully sought for almost a year to sell its Alaska 
+Assets.  Beginning in December 2008, months before it filed for bankruptcy, the former owner of 
+the assets marketed the same group of assets that Miller Energy ultimately bought to 40 potential 
+buyers.  This process failed to attract any bidders, and the assets were auctioned by the bankruptcy 
+court in July 2009, with the winning bidder agreeing to a total purchase price of $8 million for the 
+assets.  A second entity, who bid $7 million, was designated as the back-up purchaser.  Neither 
+bidder closed.    
+ 
+9. As a result, the former owner of the assets sought in August 2009, and was granted 
+in September, an order from the bankruptcy court allowing it to abandon title to the assets due to a 
+lack of interest.   
+ 
+4 
+ 
+ 
+10. Due to renewed interest in the assets from Miller Energy following their 
+abandonment, the bankruptcy court permitted the debtor to reacquire the Alaska Assets and sell 
+them to Miller Energy in a competitive auction for $2.25 million in cash and the assumption of 
+certain limited liabilities.  The transaction closed on December 10, 2009.   
+ 
+11. On March 22, 2010, Miller Energy filed its quarterly report on Form 10-Q for its 
+fiscal third quarter ended January 31, 2010 and reported a value of $480 million for the Alaska 
+acquisition.  That amount was comprised of $368 million for oil and gas properties and $110 
+million for fixed assets.  Miller Energy also reported an after-tax $277 million “bargain purchase 
+gain” which boosted net income for the quarter to $272 million – an enormous increase over the 
+$556,097 loss reported for the same period the year before. 
+ 
+12. As detailed below, these inflated balance sheet and income statement numbers were 
+repeated in numerous documents subsequently filed with the Commission.   
+ 
+13. The newly-booked value of the Alaska acquisition, which resulted in a nearly 
+5,000% increase in Miller Energy’s total assets, had a significant impact on Miller Energy’s stock 
+price.  On December 10, 2009, the date of the transaction, Miller Energy’s stock closed at $0.61 
+per share.  By March 31, 2010, Miller Energy’s stock closed 982% higher at $6.60 per share.  
+Weeks later, its stock began trading on NASDAQ and, after moving to the NYSE a year later, 
+reached an all-time high price on December 9, 2013 of $8.83 per share.   
+ 
+14. As described in detail below, Miller Energy materially overstated the value of its 
+Alaska Assets by more than four hundred million dollars. 
+ 
+Under GAAP, Miller Energy Was Required 
+ to Record the Alaska Acquisition at Fair Value 
+15. ASC 805, Business Combinations – formerly Statement of Financial Accounting 
+Standards (“SFAS”) 141(R) – became effective in December 2008.  Among its principal revisions, 
+ASC 805 requires acquisitions that result in a “bargain purchase,” e.g., entities purchased at fire 
+sales prices in non-orderly transactions, to be measured at fair value, with any resulting gain 
+recorded on the income statement. 
+ 
+16. ASC 820, Fair Value Measurements (formerly SFAS 157), provides the framework 
+for measuring fair value.  “Fair value” is defined in ASC 820 as “the price that would be received 
+to sell an asset or paid to transfer a liability in an orderly transaction between market participants at 
+the measurement date.”  A reporting entity must determine an appropriate fair value using one or 
+more of the valuation techniques described in accounting literature. 
+ 
+17. ASC 820 outlines three broad approaches to measure fair value: the market 
+approach, income approach, and cost approach.  Under the market approach, prices and other 
+relevant information generated by market transactions involving identical or comparable assets or 
+liabilities are used to measure fair value.  The income approach utilizes valuation techniques to 
+ 
+5 
+ 
+convert future amounts to a single discounted present value amount.  Finally, the cost approach is 
+based on the amount that currently would be required to replace the assets in service, i.e., current 
+replacement cost. 
+ 
+18. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-
+specific measurement, and should be determined based on the assumptions market participants 
+would use in pricing the asset or liability. 
+ 
+19. ASC 820 emphasizes that when a price for an identical asset or liability is not 
+observable, entities should use a “valuation technique that maximizes the use of relevant 
+observable inputs and minimizes the use of unobservable inputs” and entities may not ignore 
+assumptions market participants would use.2  
+ 
+20. As described below, Miller Energy purported to value its Alaska acquisition using 
+the income approach for the oil and gas reserves and the cost approach for certain fixed assets. 
+The Valuation of the Acquired Oil and Gas Properties 
+Was Based Upon a Reserve Report, Which Does Not Represent Fair Value 
+21. Reserve reports are commonly used in the oil and gas industry to estimate quantities 
+of oil and gas (the reserves) expected to be recovered from existing properties.3  Generally, these 
+reports list reserves in categories based on a minimum estimated percentage probability of eventual 
+recovery and production, i.e., proved, probable, and possible.  Information in reserve reports that 
+are prepared in accordance with Commission regulations is frequently used, among other purposes, 
+to satisfy supplemental accounting disclosure requirements concerning estimates of future oil and 
+                                                 
+2  ASC 820 defines “unobservable inputs” as “inputs that reflect the reporting entity’s own assumptions about 
+the assumptions market participants would use in pricing the asset or liability developed based on the best 
+information available in the circumstances” and “observable inputs” as “inputs that reflect the assumptions market 
+participants would use in pricing the asset or liability developed based on market data obtained from sources 
+independent of the reporting entity.”  
+3  Oil and gas reporting companies are subject to two principal authoritative pronouncements governing 
+financial accounting and reporting for oil and gas activities: Rule 4-10 of Regulation S-X (17 C.F.R. 210.4-10), 
+Financial Accounting and Reporting for Oil and Gas Producing Activities Pursuant to the Federal Securities Laws 
+and the Energy Policy and Conservation Act of 1975 (“Rule 4-10”); and ASC 932-235-50-29 through 33 (formerly 
+SFAS 19, Financial Accounting and Reporting by Oil and Gas Producing Companies and SFAS 69, Disclosures 
+About Oil and Gas Producing Activities).  ASC 932 establishes disclosure requirements for significant oil and gas 
+activities, including disclosure of the “standardized measure,” which is the future after-tax net cash flows discounted 
+at 10%. A non-GAAP measure known as “PV-10” is similar to the standardized measure but is typically presented 
+on a pretax basis.  The FASB has noted that the standardized measure supplies investors with useful information, 
+however, they also noted their concern “that users of financial statements understand that it is neither fair market 
+value nor the present value of future cash flows. It is a rough surrogate for such measures, a tool to allow for a 
+reasonable comparison of mineral reserves and changes through the use of a standardized method that recognizes 
+qualitative, quantitative, geographic, and temporal characteristics.”  Paragraph 83 of the Basis for Conclusions of 
+SFAS 69.     
+ 
+6 
+ 
+gas production.  However, the numbers used in reserve reports for this purpose are expressly not 
+considered “an estimate of fair market value.”4 
+ 
+22. Shortly after acquiring the Alaska Assets, Miller Energy’s CFO asked Hall -- a non-
+accountant with no formal accounting training -- to obtain a reserve report for the Alaska 
+properties in order to determine the fair value of the acquired assets to be reported on Miller 
+Energy’s Form 10-Q for the quarter ended January 31, 2010.  The CFO instructed Hall that the 
+reserve report should use a pretax present value of net cash flows discounted at 10% (“PV-10”). 
+23. On January 5, 2010, Hall hired a petroleum engineer firm to prepare the requested 
+reserve report.   
+24. The reserve report was finalized in February 2010 and reflected PV-10 of $368 
+million. The $368 million reserve report value did not represent fair value in part because the $237 
+million of projected operating and capital expenses that Hall provided the petroleum engineer were 
+unrealistically low, resulting in an overstated valuation.  
+25. In fact, when Hall contacted the petroleum engineer firm that the prior owners of 
+the Alaska Assets had used, that firm advised that the expected level of expenses made a 
+significant portion of the acquisition unprofitable.  Specifically, that firm told Hall that it would not 
+assign any value to one of the largest fields acquired, the Redoubt Shoal field, because it was 
+uneconomical – i.e., expected future expenses exceeded expected future cash flows – and 
+explained that it would not put its “name on a report that implies value exists where it likely does 
+not.”5   
+26. The Redoubt Shoal field – which represented $291 million of the $368 million in 
+fair value recorded by Miller Energy for the reserves – showed positive future cash flows in the 
+reserve report that was ultimately generated primarily because Hall gave the new engineer firm 
+understated and unsubstantiated expense numbers.               
+27. Hall knew the expense projections he provided to the petroleum engineer for use in 
+the reserve report were, in many cases, significantly lower than past actual experience.  For 
+example, internal documents maintained by Hall indicate that the cost to drill a new well in the 
+Redoubt field was roughly $13 million.  However, Hall told the petroleum engineer firm to use a 
+cost of $4.6 million per well in its reserve report.  And instead of using recent expense data, Hall 
+gave the engineer firm nearly three year old operating expense data, which he revised down on the 
+                                                 
+4  See Paragraph 77 of the Basis for Conclusion of  SFAS 69 (“Although it cannot be considered an estimate of 
+fair market value, the standardized measure of discounted net cash flows should be responsive to some of the key 
+variables that affect fair market value, namely, changes in reserve quantities, selling prices, production costs, and tax 
+rates.”).   
+5  Unique among the oil and gas properties purchased by Miller Energy, Redoubt Shoal is an offshore field in 
+Cook Inlet, Alaska, which requires the use of an offshore platform that sits in seventy feet of water, is accessible 
+only by boat or helicopter, and drills to depths in excess of 12,000 feet.  Offshore drilling presents risks and costs 
+not associated with onshore operations.           
+ 
+7 
+ 
+pretext that Miller Energy could run a leaner operation than former operators of the properties.  By 
+way of example, Hall told the engineer firm that the offshore Redoubt Shoal field would cost 
+$399,000 per month to operate when it actually had cost the seller more than $600,000 per month 
+and when internal estimates show that Miller Energy and Hall expected the field to cost more than 
+$800,000 per month once fully operational.  Additionally, in some years, the report included zero 
+expenses for operating the facilities in Redoubt Shoal and another field.    
+28. Hall also knew that the expense projections he provided to the petroleum engineer 
+for use in the reserve report were, in many cases, significantly lower than recent expense 
+information and projections he had used in his own internal models and budgets.    
+29. Overall, the reserve report implied operating expenses of $4 per barrel of oil 
+equivalent (“boe”) for all categories of reserves.  That level of operating expenses was 
+unreasonable in light of its predecessor’s actual operating expenses of $32.50/boe in 2008 and 
+$55.42/boe in the first half of 2009, before the wells were shut-in.   
+30. As a result of the understated expense information, the reserve report overvalued 
+the oil and gas properties by tens of millions of dollars. 
+31. Because Hall was aware that the expense information he provided to the petroleum 
+engineer for inclusion in the reserve report was significantly lower than past actual experience and 
+contrary to recent expense information and projections that Hall had used in his own internal 
+models and budgets, Hall was aware that this expense information was understated.  Hall was also 
+aware that providing understated expense information would cause the reserve report to inflate the 
+value for the Alaska Assets’ oil and gas reserves. 
+32. In its financial statements filed with the Commission, Miller Energy adopted the 
+value reported in the reserve report as the fair value for the Alaska Assets’ oil and gas reserves.  
+Hall knew or should have known that the value of the Alaska Assets as reflected in the reserve 
+report would be incorporated into Miller Energy’s financial statements. 
+Hall Caused the Company to Misstate the Value of the Fixed Assets 
+33. In addition to the $368 million value recorded for the oil and gas properties, Miller 
+Energy also erroneously recorded a separate value of $110 million for acquired fixed assets, such 
+as facilities and pipelines ancillary to the oil and gas reserves.   
+34. In a February 8, 2010 email, Miller Energy’s CFO informed Hall that the CFO 
+needed an amount to use as fair value for the fixed assets obtained as part of the Alaska acquisition.  
+He noted that, ideally, the value should be what a willing buyer would pay for the assets, but “[i]n 
+the absence of that, replacement values or something similar would probably work.”  Two days 
+later, the CFO was sent an “asset replacement cost study” purportedly provided by an independent 
+insurance broker, which appeared to list the replacement cost for the assets as $110 million.  The 
+“study” was dated September 5, 2008, but “revised” on February 9, 2010.   
+ 
+8 
+ 
+35. The CFO recorded the amount reported in the revised insurance study on Miller 
+Energy’s balance sheet.   
+36. The “asset replacement cost study” relied upon to support the $110 million fair 
+value was actually a preexisting insurance study created by an insurance broker.  It had been 
+refashioned at the direction of Hall and the CFO to appear as if a third party had derived the $110 
+million value.  In truth, the numbers in the study had been given to the insurance broker, and its 
+predecessor, by its clients (i.e., Miller Energy and the previous owners of the fixed assets) as far 
+back as 2007 and had been used as starting points for other types of estimates, such as estimates for 
+possible losses resulting from fire or natural disasters.  The two employees at the insurance broker 
+who were most familiar with the original “Loss Estimates Study,” including the engineer who 
+authored it, confirmed that no one at the broker ever tested or in any way double-checked the 
+values given to them.   
+37. On February 8, 2010, Hall directed Alaska personnel to contact the insurance 
+broker and another oil and gas consulting company to ask them for a report reflecting fair value or 
+replacement cost.  The insurance broker responded on February 9, telling Miller Energy in an 
+email copied to Hall that it could not provide a report showing replacement costs.   
+38. At Hall’s direction, Miller Energy’s Alaska personnel also contacted a separate 
+consulting firm and sent it the insurance broker’s original 2008 insurance report.  Late on February 
+8, the consulting firm informed Miller Energy that the insurance study it sent was a “good 
+reference” but the report did not state “value or replacement cost.”  The firm offered to conduct its 
+own analysis, but advised that the estimate would take “approximately 2-3 weeks to complete” and 
+“cost around $15,000-$18,000.”   
+39. Upon hearing the news that a new report might take two to three weeks, Alaska 
+personnel, including Hall, called the CFO.  According to one participant on this call, the CFO said 
+he could not wait weeks for a new report.  He “needed it quickly and he needed to base it on 
+something . . . a professional had to sign off on it, not us, some third party. . . .”  During the call, 
+the CFO and Hall decided to rely on numbers in the insurance report as replacement costs, despite 
+Hall having been told by the broker that it could not provide Miller Energy with replacement costs.   
+40. With the aim of making the report appear as though it reflected replacement costs, 
+Hall provided a subordinate with edits to the 2008 insurance report that significantly altered its 
+appearance, including changing its name from “Loss Estimates Study” to “Asset replacement cost 
+study.”  Hall knew or should have known that the revised report, which Miller Energy gave to its 
+outside auditor, omitted the insurance broker’s methodology and analysis.  As a result, the only 
+numbers reflected in the revised report were the ones provided to the broker by Miller Energy and 
+its predecessors. 
+41. By using the reserve report and the “asset replacement cost study,” as a proxy for 
+fair value, Miller Energy overvalued the Alaska Assets by more than $400 million.  Consequently, 
+Miller Energy filed with the Commission financial reports that materially misstated the value of its 
+assets, as follows:  Forms 10-Q for the third quarter of fiscal year 2010 and all three quarters of 
+ 
+9 
+ 
+fiscal years 2011 through 2015; Forms 10-K for fiscal years ended 2010 through 2014; the Form S-
+1 filed on August 8, 2010; the Forms S-3 filed on September 6, 2012 and October 5, 2012; and 
+prospectuses filed between August 25, 2010 through August 21, 2014 pursuant to Rule 424.   
+42. In addition, the following financial reports that Miller Energy filed with the 
+Commission materially misstated the Company’s net income: Forms 10-Q for the third quarter of 
+fiscal year 2010, all three quarters of fiscal 2011, and the first two quarter of 2012; Forms 10-K for 
+fiscal years ended 2010 through 2012; the Form S-1 filed on August 8, 2010; the Forms S-3 filed 
+on September 6, 2012 and October 5, 2012; and prospectus supplements filed between August 25, 
+2010 through August 21, 2014 pursuant to Rule 424.  In addition, the improper valuation of the 
+Alaska Assets rendered no fewer than 15 Forms 8-K filed between March 2010 through at least 
+December 2014 materially false and misleading.  
+VIOLATIONS 
+ 
+43. As a result of the conduct described above, Hall violated Sections 17(a)(2) and (3) 
+of the Securities Act, which prohibit fraudulent conduct in the offer or sale of securities.  
+44.   As a result of the conduct described above, Hall caused Miller Energy to violate 
+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, current, and quarterly reports as the Commission may 
+require.     
+45. As a result of the conduct described above, Hall caused Miller Energy 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.   
+46. As a result of the conduct described above, Hall caused Miller Energy to violate 
+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 GAAP.  
+ 
+47. As a result of the conduct described above Hall violated Section 13(b)(5) of the 
+Exchange Act, which prohibits any person from knowingly circumventing or knowingly failing to 
+implement a system of internal accounting controls or knowingly falsifying any book, record, or 
+account described in Section 13(b)(2) of the Exchange Act. 
+ 
+48. As a result of the conduct described above, Hall violated Rule 13b2-1 under the 
+Exchange Act, which prohibits any person from, directly or indirectly, falsifying or causing to be 
+falsified any book, record or account described in Section 13(b)(2) of the Exchange Act. 
+ 
+ 
+10 
+ 
+49. As a result of the conduct described above, Hall caused Miller Energy to violate 
+Rule 12b-20 under the Exchange Act, which requires that, in addition to the information expressly 
+required to be included in a statement or report filed with the Commission, there shall be added 
+such further material information, if any, as may be necessary to make the required statements, in 
+light of the circumstances under which they are made not misleading.  
+UNDERTAKING 
+50. Hall undertakes and agrees that for a period of five years from the date of the 
+issuance of the Order he will not act 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. § 78(l)] or that is 
+required to file reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)].  
+ 
+51. In determining whether to accept Hall’s Offer, the Commission has considered this 
+undertaking. Should Respondent violate this undertaking, the Division of Enforcement may 
+petition the Commission to reopen this proceeding solely for the purposes of determining whether 
+Respondent violated Section 17(a)(1) of the Securities Act and/or Section 10(b) of the Exchange 
+Act and Rule 10b-5 thereunder and, if so, whether to impose an officer and director bar.  In such 
+event, Respondent shall not be permitted to (1) oppose the petition, (2) challenge the validity of the 
+Order; (3) contest the findings in the Order; or (4) assert the statute of limitations as a defense. 
+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.  Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, 
+Respondent Hall cease and desist from committing or causing any violations and any future 
+violations of Section 17(a)(2) and (3) of the Securities Act, Sections 13(a), 13(b)(2)(A), 
+13(b)(2)(B) and 13(b)(5) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, 13a-13 and 13b2-
+1 thereunder.  
+B.  Respondent Hall shall pay a civil money penalty in the amount of $125,000 to the 
+Securities and Exchange Commission for transfer to the general fund of the United States 
+Treasury, subject to Exchange Act Section 21F(g)(3).  Payment shall be made in the following 
+installments: $10,000 paid within 10 business days following entry of this Order, followed by 
+$10,000 quarterly payments (i.e. 90 days) for three years, with the final payment being $5,000.  If 
+any payment is not made by the date the payment is required by this Order, the entire outstanding 
+balance, plus any additional interest accrued pursuant to 31 U.S.C. § 3717, shall be due and 
+payable immediately, without further application. Payment must be made in one of the following 
+ways: 
+ 
+(1) Respondent may transmit payment electronically to the Commission, 
+which will provide detailed ACH transfer/Fedwire instructions upon request; 
+ 
+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 
+David M. Hall 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. 
+ 
+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. 
+ 
+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. 
+ 
+       Brent J. Fields 
+       Secretary 

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+  UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES ACT OF 1933  
+Release No. 10091 / June 7, 2016 
+ 
+SECURITIES EXCHANGE ACT OF 1934  
+Release No. 78009 / June 7, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No. 3780 / June 7, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-16729 
+ 
+ 
+ 
+ 
+In the Matter of 
+ 
+MILLER ENERGY 
+RESOURCES, INC., PAUL W. 
+BOYD, CPA, DAVID M. HALL, 
+AND CARLTON W. VOGT, III, 
+CPA 
+ 
+Respondents. 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ORDER MAKING FINDINGS AND 
+IMPOSING REMEDIAL SANCTIONS 
+PURSUANT TO SECTIONS 4C AND 21C 
+OF THE SECURITIES EXCHANGE ACT 
+OF 1934 AND RULE 102(e) OF THE 
+COMMISSION’S RULES OF PRACTICE 
+AS TO CARLTON W. VOGT, III, CPA  
+ 
+   
+ 
+I. 
+ 
+ On August 6, 2015, the Securities and Exchange Commission (“Commission”) instituted 
+proceedings pursuant to Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange 
+                                                 
+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 
+continued . . .  
+ 
+2 
+ 
+Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice2 against Carlton W. Vogt, III, 
+CPA (“Vogt” 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 Pursuant to Section 4C of the 
+Exchange Act and Rule 102(e) of the Commission’s Rules of Practice as to Carlton W. Vogt, III, 
+CPA (the “Order”), as set forth below. 
+ 
+III. 
+ 
+ On the basis of this Order and Respondent’s Offer, the Commission finds3 that: 
+ 
+SUMMARY 
+ 
+1. This case involves financial accounting and reporting fraud, as well as audit 
+failures, related to the valuation of certain oil and gas assets in Alaska (“the Alaska Assets”) 
+acquired by Miller Energy Resources, Inc. (“Miller Energy” or “the Company”).  Miller Energy, 
+an oil and gas company headquartered in Houston, Texas, purchased these assets for $2.25 million 
+in cash – along with the assumption of certain liabilities it valued at approximately $2 million – 
+during a competitive bid in a bankruptcy proceeding in December 2009.   
+  
+2. The Company subsequently reported those assets at an overstated value of $480 
+million and recognized a one-time “bargain purchase” gain of $277 million for its fiscal third 
+quarter ended January 2010 and fiscal year ended April 2010.   
+                                                                                                                                                             
+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 Respondent’s Offer of Settlement and are not 
+binding on any other person in this or any other proceeding. 
+ 
+3 
+ 
+ 
+3. Miller Energy’s financial statements for its fiscal year 2010, the first annual period 
+in which the Company reported the fair value of the acquired assets, were audited by Sherb & Co. 
+LLP (“Sherb & Co.”), a now defunct CPA firm that was suspended by the Commission in 2013 for 
+improper professional conduct unrelated to this matter.  The lead engagement partner on the Miller 
+Energy audit, Vogt, failed to comply with the Public Company Accounting Oversight Board (the 
+“PCAOB”) rules and standards in auditing Miller Energy’s financial statements that included its 
+accounting for its Alaska acquisition.  Vogt failed to exercise due professional care and skepticism 
+by not adequately assessing whether the Company’s accounting treatment for the acquisition 
+complied with GAAP.  Vogt also failed to obtain sufficient competent evidential matter for 
+management’s assertions regarding the fair value of the Alaska Assets.   
+RESPONDENT 
+4. Carlton W. Vogt, III, CPA, resides in Warwick, New York.  From January 2005 to 
+October 2012, Vogt was a partner at Sherb & Co., LLP, an accounting firm based out of New 
+York.  He has been a licensed CPA in the state of New York since 1998. 
+ 
+THE COMPANY 
+ 
+5. Miller Energy Resources, Inc. is a Tennessee corporation with its principal place 
+of business in Houston, Texas.  It was founded in 1967 as an oil and gas exploration and 
+production company, and went public via a reverse merger in 1996.  It changed its name from 
+Miller Petroleum to Miller Energy Resources in April 2011.  The Company operated oil and gas 
+assets in the Appalachian region of east Tennessee until selling them in November 2014 for $3.3 
+million in cash.   Miller Energy’s securities, registered pursuant to Exchange Act Section 12(b), 
+were listed on the NYSE until September 2015, when the securities were delisted.  Between early 
+2002 and December 2009, Miller Energy’s stock price regularly traded below one dollar per share, 
+falling to a low of $0.04 per share in December 2007.  On October 1, 2015, Miller Energy filed a 
+voluntary petition for reorganization under chapter 11 of title 11 of the U.S. Code in the United 
+States Bankruptcy Court for the District of Alaska (the “Bankruptcy Case”).    
+FACTS 
+Miller Energy Acquires and Overvalues the Alaska Assets 
+6. In the fall of 2009, Miller Energy became aware of certain oil and gas properties in 
+Alaska that were in the process of being “abandoned” as part of the bankruptcy proceedings of a 
+California-based energy company.   
+ 
+7. Unable to service its heavy debt and pay the significant monthly costs required to 
+operate the properties, the bankrupt entity unsuccessfully sought for almost a year to sell its Alaska 
+Assets.  Beginning in December 2008, months before it filed for bankruptcy, the former owner of 
+the assets marketed the same group of assets that Miller Energy ultimately bought to 40 potential 
+buyers.  This process failed to attract any bidders, and the assets were auctioned by the bankruptcy 
+ 
+4 
+ 
+court in July 2009, with the winning bidder agreeing to a total purchase price of $8 million for the 
+assets.  A second entity, who bid $7 million, was designated as the back-up purchaser.  Neither 
+bidder closed.    
+ 
+8. As a result, the former owner of the assets sought in August 2009, and was granted 
+in September, an order from the bankruptcy court allowing it to abandon title to the assets due to a 
+lack of interest.   
+ 
+9. Due to renewed interest in the assets from Miller Energy following their 
+abandonment, the bankruptcy court permitted the debtor to reacquire the Alaska Assets and sell 
+them to Miller Energy in a competitive auction for $2.25 million in cash and the assumption of 
+certain limited liabilities.  The transaction closed on December 10, 2009.   
+ 
+10. On March 22, 2010, Miller Energy filed its quarterly report on Form 10-Q for its 
+fiscal third quarter ended January 31, 2010 and reported a value of $480 million for the Alaska 
+acquisition.  That amount was comprised of $368 million for oil and gas properties and $110 
+million for fixed assets.  Miller Energy also reported an after-tax $277 million “bargain purchase 
+gain” which boosted net income for the quarter to $272 million – an enormous increase over the 
+$556,097 loss reported for the same period the year before. 
+ 
+11. These inflated balance sheet and income statement numbers were repeated in 
+numerous documents subsequently filed with the Commission, including the Company’s Form 10-
+K for the year ended April 30, 2010.   
+ 
+12. The newly-booked value of the Alaska acquisition, which resulted in a nearly 
+5,000% increase in Miller Energy’s total assets, had a significant impact on Miller Energy’s stock 
+price.  On December 10, 2009, the date of the transaction, Miller Energy’s stock closed at $0.61 
+per share.  By March 31, 2010, Miller Energy’s stock closed 982% higher at $6.60 per share.  
+Weeks later, its stock began trading on NASDAQ and, after moving to the NYSE a year later, 
+reached an all-time high price on December 9, 2013 of $8.83 per share.   
+ 
+13. Miller Energy materially overstated the value of its Alaska Assets by more than 
+four hundred million dollars. 
+ 
+Miller Energy Failed to Record the Alaska Acquisition at Fair Value 
+ 
+14. ASC 805, Business Combinations – formerly Statement of Financial Accounting 
+Standards (“SFAS”) 141(R) – became effective in December 2008.  Among its principal revisions, 
+ASC 805 requires acquisitions that result in a “bargain purchase,” e.g., entities purchased at fire 
+sales prices in non-orderly transactions, to be measured at fair value, with any resulting gain 
+recorded on the income statement. 
+ 
+15. ASC 820, Fair Value Measurements (formerly SFAS 157), provides the framework 
+for measuring fair value.  “Fair value” is defined in ASC 820 as “the price that would be received 
+to sell an asset or paid to transfer a liability in an orderly transaction between market participants at 
+ 
+5 
+ 
+the measurement date.”  A reporting entity must determine an appropriate fair value using one or 
+more of the valuation techniques described in accounting literature. 
+ 
+16. ASC 820 outlines three broad approaches to measure fair value: the market 
+approach, income approach, and cost approach.  Under the market approach, prices and other 
+relevant information generated by market transactions involving identical or comparable assets or 
+liabilities are used to measure fair value.  The income approach utilizes valuation techniques to 
+convert future amounts to a single discounted present value amount.  Finally, the cost approach is 
+based on the amount that currently would be required to replace the assets in service, i.e., current 
+replacement cost. 
+ 
+17. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-
+specific measurement, and should be determined based on the assumptions market participants 
+would use in pricing the asset or liability. 
+ 
+18. ASC 820 emphasizes that when a price for an identical asset or liability is not 
+observable entities should use a “valuation technique that maximizes the use of relevant observable 
+inputs and minimizes the use of unobservable inputs” and entities may not ignore assumptions 
+market participants would use.4 
+ 
+19. Miller Energy purported to value the Alaska acquisition using the income approach 
+for the oil and gas reserves and the cost approach for certain fixed assets.  But the values that 
+Miller Energy recorded for these assets did not reflect fair value and thus did not comply with 
+GAAP. 
+ 
+The Valuation of the Acquired Oil and Gas Reserves 
+Was Based Upon a Reserve Report, Which Did Not Represent Fair Value 
+ 
+20. Reserve reports are commonly used in the oil and gas industry to estimate quantities 
+of oil and gas (the reserves) expected to be recovered from existing properties.5  Generally, these 
+                                                 
+4  ASC 820 defines “unobservable inputs” as “inputs that reflect the reporting entity’s own assumptions about 
+the assumptions market participants would use in pricing the asset or liability developed based on the best 
+information available in the circumstances” and “observable inputs” as “inputs that reflect the assumptions market 
+participants would use in pricing the asset or liability developed based on market data obtained from sources 
+independent of the reporting entity.”  
+5  Oil and gas reporting companies are subject to two principal authoritative pronouncements governing 
+financial accounting and reporting for oil and gas activities: Rule 4-10 of Regulation S-X (17 C.F.R. 210.4-10), 
+Financial Accounting and Reporting for Oil and Gas Producing Activities Pursuant to the Federal Securities Laws 
+and the Energy Policy and Conservation Act of 1975 (“Rule 4-10”); and ASC 932-235-50-29 through 33 (formerly 
+SFAS 19, Financial Accounting and Reporting by Oil and Gas Producing Companies and SFAS 69, Disclosures 
+About Oil and Gas Producing Activities).  ASC 932 establishes disclosure requirements for significant oil and gas 
+activities, including disclosure of the “standardized measure,” which is the future after-tax net cash flows discounted 
+at 10%. A non-GAAP measure known as “PV-10” is similar to the standardized measure but is typically presented 
+on a pretax basis.  The FASB has noted that the standardized measure supplies investors with useful information, 
+however, they also noted their concern “that users of financial statements understand that it is neither fair market 
+continued . . .  
+ 
+6 
+ 
+reports list reserves in categories based on a minimum estimated percentage probability of eventual 
+recovery and production, i.e., proved, probable, and possible.  Information in reserve reports that 
+are prepared in accordance with Commission regulations is frequently used, for among other 
+purposes, to satisfy supplemental accounting disclosure requirements concerning estimates of 
+future oil and gas production.  However, the numbers used in reserve reports for this purpose are 
+expressly not considered “an estimate of fair market value.”   
+ 
+21. To value the Alaska Assets oil and gas reserves, Miller Energy used a reserve report 
+prepared by an independent petroleum engineer firm that used a pretax present value of net cash 
+flows discounted at 10% (“PV-10”).  That reserve report reflected a PV-10 of $368 million.  
+ 
+22. Although that reserve report specifically cautioned that “[t]he discounted values 
+shown are for your information and should not be construed as our estimate of fair market value,” 
+Miller Energy, without undertaking any additional analysis, recorded as the fair value of the 
+acquired oil and gas properties the sum of the PV-10 estimates for 100% of the proved, probable, 
+and possible reserves.   
+ 
+23. The $368 million reserve report value did not represent fair value for several 
+reasons. 
+ 
+24. First, the reserve report did not represent fair value in part because the $237 million 
+of projected operating and capital expenses that Miller Energy provided the petroleum engineer 
+were unrealistically low, resulting in an overstated valuation.  For example, internal Miller Energy 
+documents indicate that the cost to drill certain new wells was roughly $13 million.  However, 
+Miller Energy told the petroleum engineer firm to use a cost of $4.6 million per well in its reserve 
+report.  And instead of using recent expense data, Miller Energy gave the engineer firm nearly 
+three year old operating expense data, which in some cases, was even further reduced.   
+25. Overall, the reserve report implied operating expenses of $4 per barrel of oil 
+equivalent (“boe”) for all categories of reserves.  That level of operating expenses was 
+unreasonable in light of its predecessor’s actual operating expenses of $32.50/boe in 2008 and 
+$55.42/boe in the first half of 2009, before the wells were shut-in. 
+ 
+26. Vogt was aware of the potential problems with the expense projections, cautioning 
+the Company’s Chief Financial Officer in December 2009 that the lack of any controls over the 
+expense estimates was a “concerning void.” 
+ 
+27. Second, the reserve report did not include amounts for certain asset retirement 
+obligations, i.e., the legal obligations associated with the retirement of tangible long-lived assets.   
+                                                                                                                                                             
+value nor the present value of future cash flows. It is a rough surrogate for such measures, a tool to allow for a 
+reasonable comparison of mineral reserves and changes through the use of a standardized method that recognizes 
+qualitative, quantitative, geographic, and temporal characteristics.”  Paragraph 83 of the Basis for Conclusions of 
+SFAS 69.     
+ 
+7 
+ 
+ 
+28. Third, despite showing years of net profit that market participants would expect to 
+be taxable, the reserve report did not make any adjustments for income taxes. 
+ 
+29. Fourth, the reserve report used a 10% discount rate that was inappropriate under 
+GAAP for determining fair value.  In a discounted cash flow model, a discount rate is used to 
+account for the uncertainties associated with risk and the time value of money.  A discount rate is 
+the required rate of return that an investor would demand – based on the risks associated with the 
+benefit stream under consideration – to induce the investor to make an investment.  The 10% 
+standard discount rate failed to consider assumptions market participants would use for the Alaska 
+Assets given the unique risks associated with those assets.   
+ 
+30. Finally, the valuation also overstated cash flows from certain categories of reserve 
+estimates (e.g., “probable” and “possible” reserves) by failing to apply any risk weight to such 
+reserves and the resulting cash flows.  Given the high degree of uncertainty associated with cash 
+flows from these reserve estimate categories, they are required to be risk weighted in order to 
+reflect an appropriate valuation. 
+ 
+Miller Energy Improperly Valued the Fixed Assets 
+ 
+31. In addition to the $368 million value recorded for the oil and gas properties, Miller 
+Energy also erroneously recorded a separate value of $110 million for acquired fixed assets, such 
+as facilities and pipelines ancillary to the oil and gas reserves.  This valuation violated GAAP for 
+several reasons.   
+ 
+32. First, recording a separate and additional value for the fixed assets essentially 
+amounted to double counting those assets.  Specifically, the reserve report Miller Energy relied on 
+to value the acquired oil and gas properties used a discounted cash flow model.  Valuation 
+specialists use such models to estimate the value of an enterprise’s “operating assets” – i.e., the 
+assets employed to generate future cash flows – by converting future benefit streams into a net 
+present value.  In Miller Energy’s case, the fixed assets were the very same operating assets that 
+were expected to generate the future cash flows in the reserve report.  Accordingly, they should not 
+have been separately valued. 
+ 
+33. Second, Miller Energy improperly relied on an insurance report for the fair value of 
+the fixed assets.  The values for the fixed assets in that report had been given to the insurance 
+broker, and its predecessor, by its clients (i.e., Miller Energy and the previous owners of the fixed 
+assets) as far back as 2007 and were used as starting points for other types of estimates, such as 
+estimates for possible losses resulting from fire or natural disasters. 
+ 
+34. The two employees at the insurance broker who were most familiar with the 
+original report stated that no one at the broker ever tested or in any way double-checked the values 
+given to them.   
+ 
+ 
+8 
+ 
+35. Finally, the values in that report purported to show “asset replacement cost.”   
+Absent further adjustments, replacement cost new does not qualify as fair value under GAAP.    
+ 
+Vogt’s Fiscal Year 2010 Audit of Miller Energy 
+36. As described below, Vogt failed to perform the 2010 Miller Energy audit in 
+accordance with PCAOB Standards.  These deficiencies included, among other items, failing 
+properly to audit the fair value measurements, use the work of a specialist, plan, staff and supervise 
+the audit, obtain sufficient competent audit evidence, exercise due care and professional 
+skepticism, and perform required audit testing.   
+ 
+37. In August 2008, Miller Energy hired Sherb & Co. to become the company’s 
+independent public accountant.  Vogt led an audit team that audited Miller Energy’s financial 
+statements for fiscal years ended 2009 and 2010.   
+  
+38. As the partner in charge of the fiscal year 2010 Miller Energy audit, Vogt failed to 
+perform the 2010 Miller Energy audit in accordance with PCAOB Standards.   
+39. Vogt’s failures related to the auditing of the Alaska asset acquisition.  Despite the 
+materiality of the transaction on Miller Energy’s financial statements, Vogt failed to adequately 
+test the valuation of the assets and the related calculation of the gain on acquisition.  Instead, he 
+inappropriately relied on the aforementioned reserve report and the so-called asset replacement 
+cost study to justify Miller Energy’s $480 million valuation of the Alaska Assets.   
+40. Vogt did not perform the necessary procedures to enable him to use the findings of 
+the reserve report.  See AU § 336.12.6 He and his audit staff performed a limited evaluation of the 
+petroleum engineer firm’s work and its qualifications as a specialist (as a petroleum engineer, not 
+as a fair value appraiser).  The reserve report, which was included in the audit workpapers, clearly 
+stated that the engineer firm was not engaged to – and did not in fact – perform a fair value 
+estimate for the Alaska Assets.  Among other significant flaws, Vogt never obtained an 
+understanding of the objectives and scope of the specialist’s work or the appropriateness of using 
+the specialist’s work for the purpose of fair valuing the assets.  See AU § 336.09. Nor did he make 
+the appropriate tests of data provided to the specialist, including operating and capital expenses 
+estimated and provided by Miller Energy.  See AU § 336.12. 
+41. The audit of the recorded fixed assets of $110 million was similarly flawed.  A 
+member of the audit team obtained the asset replacement cost study and placed a copy of it in the 
+workpapers, but Vogt failed to consider the nature of the fixed assets and whether they would be 
+utilized to generate the cash flow from the oil and gas properties, and, if so, what remainder value 
+would exist.  Nor did Vogt or the audit team perform any meaningful work to consider the 
+expertise and experience of those persons determining the fair value measurement, the significant 
+                                                 
+6  References in this order are to the PCAOB standards in effect at the time of the relevant conduct. 
+ 
+9 
+ 
+management assumptions used in determining the fair value, and the documentation supporting 
+management’s assumptions.  See AU § 328.12.   
+42. Vogt knew at the time of the accounting for the acquisition that Miller Energy had 
+insufficient accounting staff and that any accounting was suspect.  In a December 22, 2009 email 
+to Miller Energy’s senior management, Vogt indicated that he believed the Company’s accounting 
+staff was deficient, and that the Company’s CFO cut too many corners on the accounting 
+documentation. Furthermore, Vogt stated that Miller Energy’s modeling of cash flows and 
+expenses was “concerning” because there was no one taking a detailed look at the cost estimates 
+that the CEO of Miller Energy’s Alaska subsidiary provided to the petroleum engineer for the 
+Alaska Assets.  In an email dated March 17, 2011, Vogt also knew that the reserve report used 
+suspect data and was completed on what he described as a “rushed basis,” as Miller Energy “had 
+very little time if none for any true due diligence of much depth into what [it] purchased.”   
+43. Vogt, on behalf of Sherb & Co., issued an audit report containing an unqualified 
+opinion for use in Miller Energy’s 2010 Form 10-K that stated falsely that the audit had been 
+conducted in accordance with the PCAOB’s standards and that Miller Energy’s financial 
+statements were presented fairly, in all material respects, in conformity with GAAP.  The specific 
+failures are detailed below.   
+Failures Auditing Fair Value Measurements and Disclosures (AU § 328) 
+44. AU § 328 requires auditors to obtain sufficient competent audit evidence to provide 
+reasonable assurance that fair value measurements and disclosures are in conformity with GAAP. 
+AU § 328.03.  The standard provides that “[t]he auditor should test the data used to develop the fair 
+value measurements and disclosures and evaluate whether the fair value measurements have been 
+properly determined” including “whether the data on which the fair value measurements are based, 
+including the data used in the work of a specialist, is accurate, complete and relevant . . . .” AU § 
+328.39.  In addition, “[t]he auditor should evaluate the sufficiency and competence of the audit 
+evidence obtained from auditing fair value measurements and disclosures as well as the 
+consistency of that evidence with other audit evidence obtained and evaluated during the audit.” 
+AU § 328.47.  If a valuation model is utilized, the auditor reviews the model and evaluates whether 
+the assumptions used are reasonable.  AU § 328.38. 
+45. Vogt failed to comply with these requirements in connection with the 2010 audit of 
+Miller Energy.  While Vogt performed some testing on the data used to create the reserve report, 
+he failed to test key elements such as the discount rate utilized, the risk weighting of the probable 
+and possible reserves, estimated oil prices, and operating and capital expenses.  Vogt also never 
+properly considered the relevancy of the reserve report, improperly relying exclusively on the 
+report since the specialist, a petroleum engineer, was not engaged to estimate a fair valuation, as 
+expressly indicated in the report.  Nor did he consider the consistency of the evidence in light of 
+the other evidence, such as Miller Energy’s actual purchase price of the assets (reported at less than 
+$5 million), and the fact that the assets had previously been abandoned during a bankruptcy 
+proceeding. While Vogt and his staff reviewed some aspects of the specialist’s valuation model, 
+they failed to sufficiently review and evaluate the reasonableness of assumptions such as the 
+ 
+10 
+ 
+discount rate, risk weighting of certain reserves, future oil prices, and operating and capital 
+expenses. 
+46. Vogt also failed to obtain sufficient audit evidence to support the fair value of the 
+fixed assets.  Vogt performed limited, if any, testing of the asset replacement cost study 
+purportedly supporting the fixed asset valuation.  He did not assess the competency or sufficiency 
+of the asset replacement cost study, or understand who created the study, their qualifications, and 
+the data underlying their valuation.  Finally, Vogt failed to consider whether some or all of the 
+fixed assets were being utilized in the estimated values captured in the reserve report. 
+Failure in Using the Work of a Specialist (AU § 336) 
+47. AU § 336 provides guidance to auditors when the work of a specialist is used in 
+performing an audit of financial statements prepared in accordance with GAAP.  Among other 
+items, the standard requires the auditor to evaluate the specialist to ensure that the specialist 
+possesses the necessary skill or knowledge in the type of work under consideration and the 
+appropriateness of using the specialist’s work for the intended purpose.  Specifically, AU § 336.08 
+states that “[t]he auditor should consider the following to evaluate the professional qualifications of 
+the specialist in determining that the specialist possesses the necessary skill or knowledge in the 
+particular field:  
+a. The professional certification, license, or other recognition of the competence of 
+the specialist in his or her field, as appropriate 
+b. The reputation and standing of the specialist in the views of peers and others 
+familiar with the specialist’s capability or performance 
+c. The specialist's experience in the type of work under consideration.” 
+48. Furthermore, AU § 336.09 states “[t]he auditor should obtain an understanding of 
+the nature of the work performed or to be performed by the specialist. This understanding should 
+cover the following: 
+a. The objectives and scope of the specialist’s work 
+b. The specialist's relationship to the client  
+c. The methods or assumptions used 
+d. A comparison of the methods or assumptions used with those used in the 
+preceding period 
+e. The appropriateness of using the specialist's work for the intended purpose  
+ 
+11 
+ 
+f. The form and content of the specialist’s findings that will enable the auditor to 
+make the evaluation described in paragraph [336].12.”7 
+49. Although the Standard allows an auditor to use the work of a specialist as evidential 
+matter in performing substantive tests to evaluate material financial statement assertions (see AU § 
+336.03), Vogt failed in several respects in his use of a specialist regarding the valuation of Miller 
+Energy’s Alaska acquisition.   
+50. Vogt did not properly consider the petroleum engineer’s experience in fair 
+valuation of assets, which was nonexistent.  See AU § 336.08.  Vogt also failed to obtain an 
+understanding of the objectives and scope and intended purpose of the petroleum engineer’s 
+engagement for Miller Energy, which was to produce a reserve report for reserve disclosure 
+purposes, not a fair valuation of acquired assets.  See AU § 336.09.   Indeed, the single page of the 
+reserve report included in Vogt’s workpapers, to support his evaluation of Miller Energy’s $368 
+million valuation, clearly states that the “values shown . . . should not be construed as our estimate 
+of fair market value.”   
+51. Furthermore, Vogt failed to adequately obtain an understanding of the methods and 
+assumptions used by the specialist, or appropriately test data provided to the specialist.  See AU § 
+336.12.  There is no evidence that Vogt considered the appropriateness of certain key assumptions 
+used by the petroleum engineer, such as the discount rate, estimated price of oil and gas, and the 
+lack of risk weighting of probable and possible reserves.  Finally, Vogt, despite alerting Miller 
+Energy’s then CEO and CFO to the lack of sufficient review and inquiry, failed to adequately test 
+the operating and capital expense estimates provided to the specialist by Miller Energy, and took 
+few audit steps, other than inquiry, to assess the reasonableness of the expense estimates.  
+52. Vogt performed no steps to evaluate the qualifications of the authors of the asset 
+replacement cost study, or understand the methods or assumptions they used or the appropriateness 
+of using the Asset replacement cost study to support the valuation of the fixed assets at $110 
+million. 
+Failure to Exercise Due Professional Care in the Performance of Work (AU § 230)  
+53. PCAOB Standards require auditors to exercise due professional care in the planning 
+and performance of the audit.  See AU § 230.01.  Due professional care requires the auditor to 
+exercise professional skepticism: an attitude that includes a questioning mind and a critical 
+assessment of audit evidence.  See AU § 230.07.  Moreover, gathering and objectively evaluating 
+audit evidence requires the auditor to consider the competency and sufficiency of the evidence.  
+See AU § 230.08.     
+                                                 
+7  AU § 336.12 states that an auditor should evaluate the appropriateness and reasonableness of methods and 
+assumptions used, during which 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.” 
+ 
+12 
+ 
+54. Vogt failed to exercise due professional care regarding the audit of the Alaska 
+acquisition valuation during the 2010 Miller Energy audit.  Miller Energy had valued the assets 
+purchased for a few million dollars at $480 million and had recorded a corresponding $277 million 
+bargain purchase gain.  Given the size of the transaction, Vogt should have focused more closely 
+on the diligence required to gather and objectively evaluate the evidence supporting the fair value 
+of the oil and gas properties acquired to comply with ASC 805 and common industry practice. He 
+failed to adequately consider the competency and sufficiency of the reserve report as evidence of 
+the fair value of the acquired oil and gas properties.  Vogt also performed limited procedures and 
+failed to sufficiently evaluate the evidentiary value of the asset replacement cost study, including 
+failing to understand the source of the fixed asset values therein and the competency of the report 
+authors.   
+  Failure to Plan and Supervise (AU § 311) 
+55. AU § 311 requires an auditor to adequately plan the work and properly supervise 
+assistants.  AU § 311.01.  In planning the audit, the auditor should consider, among other matters, 
+the entity’s business, the entity’s accounting policies and procedures, and planned assessed level of 
+control risk. AU § 311.03.  A written audit program is required.  AU § 311.05.  Supervision 
+involves directing the efforts of assistants who are involved in accomplishing the objectives of the 
+audit and determining whether those objectives were accomplished.  The extent of supervision 
+appropriate in a given instance depends on many factors, including the complexity of the subject 
+matter and the qualifications of persons performing the work.  AU § 311.11.   
+56. Vogt’s work did not meet this standard.  Vogt’s audit program to test Miller 
+Energy’s fair value assessment of the Alaska acquisition was insufficient.  The planned procedures 
+largely consisted of verifying the credentials of a specialist.  Vogt’s audit program failed to set 
+forth procedures necessary to ensure the appropriateness of using the specialist’s work for the 
+purpose of a fair valuation.  Nor did his audit program provide additional and alternate procedures 
+for the insufficient evidence provided by the work of the specialist.  As to the fixed assets, Vogt’s 
+program was insufficient in that it merely required agreeing the asset balance to the Asset 
+replacement cost study provided by Miller Energy. 
+57. Vogt’s supervision of his staff was also deficient. Vogt spent little time on-site 
+while the field work was conducted, and he knew the staff auditors had insufficient oil and gas 
+industry experience.  It was evident during their respective testimonies that the two staff members 
+assigned by Vogt to the Miller Energy audit, whose experience consisted almost entirely of 
+auditing microcap companies, were ill-prepared to test a transaction purportedly valued in excess 
+of $400 million.  The most junior staff member was not a Certified Public Accountant, did not 
+appear to comprehend basic accounting principles, including elementary aspects of fair value 
+accounting, yet was charged with the testing of the oil and gas properties fair valuation.        
+  Failure to Properly Assess Audit Risk and Materiality in Conducting an Audit (AU § 312) 
+58. AU § 312 states that, when an auditor has concluded that there is a significant risk 
+of material misstatement of the financial statements, the auditor should consider this conclusion in 
+ 
+13 
+ 
+determining the nature, timing, or extent of procedures; assigning staff; or requiring appropriate 
+levels of supervision.  Ordinarily, higher risk requires more experienced personnel or more 
+extensive supervision by the auditor with final responsibility for the engagement during both the 
+planning and the conduct of the engagement.  Higher risk may cause the auditor to expand the 
+extent of procedures applied, apply procedures closer to or as of year-end, particularly in critical 
+audit areas, or modify the nature of procedures to obtain more persuasive evidence. AU § 312.17 
+59. Vogt’s knowledge of the magnitude of the Alaska acquisition, and his knowledge 
+of the inadequacy of Miller Energy’s accounting personnel, including the Company’s CFO, should 
+have resulted in increased scrutiny of Miller Energy’s valuation of the Alaska Assets.  Yet Vogt 
+assigned crucial audit procedures to staff who lacked appropriate industry and auditing experience, 
+and did not sufficiently supervise their work. 
+  Failure to Obtain Sufficient Competent Evidential Matter (AU § 326) 
+60. Under the third standard of field work, sufficient competent evidential matter is to 
+be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable 
+basis for an opinion regarding the financial statements under audit.  AU § 326.01.  Since he over 
+relied on a reserve report and the asset replacement cost study, and took limited to no additional 
+audit steps to test that audit evidence, Vogt failed to obtain sufficient evidence for the fair value of 
+the Alaska acquisition.   
+Failure to Issue an Accurate Audit Report (AU § 508) 
+61. Under AU § 508, an auditor may only express an unqualified opinion on historical 
+financial statements when the auditor has formed such an opinion on the basis of an audit 
+performed in accordance with PCAOB standards.  AU § 508.07.  Based upon the audit failures 
+discussed above, Vogt should not have issued an audit report containing an unqualified opinion on 
+Miller Energy’s fiscal year 2010 financial statements. 
+VIOLATIONS 
+ 
+62. As a result of the conduct described above, Vogt engaged in a single instance of 
+highly unreasonable conduct in circumstances for which heightened scrutiny was warranted within 
+the meaning of Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s 
+Rules of Practice.  Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) provide, in 
+pertinent part, that the Commission may censure or deny, temporarily or permanently, the privilege 
+of appearing or practicing before the Commission to any person who is found by the Commission 
+to have engaged in improper professional conduct.  Section 4C(b) of the Exchange Act and Rule 
+102(e)(1)(iv) define improper professional conduct with respect to persons license to practice as 
+accountants as (1) a single instance of highly unreasonable conduct in circumstances for which 
+heightened scrutiny is warranted; or (2) repeated instances of unreasonable conduct that indicate a 
+lack of competence.   
+ 
+ 
+14 
+ 
+IV. 
+In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
+agreed to in the Respondent’s Offer. 
+Accordingly, it is hereby ORDERED, effective immediately, that: 
+A.  Vogt is denied the privilege of appearing or practicing before the Commission as 
+an accountant. 
+ B. After three years from the date of this Order, Vogt 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 Vogt’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)  Vogt, or the public accounting firm with which he is associated, is 
+registered with the PCAOB in accordance with the Sarbanes-Oxley Act of 2002, and such 
+registration continues to be effective; 
+ 
+   (b)   Vogt, 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 Vogt’s or the firm’s quality control system that would indicate that the 
+respondent will not receive appropriate supervision; 
+ 
+   (c) Vogt 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) Vogt acknowledges his responsibility, as long as Vogt appears or 
+practices before the Commission as an independent accountant, to comply with all requirements 
+of the Commission and the PCAOB, including, but not limited to, all requirements relating to 
+registration, inspections, concurring partner reviews and quality control standards. 
+ 
+ C. The Commission will consider an application by Vogt 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 
+ 
+15 
+ 
+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 Vogt’s character, integrity, 
+professional conduct, or qualifications to appear or practice before the Commission. 
+ 
+By the Commission. 
+ 
+       Brent J. Fields 
+       Secretary 

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@@ -0,0 +1,1092 @@
+UNITED STATES OF AMERICA 
+Before the  
+SECURITIES AND EXCHANGE COMMISSION 
+     
+ 
+SECURITIES ACT OF 1933 
+Release No. 10092 / June 7, 2016  
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 78010 / June 7, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No. 3781 / June 7, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17112 
+ 
+ 
+In the Matter of 
+ 
+FRAZER FROST, LLP; SUSAN 
+WOO, CPA; and MIRANDA SUEN, 
+CPA,  
+ 
+Respondents. 
+: 
+: 
+: 
+: 
+: 
+: 
+: 
+: 
+: 
+: 
+: 
+ORDER MAKING FINDINGS AND 
+IMPOSING REMEDIAL SANCTIONS 
+AND A CEASE-AND-DESIST ORDER 
+PURSUANT TO SECTION 8A OF THE 
+SECURITIES ACT OF 1933 AND 
+SECTIONS 4C AND 21C OF THE 
+SECURITIES EXCHANGE ACT OF 
+1934 AND RULE 102(e) OF THE 
+COMMISSION’S RULES OF 
+PRACTICE 
+ 
+I. 
+ 
+ On February 11, 2016, the Securities and Exchange Commission (“Commission”) 
+instituted administrative and cease-and-desist proceedings against Frazer Frost, LLP (“Frazer 
+Frost”), Susan Woo (“Woo”), and Miranda Suen (“Suen”) (collectively, “Respondents”), pursuant 
+to Section 8A of the Securities Act of 1933 (“Securities Act”), Sections 4C1 and 21C of the 
+Securities Exchange Act of 1934 (“Exchange Act”), and Rule 102(e)2 of the Commission’s Rules 
+of Practice.   
+                                                 
+1 Section 4C of the Exchange Act provides, in relevant part, that:  
+ 
+The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege 
+of appearing or practicing before the Commission in any way, if that person is found . . . (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) of the Commission’s Rule of Practice 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. 
+ 
+ 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 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 Section 8A of the Securities Act 
+and Sections 4C and 21C of the Exchange Act and Rule 102(e) of the Commission’s Rules of 
+Practice (“Order”), as set forth below.  
+ 
+III. 
+ 
+ On the basis of this Order and Respondents’ Offers, the Commission finds3 that:  
+ 
+A. SUMMARY 
+ 
+Frazer Frost, an audit firm, and two of its accountants, engagement partner Woo and 
+manager Suen, engaged in multiple instances of improper professional conduct during their third 
+quarter 2010 review of interim financial information and their 2011 year-end audit of China 
+Valves Technology, Inc. (“CVVT”).  In 2010, CVVT misled investors about its acquisition of 
+Watts Valve (Changsha) Co., Ltd (“Changsha Valve”) and, in 2011, materially overstated 
+income and understated liabilities incurred by another subsidiary, Shanghai Pudong Hanwei 
+Valve Co., Ltd. (“Hanwei Valve”), in its financial statements.  Respondents failed to conduct the 
+review and audit during the time in which these misstatements occurred in accordance with 
+Public Company Accounting Oversight Board (“PCAOB”) auditing standards.  As a result, 
+Respondent Frazer Frost engaged in improper professional conduct as defined in Section 4C of 
+the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice, willfully 
+violated Rules 2-02(b)(1) and 2-06 of Regulation S-X, and willfully violated Rule 102(e)(1)(iii) 
+of the Commission’s Rules of Practice; Respondent Woo engaged in improper professional 
+conduct as defined in Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the 
+Commission’s Rules of Practice and caused Frazer Frost’s violations of Rules 2-02(b)(1) and 2-
+06 of Regulation S-X; and Respondent Suen engaged in improper professional conduct as 
+defined in Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of 
+Practice and caused Frazer Frost’s violation of Rule 2-06 of Regulation S-X. 
+ 
+During Respondents’ review of CVVT’s third quarter 2010 financial statements and 
+before the third quarter Form 10-Q was filed, Respondents received an email from CVVT’s CEO 
+                                                                                                                                                             
+ 
+ Rule 102(e)(1)(iii) of the Commission’s Rules of Practice provides, in pertinent part, that: 
+ 
+The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before 
+it . . . to any person who is found…to have willfully violated, or willfully aided and abetted the violation of 
+any provision of the Federal securities laws or the rules and regulations thereunder. 
+ 
+3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any other 
+person or entity in this or any other proceeding.  
+ 
+ 
+3 
+admitting that certain material information concerning the acquisition of Changsha Valve was 
+misstated or not included in the notes to the financial statements for the first and second quarter 
+Forms 10-Q.  The misstated or omitted information included:  (i) the identity of the seller; (ii) the 
+role of an undisclosed related party in the transaction; (iii) the structure of the acquisition; and 
+(iv) the allocation of assets and liabilities.  After receiving the email, Respondents performed 
+procedures that confirmed that information in the first and second quarter financial statements 
+filed in Forms 10-Q was materially incorrect.  Respondents documented proposed changes to the 
+notes to the financial statements in their work papers.  Respondents, however, failed to take 
+sufficient steps to communicate the inaccuracies and proposed changes to CVVT’s management 
+or its audit committee; and, the third quarter Form 10-Q was issued without correction and 
+repeated the known, material misstatements.   
+ 
+Respondents’ professional misconduct continued during the ensuing 2011 year-end audit 
+of CVVT’s financial statements.  Respondents correctly recognized the need to exercise 
+heightened professional skepticism during that audit.  In fact, they found CVVT’s internal 
+controls to be ineffective and identified critical areas of the audit as high risk, including testing 
+value-added-tax (“VAT”) payments made by CVVT’s subsidiaries.  However, the Respondents 
+failed to follow their audit plan for the Hanwei Valve subsidiary, failing to perform the extended 
+procedures to test $1.7 million in VAT payments purportedly made to a local tax bureau by 
+Hanwei Valve.4   They also failed to replace those procedures with adequate alternatives or to 
+document why those procedures were no longer necessary.  Instead, in contravention of the risks 
+they had identified, Respondents relied solely on information provided by CVVT and, in doing 
+so, failed to obtain sufficient audit evidence.  As a result, Respondents did not learn—unlike 
+CVVT’s two subsequent auditors—that Hanwei Valve had not made the $1.7 million in VAT 
+payments as recorded in CVVT’s books and records and reported in the 2011 financial 
+statements included in Form 10-K.  Respondents’ improper professional conduct resulted in their 
+improper issuance of an audit report with an unqualified opinion as to CVVT’s 2011 financial 
+statements, when in actuality the financial statements materially overstated net income by 6.22% 
+and materially understated tax liabilities by 22.5%. 
+ 
+B. RESPONDENTS 
+ 
+1. Frazer Frost, LLP is a PCAOB-registered accounting firm that maintains two 
+offices in California.  Frazer Frost currently has thirteen partners who provide auditing, 
+consulting and tax services.  Frazer Frost has not issued an audit report for a public company 
+since 2012.  In 2011, Frazer Frost issued only one audit report:  the report containing an 
+unqualified opinion as to CVVT’s 2011 financial statements.  Most of Frazer Frost’s audit clients 
+are companies with operations in the People’s Republic of China (“China”).  In December 2010, 
+the Commission issued a cease-and-desist order that found that Frazer Frost’s predecessor-entity 
+and one of its partners engaged in improper professional conduct in connection with its audits 
+and quarterly reviews of another China-based U.S. issuer.5  Respondent Woo acted as manager 
+for the work at issue in that matter. 
+                                                 
+4 The relevant tax bureau is the Shanghai Pudong Third Tax Office.  For ease of reference, we will refer to it as the 
+Hanwei tax bureau.   
+5 The Commission censured the firm pursuant to Section 8A of the Securities Act and Section 4C of the Exchange 
+Act and sanctioned the involved partner under Rule 102(e).  See In re Moore Stephens Wurth Frazer & Torbet LLP, 
+et al., Ex. Act. Rel. No. 9166 (Dec. 20, 2010).   
+ 
+4 
+ 
+2. Susan Woo, age 53, is a certified public accountant and an engagement partner at 
+Frazer Frost.  Woo has worked at Frazer Frost since 1994, and became the Director of its Asia 
+Services Group in 2002 and a partner in 2006.  She was the engagement partner responsible for 
+the 2010 interim review and 2011 audit of CVVT at issue in this matter.  Woo supervised the 
+Frazer Frost audit staff, reviewed and signed-off on the majority of relevant work papers, was 
+ultimately responsible for the work conducted, and approved the issuance of the 2011 CVVT 
+audit report containing an unqualified opinion on CVVT’s financial statements.   
+ 
+3. Miranda Suen, age 42, is a certified public accountant and has worked at Frazer 
+Frost since 2006.  She became a manager in 2009.  She was the engagement manager responsible 
+for the 2010 interim review and 2011 audit of CVVT at issue in this matter.  Suen was 
+responsible for the day-to-day work conducted for the 2010 interim review and 2011 audit, 
+supervised staff working on each engagement with Woo, and reviewed and signed off on the 
+relevant work papers.     
+ 
+C. RELATED PARTIES 
+ 
+4. China Valves Technology, Inc. is a Nevada corporation with operations solely in 
+China.  CVVT develops and manufactures water flow management products.  CVVT became a 
+U.S. issuer in December 2007 through a reverse merger with Intercontinental Resources, Inc., a 
+Nevada shell corporation.  CVVT’s common stock was listed on the Nasdaq Global Market 
+(NASDAQ) under the symbol “CVVT.”  On September 21, 2012, CVVT filed a Form 25 
+voluntarily withdrawing its securities from listing and registration on NASDAQ.  The 
+Commission revoked the registration of CVVT’s securities on March 4, 2015, pursuant to 
+Section 12(j) for failing to file periodic reports.  On September 29, 2014, the Commission filed 
+an action alleging fraud and other related misconduct against CVVT and three of its officers 
+related to the disclosures concerning the Changsha Valve acquisition and the mischaracterization 
+of $1.7 million in VAT payments.  The company and two of the three officers charged settled 
+that action in May 2015.6 
+ 
+D. FACTS 
+ 
+Respondents Failed to Conduct the 2010 Third Quarter Review of CVVT’s  
+Interim Financial Statements in Accordance with PCAOB Standards 
+ 
+i. CVVT Misstates the Changsha Valve Acquisition 
+ 
+5. In January 2010, CVVT purchased Changsha Valve from Watts Water 
+Technologies, Inc. (“Watts”).  CVVT purchased the subsidiary from Watts through Able Delight, 
+a related-party entity created by CVVT solely to facilitate its purchase of Changsha Valve. 
+ 
+6. On February 8, 2010, CVVT filed a Form 8-K announcing that it had purchased 
+the assets of Changsha Valve from Able Delight “for a cash price of approximately $15 million.”   
+ 
+7. CVVT’s first, second, and third quarter 2010 Forms 10-Q similarly stated that 
+                                                 
+6 See Litigation Release No. 23266 (May 20, 2015).   
+ 
+5 
+CVVT acquired “100% of the assets of Able Delight [(Changsha) Valve Co. Ltd] for a total cash 
+consideration of $15.0 million.  The acquisition was accounted as a business combination in 
+accordance to the terms of the purchase agreement.”  The Forms 10-Q also disclosed that the 
+acquisition included $4,944,755 in inventory, $10,113,703 in buildings and equipment, and zero 
+liabilities. 
+ 
+8. As described below, the Form 8-K and the 2010 Forms 10-Q fundamentally 
+misstated the Changsha Valve transaction concerning:  (i) the identity of the seller; (ii) the true 
+role of Able Delight, an undisclosed related party, in the transaction; (iii) the structure of the 
+acquisition; and (iv) the allocation of assets and liabilities. 
+ 
+ii. Respondents Learn that CVVT’s Disclosures Materially Misstate the Changsha 
+Valve Acquisition 
+ 
+9. On October 7, 2010, more than a month before CVVT filed its third quarter 2010 
+Form 10-Q, Respondent Woo received an email from CVVT’s CEO Jianbao Wang (“Wang”) to 
+an industry analyst (the “Wang Email”). 
+ 
+10. The Wang Email disclosed a number of material facts about the Changsha Valve 
+transaction that were inconsistent with, or had not been included in, CVVT’s prior disclosures. 
+ 
+11. Among other things, the Wang Email stated that: 
+ 
+a. “CVVT Changsha subsidiary was previously a subsidiary of WATTS Water.   
+CVVT made the acquisition through an intermediary Able Delight . . . .” 
+ 
+b. “But the CVVT principles [sic] insisted to be appointed as principles [sic] of Able 
+Delight (Changsha), a subsidiary of Able Delight (Hong Kong) to secure the risk 
+during the transaction.” 
+ 
+c. “Able Delight paid WATTS Regulator 6.11 [million] USD, WATTS Shanghai 8 
+[million] RMB. and WATTS Tianjin 8 [million] RMB respectively. Able Delight 
+has also paid 44691304.28 RMB to clean up the remained debts [sic] and costs 
+such as lawyer cost, 350 employees working years complete ‘bought off’ and 
+suspended sales commission etc.  The total cost is 15 [million] USD.”  
+ 
+d. “This transaction has form of equity transaction . . . .” 
+ 
+12. Respondent Woo forwarded the Wang Email to Respondent Suen and other audit 
+staff shortly after she received it, instructing them to “verify and confirm all the legal documents 
+including the payments made to various entities according to the statements [made by Wang].” 
+ 
+13. Respondents should have exercised heightened professional skepticism after 
+receiving the Wang Email.  
+ 
+14. In its work papers for the third quarter 2010 interim review, Respondents 
+documented that they performed procedures that confirmed the statements in the Wang Email.  
+Accordingly, they concluded in their work papers that:   
+ 
+6 
+ 
+a. Watts was the true seller of Changsha Valve and “because Able Delight is a 
+related party, [Frazer Frost] will ensure that this related party is disclosed in FN” 
+to the 2010 third quarter 10-Q; 
+ 
+b. “Based on the procedures [documented in the work papers], Frazer Frost verified 
+that the Company had paid out $15 [million] to third parties, $6.07 million as 
+acquisition of Changsha, while $8.4 million as payments to settle Changsha’s 
+previous liabilities and $.6 million as legal and due diligent [sic] fees”; 
+ 
+c. The transaction was an equity, not an asset, purchase; and 
+ 
+d. Proposed corrections should be made concerning net assets and liabilities. 
+ 
+iii. Respondents Fail to Take Corrective Action and CVVT’s Third Quarter Form 
+10-Q Repeats the Material Misstatements and Does Not Conform with GAAP  
+ 
+15. Although Respondents verified during their 2010 third quarter review that the 
+information in the Wang Email was correct and that CVVT’s 2010 financial statements included 
+in Forms 10-Q misstated the acquisition, Respondents failed to act in accordance with PCAOB 
+interim review standards and recommend modifications to CVVT’s management or audit 
+committee to make the Form 10-Q conform to Generally Accepted Accounting Principles 
+(“GAAP”). 
+ 
+16. Respondents’ work papers contain no documentation of discussions with CVVT’s 
+management or audit committee concerning the need for modifications to make the Form 10-Q 
+conform to GAAP or any steps taken to address the needed modifications. 
+ 
+17. Respondents Woo and Suen signed off on their review of the notes to the third 
+quarter financial statements, and CVVT’s third quarter Form 10-Q was issued on November 15, 
+2010. 
+ 
+18. Despite the auditors’ awareness of the inaccuracies, CVVT’s third quarter 2010 
+financial statements included in its Form 10-Q repeated the material misstatements from the two 
+previous quarters and did not conform with GAAP.7 
+ 
+iv. Respondents Failed to Act in Accordance with Interim Review Obligations   
+(AU § 722) or Exercise Due Care (AU § 230) 
+ 
+19. PCAOB standards “require”8 that auditors exercise due professional care in 
+                                                 
+7 See ASC 805-10-50, which provides that: “the acquirer shall disclose the following information for each business 
+combination that occurs during the reporting period: a. the name and description of the acquiree; b. the acquisition 
+date; c. the percentage voting equity interests acquired; and d. the primary reasons for the business combination and 
+a description of how the acquirer obtained control of the acquiree.”  Additionally, ASC 805-20-50 states the acquirer 
+shall disclose “the amounts recognized as of the acquisition date for each major class of assets acquired and 
+liabilities assumed.” 
+8 PCAOB Rule 3101 discusses the meaning of certain terms used in the PCAOB standards.  The rule provides the 
+degree of responsibility the PCAOB standards impose on auditors.  The rule states that the words “must,” “shall,” 
+ 
+7 
+performing reviews of interim financial information.  (AU §§ 722.01 and 230.01.)  Due care 
+requires that the auditor exercise professional skepticism, “an attitude that includes a questioning 
+mind and a critical assessment of audit evidence.”  (AU § 230.07.)  When an auditor discovers 
+information that causes it to question the accuracy of prior information in the financials, the 
+auditor should consider what steps should be taken, including discussing the information with the 
+client and preventing reliance on the financials.  (AU §§ 722.46 and 561.04.)  When an 
+accountant becomes aware of misstatements, the accountant should evaluate the information to 
+determine whether material modifications should be made to the interim financial information 
+for it to conform with GAAP, and, when the accountant determines that a material modification 
+should be made, “the accountant should communicate the matter(s) to the appropriate level of 
+management as soon as practicable.”  (AU §§ 722.22, 722.26 and 722.29.)  If management does 
+not respond appropriately within a reasonable period of time, the auditor should communicate 
+the matter to the audit committee (or others with equivalent authority) and, if the audit committee 
+does not appropriately respond, should consider whether to resign.  (AU §§ 722.30 and 722.31.)  
+The communication to the audit committee can be oral or in writing, but, if oral, should be 
+documented.  (AU § 722.30.)  Finally, PCAOB standards require accountants to document any 
+significant findings or issues, such as procedures that indicate that the interim financial 
+statements could be materially misstated, and actions taken to address those findings.  (AU § 
+722.52.) 
+ 
+20. Respondents received information directly from CVVT’s management that made 
+it clear that the company’s disclosures concerning the Changsha Valve acquisition in its first and 
+second quarter 2010 Forms 10-Q were false.  Respondents failed to exercise due professional 
+care and an appropriate level of professional skepticism in evaluating this new information and 
+in considering whether actions were needed to correct the disclosures and prevent future reliance 
+on the inaccurate Forms 10-Q for the first two quarters of 2010. 
+ 
+21. Respondents knew that CVVT’s notes to the third quarter 2010 financial 
+statements materially misstated the Changsha Valve acquisition before they were filed with the 
+Commission.  In fact, Respondents repeatedly noted in the work papers that corrections were 
+needed.  Nevertheless, Respondents failed to raise the inaccuracies with CVVT’s management or 
+CVVT’s audit committee as required by PCAOB standards. 
+ 
+22. Respondents further failed to document, as required by AU §§ 722.30 and 722.52, 
+communications with the audit committee, if any, and what actions, if any, were taken to address 
+their findings that the notes to the 2010 third quarter financial statements were inaccurate or why 
+they deemed it unnecessary to recommend the corrections noted in their work papers.  As a result 
+of these failures, CVVT’s third quarter 2010 Form 10-Q repeated the material misstatements 
+from the two previous quarters about the Changsha Valve acquisition and did not conform to 
+GAAP. 
+  
+                                                                                                                                                             
+and “is required” indicate unconditional responsibilities.  The word “should” indicates responsibilities that are 
+presumptively mandatory.  The phrase “PCAOB standards require” is used herein when discussing both 
+unconditional responsibilities and presumptively mandatory responsibilities.  This is appropriate because under Rule 
+3101(a)(2) the “[f]ailure to discharge a presumptively mandatory responsibility is a violation of the relevant standard 
+and Rule 3100 unless the auditor demonstrates that, in the circumstances, compliance with the specified 
+responsibility was not necessary to achieve the objectives of the standard.” 
+ 
+8 
+ 
+Respondents Failed to Conduct the 2011 CVVT Audit in  
+Accordance with PCAOB Standards and Regulation S-X 
+ 
+i. CVVT’s 2011 Form 10-K Misstated the Hanwei Valve VAT Payments 
+   
+23. Frazer Frost was the independent auditor for the 2011 audit of CVVT’s financial 
+statements for the fiscal year ended September 30, 2011.  On November 18, 2011, Frazer Frost 
+issued an audit report containing an unqualified opinion as to CVVT’s 2011 financial statements. 
+ 
+24. In a November 3, 2011 Form 8-K, CVVT announced that Frazer Frost’s service 
+as CVVT’s independent auditor would terminate at the completion of the 2011 audit.  In that 
+same filing, CVVT announced that it had retained a China-based accounting firm (Successor 
+Auditor A) to serve as the company’s independent auditor starting with the first quarter ended 
+December 31, 2011. 
+ 
+25. In a February 14, 2012 Form 8-K, CVVT disclosed that during the interim review 
+of financial statements for the quarter ended December 31, 2011, Successor Auditor A 
+discovered that the VAT return for CVVT’s Hanwei subsidiary “could not be reconciled to the 
+Company’s financial statements for the fiscal year ended September 30, 2011.”  CVVT further 
+disclosed that, as a result of an initial investigation, management had determined that a 
+restatement was necessary and “that the Company’s unaudited financial statements for the 
+quarters ended March 31, 2011 and June 30, 2011 as well as its audited financial statements for 
+the year ended September 30, 2011, should no longer be relied upon.” 
+ 
+26. In an August 12, 2013 Form 8-K/A, CVVT announced that: 
+ 
+After internal auditing and investigation, management found that 
+Hanwei purchased certain equipment from a third party to perform 
+reverse engineering and improve its products. Since the third party 
+did not provide Hanwei with an invoice or any other written record 
+of the sale and, because Hanwei was concerned that its purchase of 
+the equipment might cause it to become the subject of a challenge 
+with respect to intellectual property rights associated with the 
+equipment, Hanwei’s ma nagement made the determination to 
+account for this purchase transaction as VAT and supplementary 
+tax payments against the VAT payable and paid the third party as 
+such.  
+ 
+CVVT further disclosed that, as a result, approximately $1.7 million in VAT had not been paid 
+in fiscal year 2011 and was misstated in the 2011 Form 10-K. 
+ 
+ 
+ 
+ii. Respondents Identified VAT Payments as High Risk Yet Failed to Perform 
+Planned Extended Procedures Designed to Test Hanwei’s VAT Payments 
+ 
+27. In its 2010 and 2011 audit reports, Frazer Frost concluded that CVVT’s internal 
+ 
+9 
+controls over financial reporting were ineffective and identified material weaknesses and 
+significant deficiencies in critical areas, including CVVT’s control environment and the U.S. 
+GAAP expertise of CVVT accounting staff.  
+ 
+28. Respondents determined that they would exercise heightened skepticism for the 
+2011 audit of CVVT. 
+ 
+29. On October 3, 2011, the PCAOB issued Staff Audit Practice Alert No. 8, Audit 
+Risks in Certain Emerging Markets, which advised auditors of the increased risks of auditing 
+companies in emerging market such as China, including the risk of wrongdoing by company 
+management and the need to independently authenticate management representations (“PCAOB 
+Alert No. 8”).  
+ 
+30. In response to PCAOB Alert No. 8, Respondents’ designed an extended audit 
+approach for the area covering VAT payments. 
+  
+31. The 2011 fiscal year VAT payable for Hanwei Valve exceeded the $1.1 million 
+materiality threshold assessed by Respondents for the audit. 
+ 
+32. Respondents did not conduct internal controls testing for the area covering VAT 
+taxes, and therefore assessed control risk as high for all assertions.   
+  
+33. Accordingly, Respondents’ designed the extended procedure of “go[ing] to the 
+tax authority directly and confirm[ing] amount paid” in order to independently confirm VAT tax 
+paid (the “Tax Authority Procedure”). 
+ 
+34. Respondents determined it was necessary and planned to perform the Tax 
+Authority Procedure in addition to standard tracing procedures that relied solely on information 
+and documents provided to them by CVVT. 
+ 
+35. In addition to the Tax Authority Procedure, Respondent Woo instructed her staff 
+to “observe the VAT and income tax return online using the Company’s IC card,” which could 
+be placed into a computer system residing at the subsidiary to independently observe VAT 
+amounts directly through the tax bureau system, including the amount of VAT paid (the “IC 
+Card Procedure”). 
+ 
+a. Respondents Failed to Conduct the Tax Authority Procedure or Adequate 
+Alternative Extended Procedures 
+ 
+36. Respondents failed to perform the Tax Authority Procedure or adequate 
+alternative extended procedures to meet the audit objective of independently confirming the 
+VAT paid by Hanwei Valve. 
+ 
+37. Respondents’ work papers contain no documentation that Respondents performed 
+or attempted to perform the Tax Authority Procedure or adequate alternative extended 
+procedures to meet the audit objective of independently confirming the VAT paid by Hanwei 
+Valve.   
+ 
+ 
+10 
+38. Respondents’ work papers do not document the basis for their conclusions and 
+opinions regarding why they did not perform the Tax Authority Procedure and what, if any, 
+alternative extended procedures were considered. 
+ 
+39. Respondents observed the VAT payment filings for two other CVVT subsidiaries, 
+Henan Kaifeng High Pressure Valve Co. (“Kaifeng”) and Zhengzhou City ZD Valve Co. Ltd. 
+(“ZD”).  The work papers for Kaifeng and ZD state that Frazer Frost staff went to the tax 
+authorities and “the tax bureau personnel reconciled the numbers on VAT tax filing and the 
+system.  All numbers agreed and then stamped.  [Frazer Frost] observed beginning balance of 
+OCT agreed to the Sep ending balance per VAT tax filing, and the stamp was the same as the 
+stamp [provided by the company].” 
+ 
+40. In its review of CVVT’s interim financial statements for the quarter ended 
+December 31, 2011, Successor Auditor A discovered that Hanwei Valve’s VAT tax return did 
+not reconcile to CVVT’s financial statements.  After that discovery, Successor Auditor A visited 
+the Hanwei tax bureau and verified the correct VAT tax return.   
+ 
+41. In a July 23, 2012 Form 8-K, CVVT announced the resignation of Successor 
+Auditor A as its independent auditor.  In a June 3, 2013 Form 8-K, CVVT announced that it had 
+engaged a U.S.-based accounting firm (“Successor Auditor B”) as the company’s independent 
+auditor.  
+ 
+42. In August 2013, Successor Auditor B also visited the Hanwei tax bureau and 
+verified that Hanwei Valve had paid approximately $44,000, not $1.7 million, in VAT during 
+fiscal year 2011.   
+ 
+iii. Respondents Failed to Conduct the IC Card Procedure or Adequate Alternative 
+Extended Procedures 
+ 
+43. Respondents failed to perform the IC Card Procedure or adequate alternative 
+extended procedures to meet the audit objective of independently verifying the VAT paid by 
+Hanwei Valve. 
+ 
+44. Respondents’ work papers do not document the basis for their conclusions and 
+opinions regarding why they did not perform the IC Card Procedure for Hanwei Valve and what, 
+if any, alternative extended procedures they considered. 
+ 
+45. A China-based accounting firm subsequently hired by CVVT confirmed that 
+Hanwei Valve paid approximately $44,000, and not $1.7 million, in VAT payments to the 
+Hanwei tax bureau during the 2011 fiscal year. 
+  
+ 
+11 
+iv. Respondents Failed to Exercise Due Care (AU § 230), Obtain a Reasonable 
+Basis for Believing that the Financial Statements were Accurate (AU §§ 230 
+and 316 and AS Nos. 8 and 13), Obtain Sufficient Evidential Matter (AS No. 15 
+and AU § 150), and Instead Placed Undue Weight on Management 
+Representations (AU § 333) 
+ 
+46. PCAOB standards require auditors to exercise due professional care when 
+conducting an audit and preparing a report.  (AU § 230.01.)  Under this standard, auditors must 
+maintain an attitude of professional skepticism, which includes “a questioning mind and a critical 
+assessment of audit evidence.”  (AU § 230.07.)  “The auditor neither assumes that management 
+is dishonest nor assumes unquestioning honesty.”  (AU § 230.09.)  “The exercise of due 
+professional care allows the auditor to obtain reasonable assurance about whether the financial 
+statements are free of material misstatement, whether caused by error or fraud . . . . Although not 
+absolute assurance, reasonable assurance is a high level of assurance.”  (AU § 230.10.) 
+ 
+47. Auditors must design and perform audit procedures to obtain reasonable 
+assurance that the financial statements are free of material misstatement due to error or fraud.  
+(AS Nos. 8.3 and 13.3.)  “The necessary extent of a substantive audit procedure depends on the 
+materiality of the account or disclosure, the assessed risk of material misstatement, and the 
+necessary degree of assurance from the procedure.”  (AS No. 13.42.)  “The auditor must plan and 
+perform audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable 
+basis for his or her opinion.”  (AS No. 15.4.)  The higher the assessed risk of material 
+misstatement, the more persuasive audit evidence the auditor should obtain from substantive 
+audit procedures.  (A.S. Nos. 13.37, 13.9, and 15.5.)  In determining the amount of audit 
+evidence needed, the auditor should consider the risk associated with the relevant internal control 
+and the quality (i.e. the relevance and reliability) of the evidence obtained.  (AS Nos. 15.5 and 
+15.6.)  Among other things, “[e]vidence obtained from a knowledgeable source that is 
+independent of the company is more reliable than evidence obtained only from internal company 
+sources.”  (AS No. 15.8.)  When audit evidence is provided by the company, the auditor should 
+evaluate the sufficiency and appropriateness of the evidence 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 No. 15.10.)  
+ 
+48. Auditing standards require that “[s]ufficient appropriate evidential matter is to be 
+obtained through inspection, observation, inquiries, and confirmations to afford a reasonable 
+basis for an opinion regarding the financial statements under audit.”  (AU § 150.02.)  
+Management’s representations should not act as a substitute for auditing procedures necessary to 
+obtain a reasonable basis about the financial statements.  (AU § 333.02.)  Rather, auditors must 
+plan and perform procedures to address the fraud risks and obtain reasonable assurance that the 
+financial statements do not contain material misstatements.  (AU §§ 316.01 and 316.52.)  In 
+doing so, the auditor “should not be satisfied with less-than-persuasive evidence because of a 
+belief that management is honest.”  (AU § 333.03.) 
+ 
+49. Respondents failed to exercise due care and professional skepticism in performing 
+the 2011 year-end audit of Hanwei Valve.  Respondents specifically designed the extended Tax 
+Authority Procedure and IC Card Procedure to account for the risk of material misstatement.  
+Nonetheless, Respondents failed to ensure that the planned procedures were actually performed 
+ 
+12 
+for Hanwei Valve.  
+ 
+50. Respondents failed to ensure that alternative extended procedures to the Tax 
+Authority Procedure or IC Card Procedure were performed to independently verify the VAT 
+payments recorded by Hanwei Valve and obtain a reasonable basis for concluding that the 
+financial statements were free of material misstatements.  Accordingly, Respondents violated the 
+standards of due care and professional skepticism, failed to ensure that appropriate procedures 
+were performed to address the risk of material misstatement, and failed to obtain sufficient audit 
+evidence.   
+ 
+51. Respondents placed undue weight on management’s representations by relying 
+solely on documentation and information provided by CVVT instead of performing the 
+specifically designed extended procedures or adequate alternative extended procedures designed 
+to meet the audit objective of independently confirming the VAT paid by Hanwei Valve. 
+ 
+v. Respondents Failed to Document Procedures or Retain Documents (AS No. 3) 
+and, by doing so, Frazer Frost Violated and Woo and Suen Caused Frazer 
+Frost’s Violation of Rule 2-06 of Regulation S-X 
+ 
+52. PCAOB standards require that auditors document the procedures performed, the 
+evidence obtained, and the conclusions reached.  (AS No. 3.6.)  Notably, “audit documentation 
+must clearly demonstrate that the work was in fact performed,” regardless of whether the work 
+was performed by the engagement team or specialists assisting the auditor.  Id.  Audit 
+documentation must contain information sufficient to allow an auditor with no connection to the 
+work to understand the procedures performed, evidence obtained and conclusions reached and to 
+determine who performed the work, when the work was completed, the person who reviewed the 
+work, and the date of the review.  Id.   
+ 
+53. “Because audit documentation is the written record that provides the support for 
+the representations in the auditor’s report, it should:  a. Demonstrate that the engagement 
+complied with the standards of the PCAOB, b. Support the basis for the auditor’s conclusions 
+concerning every relevant financial statement assertion, and c. Demonstrate that the underlying 
+accounting records agreed or reconciled with the financial statements.”  (AS No. 3.5.)  “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.”  (A.S. No. 3.12).  Significant findings or issues include:  “e. circumstances that 
+cause difficulty in applying auditing procedures” and “f. significant changes in the auditor’s risk 
+assessments, including risks that were not identified previously, and the modifications to audit 
+procedures or additional audit procedures in response to those changes.”  Id. 
+ 
+54. Rule 2-06 of Regulation S-X imposes documentation and retention obligations on 
+accountants.  Rule 2-06 requires that accountants retain certain relevant audit records for a period 
+of seven years, including work papers and other documents that contain conclusions, opinions, 
+analyses, or financial data.  Rule 2-06 also requires documentation of any significant matters 
+considered during the audit.  As noted in the adopting release, “[i]f such work is performed but 
+not documented, the auditor generally would violate [generally accepted auditing standards] or 
+ 
+13 
+new rule 2-06.”9 
+ 
+55. Respondents failed to document the extended procedures, if any, performed to test 
+Hanwei Valve’s VAT payments.   
+ 
+56. Respondents failed to ensure that Frazer Frost staff documented the basis for their 
+conclusions and opinions regarding why the designed extended procedures were not performed, 
+why sufficient alternative extended procedures that achieved the same audit objective were not 
+performed, and how reasonable assurances that the financial statements were free of material 
+misstatements were obtained in the absence of these procedures.   
+ 
+57. Respondents failed to ensure adequate documentation of who performed and 
+reviewed procedures concerning the Hanwei Valve VAT payments and when that work was 
+performed.   
+ 
+58. Respondents also failed to ensure the documentation and retention of documents 
+that contain conclusions, opinions, analyses, and financial data concerning the Hanwei audit as 
+required under Rule 2-06 of Regulation S-X, including: tax bureau vouchers, bank account 
+statements, monthly VAT returns, or any other financial data concerning the VAT purportedly 
+paid by Hanwei. 
+ 
+vi. Respondents Failed to Adequately Supervise Staff (AS No. 10). 
+ 
+59. PCAOB standards require auditors to supervise the audit engagement “so that the 
+work is performed as directed and supports the conclusions reached.”  (AS No. 10.2.)  “[T]he 
+engagement partner is responsible for proper supervision of the work of the engagement team 
+members and for compliance with PCAOB standards.”  (A.S. No. 10.3.)  The engagement 
+partner may obtain assistance from other team members in supervising the audit staff, and such 
+team members are similarly responsible for complying with supervisory standards.  (AS No. 
+10.4.)  The engagement partner and other staff members assisting with supervision should inform 
+staff members of their responsibilities, including, among other things:  (1) the objectives of the 
+procedures, (2) the nature, timing, and extent of the procedures to be performed, and (3) any 
+relevant issues that could affect the performance of the procedures.  (AS No. 10.5.)  In 
+determining the extent of supervision, the engagement partner and staff members assisting with 
+supervision should take into account “the risk of material misstatement; and the knowledge, skill, 
+and ability of each engagement team member.”  (A.S. No. 10.6.)   Additionally, the engagement 
+partner and staff members assisting with supervision should review the work of their team 
+members “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 No. 10.5.)   
+ 
+60. Respondent Woo, as the engagement partner, was responsible for supervising her 
+audit staff and for the conduct of the audit in accordance with PCAOB standards.   
+ 
+61. Respondent Suen, the audit manager, directed the fraud and audit planning 
+                                                 
+9 Final Rule: Retention of Records Relevant to Audits and Reviews, 17 CFR Part 210.   
+ 
+14 
+discussions10 and assisted in supervising the audit staff and reviewing the work performed.   
+ 
+62. Respondents Woo and Suen failed to adequately supervise staff in connection 
+with the audit of Hanwei Valve.  
+ 
+63. Respondent Woo assigned a manager (“Assisting Manager”), who was not 
+originally assigned to the CVVT engagement, to perform field work for Hanwei Valve.  
+Respondent Woo reviewed the Assisting Manager’s work.   
+ 
+64. The Assisting Manager’s involvement in the CVVT engagement began after 
+planning was completed and field work was underway; thus, she was not involved in the initial 
+fraud discussion and audit planning.  The Assisting Manager was not aware of and did not 
+conduct the designed Tax Authority Procedure, IC Card Procedure, or adequate alternative 
+extended procedures to independently verify the VAT paid by Hanwei Valve. 
+ 
+65. A China-based independent contractor assisted Respondents on the 2011 audit 
+(“Independent Contractor”).  The Independent Contractor purportedly performed standard 
+tracing procedures to test Hanwei Valve’s VAT payments, but did not perform the designed Tax 
+Authority Procedure, the IC Card Procedure, or adequate alternative extended procedures to 
+independently verify the VAT paid by Hanwei Valve. 
+ 
+66. Respondent Woo failed to ensure that the Independent Contractor—who was not 
+a licensed U.S. accountant and hired only to perform low-level administrative tasks—performed 
+procedures that were commensurate with her qualifications. 
+ 
+67. Respondent Woo violated her obligations when she failed to adequately inform 
+the Assisting Manager and Independent Contractor of the designed procedures, the extent and 
+objectives of the procedures, and the risks involved in the audit.  In particular, Respondent Woo 
+failed to supervise the Assisting Manager and Independent Contractor when she failed to 
+evaluate whether the designed procedure were performed, that the objectives of the procedures 
+were achieved, and that the results of the work supported the conclusions reached. 
+ 
+68. Although the designed extended procedures or adequate alternative extended 
+procedures to independently confirm the VAT paid by Hanwei Valve were not performed, 
+Respondents Woo and Suen reviewed and signed off on the relevant work papers and provided 
+improper assurance on the 2011 financial statements, which materially misstated the amount of 
+VAT paid. 
+ 
+69. On November 18, 2011, Frazer Frost issued an audit report containing an 
+unqualified opinion as to CVVT’s 2011 financial statements, which materially misstated the 
+VAT payable.  
+ 
+ 
+ 
+                                                 
+10 The engagement partner is responsible for planning the audit and may seek assistance from appropriate 
+engagement team members in fulfilling these responsibilities.  (A.S. No. 9.3.)  Engagement team members who 
+assist the engagement partner with audit planning must also comply with the relevant PCAOB standards governing 
+planning.  Id. 
+ 
+15 
+vii. Frazer Frost Violated Rule 2-02(b)(1) of Regulation S-X and Woo Caused 
+Frazer Frost’s Violation by Issuing an Audit Report Falsely Stating that the 
+Audit Complied with GAAS 
+ 
+70. Rule 2-02(b)(1) of Regulation S-X requires that an auditor’s report state, “whether 
+the audit was made in accordance with generally accepted auditing standards [GAAS].”11         
+17 C.F.R. 210.2-02(b)(1).  An auditor violates Rule 2-02(b)(1) if it issues a report stating that it 
+conducted its audit in accordance with PCAOB standards when it did not.  Frazer Frost’s 2011 
+audit report stated that the firm had conducted the audits in accordance with PCAOB standards.  
+These representations were false, and thus Frazer Frost willfully violated Rule 2-02(b)(1).  Woo, 
+as an engagement partner at Frazer Frost, approved the signing of the firm’s name to the audit 
+report and its issuance for inclusion in the filings with the Commission.  As a result, Woo caused 
+Frazer Frost’s violation of Rule 2-02(b)(1). 
+  
+E. VIOLATIONS 
+ 
+Rule 102(e)(1)(ii) and Section 4C(a)(2) of the Exchange Act 
+ 
+71. As a result of the conduct described above, Respondents engaged in improper 
+professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and Rule 
+102(e)(1)(ii) of the Commission’s Rules of Practice. 
+  
+72. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) provide, in part, that the 
+Commission may censure or deny, temporarily or permanently, the privilege of appearing or 
+practicing before the Commission to any person who is found by the Commission to have 
+engaged in “improper professional conduct.”  In relevant part, Section 4C(b)(2) and Rule 
+102(e)(1)(iv)(B) define “improper professional conduct” as one of two types of negligent 
+conduct:  (1) a single instance of highly unreasonable conduct in circumstances for which 
+heightened scrutiny is warranted; or (2) repeated instances of unreasonable conduct that indicate 
+a lack of competence.   
+ 
+73. As discussed above, Respondents’ failures to conform to applicable professional 
+standards in connection with the 2010 interim review and the 2011 audit of CVVT constitute 
+both repeated instances of unreasonable conduct and single instances of highly unreasonable 
+conduct under circumstances that warranted heightened scrutiny. 
+ 
+Rules 2-02 and 2-06 of Regulation S-X 
+ 
+74. An auditor violates Rule 2-02(b)(1) of Regulation S-X by issuing a report falsely 
+stating that an audit was conducted in accordance with PCAOB standards. As a result of the 
+conduct described above, Respondent Frazer Frost willfully violated and Respondent Woo 
+caused Frazer Frost’s violation of Rule 2-02(b)(1). 
+ 
+75. Rule 2-06 under Regulation S-X provides that for a period of seven years after an 
+accountant concludes an audit or review of an issuer’s financial statements, the accountant shall 
+                                                 
+11 These standards include the auditing standards adopted by the PCAOB following passage of the Sarbanes-Oxley 
+Act of 2002. 
+ 
+16 
+retain records relevant to the audit or review, including work papers and other documents that 
+form the basis of the audit or review, and memoranda, correspondence, communications, other 
+documents and records (including electronic records), which: “(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 auditor or review.”  The rule also requires documentation of any 
+significant matters considered during the audit.   
+ 
+76. Frazer Frost willfully violated Rule 2-06 as a result of its documentation and 
+retention failures, and Woo and Suen caused Frazer Frost’s violation of Rule 2-06. 
+ 
+Rule 102(e)(1)(iii) and Section 4C(a)(3) of the Exchange Act 
+ 
+77. As a result of the conduct described above, Frazer Frost willfully violated certain 
+provisions of the federal securities laws or the rules and regulations thereunder pursuant to 
+Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of 
+Practice. 
+ 
+78. Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s 
+Rules of Practice provide that the Commission may deny the privilege of appearing or practicing 
+before the Commission to any person found “[t]o have willfully violated, or willfully aided and 
+abetted the violation of, any provision of the Federal securities laws or the rules and regulations 
+thereunder.”   
+ 
+79. As a result of the conduct described above, Respondent Frazer Frost willfully 
+violated certain provisions of the federal securities laws or rules and regulations thereunder 
+pursuant to Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s 
+Rules of Practice when it willfully violated Rules 2-02(b)(1) and 2-06 of Regulation S-X. 
+ 
+F. FINDINGS 
+ 
+80. Based on the foregoing, the Commission finds that Respondents engaged in 
+improper professional conduct pursuant to Rule 102(e)(1)(ii) of the Commission’s Rules of 
+Practice and Section 4C(a)(2) of the Exchange Act. 
+ 
+81. Additionally, the Commission finds that Respondent Frazer Frost willfully 
+violated and Respondent Woo caused Frazer Frost’s violation of Rule 2-02(b)(1) under 
+Regulation S-X. 
+ 
+82. Additionally, the Commission finds that Respondent Frazer Frost willfully 
+violated and Woo and Suen caused Frazer Frost’s violations of Rule 2-06 under Regulation S-X. 
+ 
+83. Additionally, the Commission finds that Respondent Frazer Frost willfully 
+violated certain provisions of the federal securities laws or the rules and regulations thereunder 
+pursuant to Rule 102(e)(1)(iii) of the Commission’s Rules of Practice and Section 4C(a)(3) of the 
+Exchange Act. 
+ 
+ 
+ 
+ 
+17 
+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:  
+ 
+ Frazer Frost 
+ 
+A. Frazer Frost shall cease and desist from committing or causing any violations and 
+any future violations of Rules 2-02(b) and Rule 2-06 under Regulation S-X (17 C.F.R. §§ 210.2-
+02(b) and 210.2-06). 
+  
+B. Frazer Frost is denied the privilege of appearing or practicing before the 
+Commission as an accountant. 
+ 
+C. After five years from the date of this order, Frazer Frost, 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 Frazer Frost’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) Frazer Frost is registered with the PCAOB in accordance with the Sarbanes-
+Oxley Act of 2002, and such registration continues to be effective; 
+ 
+(b) 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, has conducted a review of Frazer Frost’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 Frazer Frost’s 
+employees will not receive appropriate supervision. Frazer Frost 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 
+Frazer Frost, or any of its present or former affiliates, directors, officers, 
+employees, or agents acting in their capacity. The agreement will also provide 
+ 
+18 
+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 Frazer Frost, 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) Frazer Frost 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) Frazer Frost acknowledges its responsibility, as long as it appears or practices 
+before the Commission as an independent accountant, to comply with all 
+requirements of the Commission and the PCAOB, including, but not limited 
+to, all requirements relating to, inspections, concurring partner reviews and 
+quality control standards.   
+ 
+3. The Commission will consider an application by Frazer Frost 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.  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 Frazer Frost’s character, integrity, 
+professional conduct, or qualifications to appear or practice before the 
+Commission. 
+ 
+D. Frazer Frost shall, within sixty (60) days of the entry of this Order, pay 
+disgorgement of $50,000, which represents profits gained as a result of the conduct described 
+herein, and prejudgment interest of $6,914.56, to the Securities and Exchange Commission.  If 
+timely payment is not made, additional interest shall accrue pursuant to SEC Rule of Practice 
+600.  
+  
+E. Frazer Frost shall, within sixty (60) days of the entry of this Order, pay a civil 
+money penalty in the amounts 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.  
+ 
+Woo 
+ 
+F. Woo shall cease and desist from committing or causing any violations and any 
+future violations of Rules 2-02(b) and Rule 2-06 under Regulation S-X (17 C.F.R. §§ 210.2-
+02(b) and 210.2-06). 
+ 
+G. Woo is denied the privilege of appearing or practicing before the Commission as 
+an accountant. 
+ 
+ 
+19 
+H. After three years from the date of this order, Woo may request that the 
+Commission consider her reinstatement by submitting an application (attention: Office of the 
+Chief Accountant) to resume appearing or practicing before the Commission as: 
+ 
+1. a preparer or reviewer, or a person responsible for the preparation or review, of 
+any public company’s financial statements that are filed with the Commission.  
+Such an application must satisfy the Commission that Woo’s work in her practice 
+before the Commission will be reviewed either by the independent audit 
+committee of the public company for which she works or in some other 
+acceptable manner, as long as she practices before the Commission in this 
+capacity; and/or 
+ 
+2. an independent accountant.   
+ 
+Such an application must satisfy the Commission that: 
+ 
+(a) Woo, or the public accounting firm with which she is associated, is registered 
+with the PCAOB in accordance with the Sarbanes-Oxley Act of 2002, and 
+such registration continues to be effective; 
+ 
+(b) Woo, or the registered public accounting firm with which she 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 Woo will not receive appropriate 
+supervision; 
+ 
+(c) Woo 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) Woo acknowledges her responsibility, as long as she appears or practices 
+before the Commission as an independent accountant, to comply with all 
+requirements of the Commission and the PCAOB, 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 Woo to resume appearing or 
+practicing before the Commission provided that her state CPA license is current 
+and she has resolved all other disciplinary issues with the applicable state boards 
+of accountancy.  However, if state licensure is dependent on reinstatement by the 
+Commission, the Commission will consider an application on its other merits.  
+The Commission’s review may include consideration of, in addition to the matters 
+referenced above, any other matters relating to Woo’s character, integrity, 
+professional conduct, or qualifications to appear or practice before the 
+Commission. 
+ 
+20 
+ 
+I. Woo shall, within thirty (30) days of the entry of this Order, pay a civil money 
+penalty in the amount of $5,000 to the Securities and Exchange Commission.  If timely payment 
+is not made, interest shall accrue pursuant to 31 U.S.C. § 3717. 
+ 
+Suen 
+ 
+J. Suen shall cease and desist from committing or causing any violations and any 
+future violations of Rule 2-06 under Regulation S-X (17 C.F.R. § 210.2-06). 
+  
+K. Suen is denied the privilege of appearing or practicing before the Commission as 
+an accountant. 
+ 
+L. After one year from the date of this order, Suen may request that the Commission 
+consider her reinstatement by submitting an application (attention: Office of the Chief 
+Accountant) to resume appearing or practicing before the Commission as: 
+ 
+1. a preparer or reviewer, or a person responsible for the preparation or review, of 
+any public company’s financial statements that are filed with the Commission.  
+Such an application must satisfy the Commission that Suen’s work in his practice 
+before the Commission will be reviewed either by the independent audit 
+committee of the public company for which she works or in some other 
+acceptable manner, as long as she practices before the Commission in this 
+capacity; and/or 
+ 
+2. an independent accountant.   
+ 
+Such an application must satisfy the Commission that: 
+ 
+(a) Suen, or the public accounting firm with which she is associated, is registered 
+with the PCAOB in accordance with the Sarbanes-Oxley Act of 2002, and 
+such registration continues to be effective; 
+ 
+(b) Suen, or the registered public accounting firm with which she 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 Suen will not receive appropriate 
+supervision; 
+ 
+(c) Suen 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) Suen acknowledges her responsibility, as long as she appears or practices 
+before the Commission as an independent accountant, to comply with all 
+requirements of the Commission and the PCAOB, including, but not limited 
+to, all requirements relating to registration, inspections, concurring partner 
+reviews and quality control standards. 
+ 
+21 
+ 
+3. The Commission will consider an application by Suen to resume appearing or 
+practicing before the Commission provided that her state CPA license is current 
+and she has resolved all other disciplinary issues with the applicable state boards 
+of accountancy.  However, if state licensure is dependent on reinstatement by the 
+Commission, the Commission will consider an application on its other merits.  
+The Commission’s review may include consideration of, in addition to the matters 
+referenced above, any other matters relating to Suen’s character, integrity, 
+professional conduct, or qualifications to appear or practice before the 
+Commission. 
+ 
+M. Suen shall, within thirty (30) days of the entry of this Order, pay a civil money 
+penalty in the amount of $1,000 to the Securities and Exchange Commission.  If timely payment 
+is not made, interest shall accrue pursuant to 31 U.S.C. § 3717. 
+ 
+Money Payments 
+ 
+N. Money payments ordered in paragraphs D, E, I, and M 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 
+ 
+O. Payments by check or money order must be accompanied by a cover letter 
+identifying Frazer Frost, Woo and Suen as Respondents in these proceedings, and the file 
+number of these proceedings; a copy of the cover letter and check or money order must be sent to 
+Antonia Chion, Associate Director, Division of Enforcement, Securities and Exchange 
+Commission, 100 F Street, N.E., Washington, D.C. 20549-5720B SP2. 
+ 
+Treatment of Penalties Ordered in this Proceeding 
+ 
+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 
+ 
+22 
+agrees that in any Related Investor Action, they shall not argue that they are entitled to, nor shall 
+they benefit by, offset or reduction of any award of compensatory damages by the amount of any 
+part of Respondents’ payment of a civil penalty in this action (“Penalty Offset”).  If the court in 
+any Related Investor Action grants such a Penalty Offset, Respondents agrees that they shall, 
+within 30 days after entry of a final order granting the Penalty Offset, notify the Commission’s 
+counsel in this action and pay the amount of the Penalty Offset to the Securities and Exchange 
+Commission.  Such a payment shall not be deemed an additional civil penalty and shall not be 
+deemed to change the amount of the civil penalty imposed in this proceeding.  For purposes of 
+this paragraph, a “Related Investor Action” means a private damages action brought against 
+Respondents by or on behalf of one or more investors based on substantially the same facts as 
+alleged in the Order instituted by the Commission in this proceeding. 
+ 
+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 Woo and Suen, and further, any debt for disgorgement, prejudgment interest, civil 
+penalty or other amounts due by Woo and Suen 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 Woo and Suen 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 
+ 
+ 
+ 

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+ 
+ UNITED STATES OF AMERICA 
+ Before the 
+ SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 78017 / June 8, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT  
+Release No. 3782 / June 8, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17278 
+ 
+ 
+In the Matter of 
+ 
+IEC ELECTRONICS CORP., 
+RONALD J. YEARS, CPA, 
+and DONALD S. DOODY, 
+ 
+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 cease-
+and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities 
+Exchange Act of 1934 (“Exchange Act”) against IEC Electronics Corp., Ronald J. Years, CPA, 
+and Donald S. Doody (collectively, “Respondents”).   
+  
+     2 
+ 
+ Additionally, the Commission deems it appropriate that administrative proceedings be, and 
+hereby are, instituted pursuant to Section 4C of the Exchange Act1 and Rule 102(e)(1)(iii) of the 
+Commission’s Rules of Practice2 against Years.  
+ 
+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 
+Sections 4C and 21C of the Securities Exchange Act of 1934, and Rule 102(e) of the 
+Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-
+and-Desist Order (“Order”), as set forth below.   
+ 
+III. 
+ 
+ On the basis of this Order and Respondents’ Offers, the Commission finds that:  
+ 
+Summary 
+ 
+ IEC Electronics Corp. (“IEC”) filed false financial statements for Q3 2012, FYE 2012, and 
+Q1 2013 as a result of misconduct that occurred at IEC’s now-former subsidiary, Southern 
+California Braiding, Inc. (“SCB”).  Former SCB controller, Ronald Years, and former IEC 
+executive vice president of operations, Donald Doody, engaged in misconduct relating to SCB’s 
+work-in-process inventory (“WIP”).  Years made false accounting entries into a WIP spreadsheet 
+that Years prepared, and these entries were based in part on amounts provided by Doody to Years 
+that were false.  Years and Doody also kept material in WIP that had already been used and added 
+inventory to WIP that was missing.  Years and Doody engaged in this misconduct to meet SCB’s 
+                                                 
+1 Section 4C provides, in relevant part, that:  
+ 
+ The Commission may censure any person, or deny, temporarily or permanently, to any person the 
+privilege of appearing or practicing before the Commission in any way, if that person is found . . . to have 
+willfully violated, or willfully aided and abetted the violation of, any provision of the securities laws or 
+the rules and regulations thereunder. 
+ 
+2 Rule 102(e)(1)(iii) provides, in pertinent part, that: 
+ 
+ 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 
+budgeted gross profit margins (“GPMs”).  In addition, Years failed to consider the percentage 
+completion of WIP and consequently capitalized too many weeks of labor and overhead costs to 
+WIP.  As a result of Years’ and Doody’s misconduct, IEC materially understated cost of goods 
+sold, and materially overstated gross profit and net income before taxes in its financial statements 
+for Q3 2012 and FYE 2012, and, in the case of Years, Q1 2013.  In Q2 2013, IEC’s then-CFO 
+discovered potential issues with respect to SCB’s WIP, and after IEC determined that the prior 
+accounting was incorrect, it announced the need for a restatement in May 2013 and filed the 
+restatement in July 2013.    
+ 
+Respondents 
+ 
+1. IEC Electronics Corp., (“IEC”) is a Delaware corporation headquartered in 
+Newark, New York.  IEC manufactures, among other things, circuit cards, cable and wire 
+harnesses, and sheet metal components that can withstand harsh environments, such as extreme hot 
+and cold temperatures.  IEC services the medical, aerospace, defense, industrial, and transportation 
+industries.  In February 2015, IEC’s board of directors was replaced with a new board as a result of 
+a proxy contest.  The new board terminated the CEO, and elected a new CEO.  IEC’s common 
+stock is registered with the Commission pursuant to Exchange Act Section 12(b) and is listed on 
+NYSE MKT under ticker symbol IEC.    
+ 
+2. Ronald J. Years, (“Years”) age 52, of La Habra, California, worked for IEC from 
+April 2008 through February 2013.  Years was SCB’s controller from May 2011 through February 
+2013.  Years has been a licensed CPA in Massachusetts since August 2012. 
+ 
+3. Donald S. Doody, (“Doody”) age 49, of Mukilteo, Washington, is the former 
+executive vice president of operations for IEC.  Doody worked in operations for IEC from 2004 
+through January 2014.   
+ 
+Other Relevant Entity 
+ 
+4. Southern California Braiding, Inc., is a Delaware corporation headquartered in 
+Bell Gardens, California.  SCB was an IEC subsidiary from December 2010 to July 2015.  IEC 
+sold SCB in July 2015 to a privately held company.  SCB has never been registered with the 
+Commission in any capacity.   
+  
+     4 
+Facts 
+ 
+A. Background 
+ 
+5. IEC acquired SCB in December 2010.  In May 2011, Years became SCB’s 
+controller.  Years reported to IEC’s then-CFO.  In the summer of 2011, IEC’s then-CEO asked 
+Doody to become involved in SCB’s operations because SCB was not performing financially as 
+IEC’s CEO had expected.  Doody reported directly to IEC’s CEO.   
+ 
+6. SCB mainly manufactured custom cables and wire harnesses for the aerospace 
+and defense industries.  It took SCB on average about six weeks to assemble/manufacture a 
+product for a customer.  SCB’s inventory mainly consisted of raw material and WIP.  WIP 
+consists of the material in production, the labor used to produce the product, and a portion of the 
+factory overhead.  SCB held few finished goods because when a product was complete, it was 
+shipped to the customer.                      
+ 
+7. Prior to IEC acquiring SCB, SCB was a privately held company that operated on 
+a cash basis and lacked an adequate system of internal accounting controls.  Years worked on 
+implementing internal accounting controls over SCB’s inventory.  Years, however, failed to 
+implement an adequate system of internal accounting controls for WIP.  Specifically, Years did 
+not consider the percentage completion of WIP when he calculated how much labor and 
+overhead should be capitalized to WIP at the end of each quarter.  By not considering the 
+percentage completion of WIP, Years capitalized too much labor and overhead to WIP and 
+inappropriately inflated WIP.  This resulted in the overstatement of labor and overhead in WIP 
+and an understatement of cost of goods sold (“COGS”) and an overstatement of gross profit and 
+net income before taxes for Q1 2012 through Q1 2013.3  IEC’s and SCB’s fiscal year is from 
+October 1 through September 30.     
+ 
+8. In addition, at the end of Q3 2012, both Years and Doody started inappropriately 
+inflating WIP.  At the end of Q3 2012 and Q4 2012, Years made false accounting entries that 
+capitalized additional amounts of labor and overhead to WIP, and these entries were based in 
+part on amounts provided by Doody to Years that were false.  At the end of Q4 2012, Years and 
+Doody also kept material in WIP that had already been used and added inventory to WIP that 
+was missing.  Years and Doody engaged in this misconduct to meet SCB’s budgeted GPMs.   
+ 
+9. As a result of their misconduct, Years and Doody overstated WIP and materially 
+understated COGS and materially overstated gross profit and net income before taxes for Q3 
+2012 and FYE 2012, and, in the case of Years, Q1 2013.  Thus, IEC filed a materially false Form 
+10-Q for Q3 2012, Form 10-K for FY 2012, and Form 10-Q for Q1 2013.  IEC also filed 
+multiple materially false Forms 8-K, and IEC’s earnings calls for Q3 2012 through Q1 2013 
+contained materially false information about IEC’s financial results.        
+                                                 
+3 When WIP is overstated on the balance sheet, COGS is understated by the same amount on the income 
+statement.  When COGS is understated, then gross profit and net income are overstated on the income 
+statement.    
+ 
+     5 
+B. Years and Doody Inflated SCB’s WIP  
+ 
+i. Failure to Consider Percentage Completion of WIP 
+ 
+ 10. Years failed to develop a methodology that accurately reflected the value of 
+SCB’s WIP because he failed to consider the percentage completion of WIP.  In addition, Years 
+did not do any testing on WIP to determine the percentage completion.  Thus, Years failed to 
+implement adequate internal accounting controls over WIP, and, and as a result, Years inflated 
+WIP from Q1 2012 through Q1 2013.  In addition, there was lack of adequate internal accounting 
+controls over the review of Years’ work.  The IEC accounting personnel who reviewed Years’ 
+WIP spreadsheet each month failed to see that Years was not considering the percentage 
+completion of WIP.  As a result of the lack of internal accounting controls over WIP, IEC had a 
+material weakness in internal control over financial reporting related to WIP.  IEC stated in its 
+amended Form 10-K for FYE 2012 that it had this material weakness, and it stated in its Form 
+10-Q for Q3 2014 that this material weakness had been remediated.   
+ 
+11. SCB’s inventory mainly consisted of raw materials and WIP (SCB held few 
+finished goods because generally when a product was complete, it was shipped to the customer).  
+SCB’s WIP consisted of material, labor, and overhead.  Although there was a system to track 
+material, SCB never developed a system to track the actual amount of labor and overhead 
+applied to each job in WIP.  As a result, Years had to determine the appropriate amount of labor 
+and overhead to capitalize to WIP each quarter.  From Q2 2011 through Q4 2011, Years 
+capitalized four weeks of labor and overhead to WIP each quarter.  Starting in Q1 2012, Years 
+developed a methodology to calculate labor and overhead capitalized to WIP.  Years’ 
+methodology was captured in a WIP spreadsheet.  Years used this spreadsheet to calculate labor 
+and overhead to be capitalized to WIP on a monthly basis.  Years’ methodology, however, failed 
+to consider the percentage completion of WIP.  From Q1 2012 through Q4 2012, because Years 
+failed to consider the percentage completion of WIP, Years gradually increased the number of 
+weeks that he capitalized labor and overhead to WIP from five weeks to eleven weeks.  By the 
+end of Q1 2013, Years was capitalizing thirteen weeks of labor and overhead to WIP.   
+ 
+12. In each quarter of FY 2012 and Q1 2013, it took SCB on average about six weeks 
+to assemble/manufacture a product, and on average a product in WIP was about 25% complete at 
+each quarter-end.  This meant that on average only one and a half weeks (six weeks multiplied 
+by 25%) of labor and overhead should have been capitalized to WIP at each quarter-end versus 
+the five to thirteen weeks that Years was capitalizing to WIP from Q1 2012 through Q1 2013.  
+Because Years inappropriately capitalized too many weeks of labor and overhead to WIP, WIP 
+was overstated during FY 2012 and for Q1 2013.  
+ 
+13. By at least October 2012, prior to SCB filing its FYE 2012 Form 10-K in 
+November 2012, Years knew, or was reckless in not knowing, that he was capitalizing too many 
+weeks of labor and overhead to WIP for Q4 2012.   
+ 
+     6 
+ii. False Accounting Entries to WIP in Q3 2012 and Q4 2012  
+ 
+14. At quarter-ends Q3 2012 and Q4 2012, WIP was inappropriately inflated through 
+false accounting entries that capitalized additional amounts of labor and overhead to WIP.  Years 
+made these false accounting entries into his WIP spreadsheet by hard coding, i.e. forcing, these 
+amounts into the spreadsheet without any supporting formulas, and these entries were based in part 
+on amounts provided by Doody to Years that were false.  Years and Doody engaged in this 
+misconduct to meet SCB’s budgeted GPMs for Q3 2012 and FYE 2012.  At the end of Q3 2012, 
+the accounting entry capitalized an additional $104,000 of labor and $265,000 of overhead to WIP 
+that should not have been capitalized.  At the end of Q4 2012, the accounting entry capitalized an 
+additional $124,000 of labor and $346,000 of overhead to WIP that should not have been 
+capitalized.  As a result of these entries, inventory was overstated on IEC’s balance sheet, COGS 
+was understated on IEC’s income statement, and gross profit and net income before taxes were 
+overstated on IEC’s income statement for Q3 2012 and FYE 2012. 
+ 
+15. As part of IEC’s FYE 2012 audit, IEC’s auditors asked Years about the $124,000 of 
+labor and the $346,000 of overhead added to WIP for Q4 2012.  Years emailed Doody and told 
+him that the auditors were asking about the $124,000 of labor and the $346,000 of overhead that 
+“doesn’t have backup.”  Years attached to his email a spreadsheet that he created as support for the 
+false accounting entry.  He asked Doody if Doody had additional information that Years could use 
+to support a percentage number in his spreadsheet.  Years also said, “Going forward we all realize 
+we have to do something with this and the other material in WIP.  I will come up with a way to 
+make it less visible in the future, but I have to get past this for now.  Thanks for the input.  Last 
+thing I have to do… I hope.”  Doody responded to Years by telling him where he could find 
+additional information for the percentage number.  Years gathered this additional information and 
+sent it and the spreadsheet to the auditors as support for the false accounting entry.     
+ 
+iii. Keeping Material in WIP That Already Had Been Used 
+ 
+16. In Q4 2012, Years and Doody inappropriately inflated WIP on SCB’s balance sheet 
+by keeping material in WIP that already had been used for a SCB customer on two job orders.  
+Years kept this material in WIP by not recognizing enough COGS material related to these two job 
+orders on SCB’s income statement during FY 2012 and Q1 2013.  As a result of keeping this 
+material in WIP, inventory was overstated on IEC’s balance sheet, COGS was understated on 
+IEC’s income statement, and gross profit and net income before taxes were overstated on IEC’s 
+income statement during FY 2012 and Q1 2013. 
+ 
+17. By late August 2012, following a physical inventory count, Years knew, or was 
+reckless in not knowing, that at least $312,724 of material related to these two job orders for this 
+customer had already been used and no longer existed in inventory.  Years told Doody that this 
+$312,724 of material was missing from inventory.  Doody believed that Years was going to write-
+off this missing material from SCB’s balance sheet.  Years, however, did not write-off this 
+material, and by the end of Q4 2012, the balance grew to $395,138.  In mid and late October 2012, 
+prior to IEC filing its Form 10-K for FYE 2012, Years sent Doody emails reminding Doody that 
+this inventory was still in WIP at the end of Q4 2012 and “shouldn’t be there.”   
+     7 
+18. As part of IEC’s FYE 2012 audit, IEC’s auditors asked Years about this $395,138 
+of material in WIP.  Years did not tell the auditors that the $395,138 of material had already been 
+used on jobs shipped to a customer and that this material no longer existed in inventory.  Instead, 
+Years, among other things, falsely told the auditors that SCB had not yet shipped these job orders 
+to the customer.  Years had emailed Doody and told Doody that the auditors had asked about the 
+$395,138 of material still in WIP, and Years also told Doody what he planned to tell the auditors.  
+Even though Doody knew, or was reckless in not knowing, that this material was missing from 
+inventory and had not been written-off, Doody did not respond to Years and failed to take 
+corrective action.   
+ 
+19. By the end of Q1 2013, the balance of this material grew to $422,132 because no 
+COGS for this material had been recognized by Years.   
+ 
+iv. Adding Missing Finished Goods Inventory to WIP 
+ 
+20. Lastly, in Q4 2012, Years and Doody inflated WIP by adding $116,227 of missing 
+finished goods inventory (acquired during IEC’s acquisition of SCB) to WIP.  As a result of adding 
+this missing finished goods inventory to WIP, inventory was overstated on IEC’s balance sheet, 
+COGS was understated on IEC’s income statement, and gross profit and net income before taxes 
+were overstated on IEC’s income statement at FYE 2012.   
+ 
+21. By late August 2012, following a physical inventory count, Years and Doody knew, 
+or were reckless in not knowing, that this finished goods inventory was missing.  In the beginning 
+of October 2012, Years emailed Doody seeking direction on what Years should do with the 
+$116,227 of missing finished goods, writing, “Should go to [Cost of Goods Sold], or can go to 
+WIP…”  Doody responded, “…my sense is WIP for now…”  Years then moved the inventory 
+from finished goods inventory to WIP in the general ledger.  In mid and late October 2012, prior to 
+IEC filing its Form 10-K for FYE 2012, Years sent Doody emails reminding Doody that this 
+missing finished goods inventory (as well as the $395,128 of already used inventory) was still in 
+WIP at the end of Q4 2012 and “shouldn’t be there.”   
+ 
+22. Years sent the auditors a spreadsheet that showed that Years was writing-off the 
+$116,227 of finished goods inventory.  Years, however, did not write-off the $116,227 and instead 
+moved the $116,227 into WIP.  Years emailed Doody, informing him that the auditors had asked 
+about the $395,138 of missing customer material (discussed above), and added that “[The auditors] 
+haven’t seen the $116k of [finished goods] transferred into WIP.”  Doody did not respond to Years 
+and failed to take corrective action.    
+ 
+C. IEC Restated its FY 2012 and Q1 2013 Financial Statements  
+ 
+23. IEC restated its Q1 through Q3 2012, FYE 2012, and Q1 2013 financial 
+statements because SCB overstated WIP, gross profit, and net income, and understated COGS.  
+In May 2013, IEC filed a Form 8-K that announced the restatement of its financials and provided 
+the restated net income amounts for Q1 through Q3 2012, FYE 2012, and Q1 2013.  In July 
+2013, IEC filed an amended Form 10-K for FYE 2012 and a Form 10-Q for Q1 2013.  IEC 
+     8 
+included its Q1 2012 through Q3 2012 restated financial statements in its amended Form 10-K 
+for FYE 2012. 
+ 
+24. The table below summarizes the impact of the misstatement on IEC’s net income 
+before taxes from Q1 2012 through Q1 2013.4  The overstatement of SCB’s WIP was material to 
+IEC’s net income before taxes for Q3 2012, FYE 2012, and Q1 2013.   
+ 
+Period End Net Income Before Taxes  
+– Originally Reported 
+Net Income Before Taxes  
+–  Restated5 
+$ Difference % Difference  
+of Restated 
+Q1 2012 $1,503,157  $1,460,017  $43,140  (3%) 
+Q2 2012 $4,136,520  $3,962,678  $173,842  (4%) 
+Q3 2012 $3,452,045  $2,888,635  $563,410  (20%) 
+Q4 2012 $2,921,742  $2,180,500  $741,242  (34%) 
+FYE 2012 $12,013,436  $10,491,801  $1,521,635  (15%) 
+Q1 2013 $378,990  ($160,070) $539,060  Profit to loss 
+FYE 2012 +  
+Q1 2013 
+  $2,060,695  
+ 
+25. IEC’s FYE 2012 net income before taxes was overstated by $1,521,635, of which 
+$924,991, 6 or 61%, was the result of both Years and Doody inappropriately inflating WIP in 
+Q3 2012 and Q4 2012.  The remainder of IEC’s overstated income in FYE 2012 was mainly 
+from Years failing to consider the percentage completion of WIP and thus, capitalizing too many 
+weeks of labor and overhead to WIP from Q1 2012 through Q4 2012.   
+ 
+26. IEC’s Q1 2013 net income before taxes was overstated by $539,060, the majority 
+of which was from Years failing to consider the percentage completion of WIP.  The $539,060 
+overstatement in Q1 2013 took IEC’s net income before taxes from a profit to a loss for that 
+quarter.   
+ 
+                                                 
+4 The restated net income before taxes amounts in this table for Q1 2012, Q4 2012, and FYE 2012 are 
+different than the restated amounts reported by IEC for two reasons.  First, for FY 2011, WIP was 
+overstated by $245,328.  Because this amount was not material to IEC’s FY 2011 financial statements, 
+IEC included this overstatement in its Q1 2012 restated net income before taxes; this $245,328 
+overstatement is not included in the table above because the amount related to FY 2011.  Second, during 
+the restatement process, IEC did not discover the $116,227 of missing finished goods inventory that 
+Years and Doody moved to WIP.  As a result, IEC did not deduct the $116,227 from IEC’s Q4 2012 
+restated net income before taxes.  
+ 
+5 For Q1 2012 through Q1 2013, the restated figures also include small amounts of additional material 
+that IEC wrote-off from WIP and deducted from net income before taxes.  For FYE 2012 and Q1 2013, 
+IEC wrote-off additional material of $70,408 and $74,068, respectively.  
+ 
+6 The total $924,991 is arrived at by adding the Q4 2012 false accounting entry of $124,000 of labor and 
+$346,000 of overhead, plus the $395,138 of material that had already been shipped and no longer existed 
+in WIP but was still held in WIP (less an inventory reserve of $56,374), plus the $116,227 of missing 
+finished goods inventory that was moved to WIP. 
+ 
+     9 
+27. As a result, IEC filed a materially false Form 10-Q for Q3 2012, Form 10-K for 
+FY 2012, and Form 10-Q for Q1 2013.  IEC also filed multiple false Forms 8-K for Q3 2012 
+through Q1 2013.7  In addition, IEC’s earnings calls for Q3 2012, Q4 2012 / FYE 2012, and Q1 
+2013 contained false information about IEC’s financial results, including its net income.   
+ 
+D. Later Developments at IEC 
+ 
+28. Both Years and Doody no longer work for IEC.  Years left IEC in February 2013, 
+and Doody voluntarily left in January 2014.  IEC is also under new management, including a new 
+CEO and new Board of Directors, as a result of activist shareholders waging a proxy battle in early 
+2015.  In addition, IEC no longer owns SCB; IEC sold SCB in July 2015 to a privately held 
+company. 
+ 
+Violations 
+ 
+29. As a result of the conduct described above, IEC and Doody violated, and Years 
+willfully violated, Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder, and 
+IEC violated, Years willfully aided and abetted and caused IEC’s violations of, and Doody caused 
+IEC’s violations of, Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, which 
+prohibit fraudulent conduct in connection with the purchase or sale of securities. 
+ 
+ 30. As a result of the conduct described above, IEC violated, Years willfully aided and 
+abetted and caused IEC’s violations of, and Doody caused IEC’s violations of, Section 13(a) of the 
+Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, which requires an issuer to 
+file with the Commission accurate annual, current, and quarterly reports. 
+ 
+31. As a result of the conduct described above, IEC violated, Years willfully aided and 
+abetted and caused IEC’s violations of, and Doody caused IEC’s violations of, Section 13(b)(2)(A) 
+of the Exchange Act, which requires an issuer to make and keep books, records, and accounts, 
+which in reasonable detail, accurately and fairly reflect the transactions and dispositions of the 
+assets of the issuer.      
+ 
+32. As a result of the conduct described above, IEC violated, and Years willfully aided 
+and abetted and caused IEC’s violations of, Section 13(b)(2)(B), which requires an issuer to devise 
+and maintain an adequate system of internal accounting controls.   
+ 
+33. As a result of the conduct described above, Years willfully violated, and Doody 
+violated, Section 13(b)(5) of the Exchange Act, which prohibits any person from knowingly 
+circumventing or knowingly failing to implement a system of internal accounting controls or 
+knowingly falsifying any book, record, or account of an issuer.    
+ 
+                                                 
+7 Form 8-K, Q3 2012 Earnings Release 7/31/12; Form 8-K, Q4 2012 / FYE 2012 Earnings Release 
+11/20/12; Form 8-K, Presentation - Noble Financial Conference 1/22/13; Form 8-K, Presentation - Annual 
+IEC Shareholders Meeting 1/30/13; Form 8-K, Q1 2013 Earnings Release 2/5/13.      
+ 
+     10 
+34. As a result of the conduct described above, Years willfully violated, and Doody 
+violated, Rule 13b2-1 of the Exchange Act, which prohibits any person from, directly or indirectly, 
+falsifying or causing to be falsified, any book, record, or account that the Exchange Act requires an 
+issuer to maintain. 
+ 
+35. As a result of the conduct described above, Years willfully violated, and Doody 
+violated, Rule 13b2-2 of the Exchange Act, which prohibits a director or officer of an issuer, or any 
+other person acting under the direction thereof, directly or indirectly, from making or causing to be 
+made, a materially false or misleading statement or omission to an accountant in connection with a 
+required audit or the preparation or filing of a required document or report. 
+ 
+IV. 
+ 
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
+agreed to in Respondents’ Offers. 
+ 
+ Accordingly, it is hereby ORDERED that: 
+ 
+ A. Pursuant to Section 21C of the Exchange Act, IEC cease and desist from 
+committing or causing any violations and any future violations of Sections 10(b), 13(a), 
+13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 
+13a-13 thereunder. 
+ 
+B. Pursuant to Section 21C of the Exchange Act, Years cease and desist from 
+committing or causing any violations and any future violations of Sections 10(b), 13(a), 
+13(b)(2)(A), 13(b)(2)(B), 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, 
+13a-13, 13b2-1, and 13b2-2 thereunder. 
+ 
+C. Pursuant to Section 21C of the Exchange Act, Doody 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)(5)  of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 
+13b2-1, and 13b2-2 thereunder.  
+ 
+D. Years is denied the privilege of appearing or practicing before the Commission as 
+an accountant.   
+ 
+E. Doody is prohibited for a period of five (5) years from the date of the Order from 
+acting as an officer or director of any issuer that has a class of securities registered pursuant to 
+Section 12 of the Exchange Act, or that is required to file reports pursuant to Section 15(d) of the 
+Exchange Act. 
+ 
+F.  IEC shall, within 10 days of the entry of this Order, pay a civil money penalty of 
+$200,000 to the Securities and Exchange Commission for transfer to the general fund of the United 
+States Treasury, subject to Exchange Act Section 21F(g)(3).  If timely payment of the civil money 
+penalty is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. 
+     11 
+ 
+G. Years shall pay a civil money penalty of $40,000 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) $30,000 within 10 
+days of the entry of this Order; (2) $2,500 within 90 days of entry of this Order; (3) $2,500 within 
+180 days of entry of this Order; (4) $2,500 within 270 days of entry of this Order; and (5) $2,500 
+within 360 days 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 the civil money penalty, plus any 
+additional interest accrued pursuant to 31 U.S.C. § 3717, shall be due and payable immediately, 
+without further application.   
+ 
+H.  Doody shall pay disgorgement of $26,368, prejudgment interest of $2,836.48, and a 
+civil money penalty 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).  Payment 
+shall be made in the following installments:  (1) $29,204.48 within 10 days of the entry of this 
+Order; (2) $12,500 within 90 days of entry of this Order; and (3) $12,500 within 180 days 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 disgorgement, prejudgment interest, and the civil money penalty, plus 
+any additional interest accrued pursuant to SEC Rule of Practice 600 and 31 U.S.C. § 3717, shall 
+be due and payable immediately, without further application.   
+ 
+I. All payments required by this Order must be made in one of the following ways:   
+ 
+(1) Respondents may transmit payment electronically to the Commission, 
+which will provide detailed ACH transfer/Fedwire instructions upon 
+request;  
+ 
+(2) Respondents may make direct payment from a bank account via Pay.gov 
+through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or  
+ 
+(3) Respondents may pay by certified check, bank cashier’s check, or United 
+States postal money order, made payable to the Securities and Exchange 
+Commission and hand-delivered or mailed to: 
+ 
+Enterprise Services Center 
+Accounts Receivable Branch 
+HQ Bldg., Room 181, AMZ-341 
+6500 South MacArthur Boulevard 
+Oklahoma City, OK 73169 
+ 
+Payments by check or money order must be accompanied by a cover letter 
+identifying Respondent as a Respondent in these proceedings, and the file number of these 
+proceedings; a copy of the cover letter and check or money order must be sent to Victoria A. 
+Levin, Assistant Regional Director, Division of Enforcement, Securities and Exchange 
+     12 
+Commission, Los Angeles Regional Office, 444 South Flower Street, Suite 900, Los Angeles, 
+California 90071.   
+ 
+ J. 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 Years and Doody, and further, any debt for disgorgement, prejudgment interest, civil 
+penalty or other amounts due by Respondents Years and Doody 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 Years and Doody 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 
+ 

raw/aaer/2016/AAER-3783.txt

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+ 
+ 
+ 
+UNITED STATES OF AMERICA  
+Before the  
+SECURITIES AND EXCHANGE COMMISSION  
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No.  78030 / June 10, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No.  3783 /June 10, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17283 
+ 
+ 
+In the Matter of 
+ 
+ICON CAPITAL LLC f/k/a 
+ICON CAPITAL 
+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 ICON Capital LLC, formerly known as ICON 
+Capital Corporation (“Icon” or “Respondent”).   
+II. 
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
+of Settlement (“Offer”) which the Commission has determined to accept.  Solely for the purpose of 
+these proceedings and any other proceedings brought by or on behalf of the Commission, or to 
+which the Commission is a party, and without admitting or denying the findings herein, except as 
+to the Commission’s jurisdiction over 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:  
+RESPONDENT 
+1. Icon is an unregistered investment manager organized as a limited liability 
+company (“LLC”) under the laws of Delaware and based in New York, New York.  Today Icon is 
+wholly owned by ICON Investment Group, LLC, a closely held corporation.  During the relevant 
+period, Icon’s primary activity was the development, marketing, sponsorship and investment 
+management of a series of equipment leasing funds (“Icon Leasing Funds” or “Leasing Funds”), 
+which have registered their securities offerings pursuant to the Securities Act of 1933 and whose 
+securities are registered under Section 12(g) of the Exchange Act.  Each Icon Leasing Fund was 
+organized as a separate entity and was subject to the periodic reporting obligations of Section 13 of 
+the Exchange Act and related rules.  The Leasing Fund interests are not publicly traded. 
+RELEVANT FUND ENTITIES 
+2. The Leasing Funds relevant to this proceeding are Icon Income Fund Nine, LLC 
+(“Fund 9”), Icon Income Fund Ten, LLC (“Fund 10”), Icon Leasing Fund Eleven, LLC (“Fund 
+11”), and Icon Leasing Fund Twelve, LLC (“Fund 12”), which were formed by Icon as Delaware 
+LLCs between 2001 and 2007.  Each of the four Leasing Funds had a principal place of business in 
+New York, New York and filed periodic reports pursuant to Section 13 of the Exchange Act.  
+Funds 9, 10, 11 and 12 held portfolios that included, among other things, tankers and container 
+vessels, aircraft, auto and refrigeration equipment, rail support construction equipment, and 
+telecommunications assets.  During the period at issue here, reported fund assets ranged up to $621 
+million (Fund 12), with reported annual net income ranging from a profit of $13 million (Fund 12) 
+to a loss of $45 million (Fund 11), on reported annual revenues of up to $103 million (Fund 11). 
+FACTS 
+Overview 
+3. Over a number of years, Icon made accounting errors that resulted in material 
+inaccuracies in periodic reports filed by the four Icon Leasing Funds identified above.  Due to 
+inadequate internal accounting controls and the misapplication of Generally Accepted Accounting 
+Principles (“GAAP”) in certain instances, Icon did not report accurately financial results, and had 
+inaccuracies in books and records, for these four Leasing Funds from 2009 through 2012.  Icon’s 
+accounting errors resulted in, among other things, one or more of the relevant Leasing Funds not 
+taking certain required asset value impairments, overstating post-impairment values or overstating 
+residual values in multiple reporting periods.  As a result, there were material inaccuracies in 
+financial statements for the relevant Leasing Funds for annual and interim periods from 2009 
+through 2011, and some of these inaccurate financial results also appeared in the relevant Leasing 
+                                              
+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 
+Funds’ periodic reports for 2012.  Icon’s errors resulted in overstatements of net income (or 
+understatements of net loss) and overstated asset and Leasing Fund members’ equity values in the 
+amounts set forth herein.  As detailed below, Icon was therefore a cause of violations of Sections 
+13(a), 13(b)(2)(A), and 13(b)(2)(B)  of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 
+thereunder by the relevant Leasing Funds.2 
+Background 
+4. Icon markets each Leasing Fund to investors at the Leasing Fund’s inception 
+through various broker-dealers, acquires and manages the Leasing Fund’s assets, and then winds 
+down the Leasing Fund after a set period of time.  By design, the Leasing Funds have limited life 
+spans, beginning with an offering period, followed by an operational period and then a liquidation 
+period.  Each Leasing Fund sells interests to investors only during that Leasing Fund’s initial 
+offering period, and the Leasing Fund interests are not traded thereafter in a secondary trading 
+market, public or private.  By contract, the ability of Leasing Fund investors to sell, transfer or 
+redeem their interests during the operational and liquidation periods was limited, and all such 
+actions were subject to Icon’s approval.  Each Leasing Fund typically begins filing its periodic 
+reports after its registration statement is declared effective by the SEC (as the Leasing Funds at 
+issue here did).  Icon performs all of the accounting functions for each Leasing Fund, including the 
+preparation of each Leasing Fund’s financial statements and periodic reports. 
+5. During the relevant period, one of Icon’s primary investment strategies for a 
+number of the Leasing Funds, including the four Leasing Funds at issue in this proceeding, was to 
+purchase shipping vessels and lease the vessels to commercial shipping companies.  The Leasing 
+Funds collected the rental income, as well as the sale or other proceeds from the disposal of the 
+vessels and other Leasing Fund assets.  Icon, in turn, received management and acquisition fees 
+from each Leasing Fund, calculated on the basis of rental payments received by the Leasing Fund 
+and acquisition prices of assets.  Icon waived some or all of the management and acquisition fees 
+and expense reimbursement payments due from three of the four Leasing Funds at issue during the 
+relevant period. 
+                                              
+2  Section 13(a) of the Exchange Act requires issuers whose securities are registered with 
+the Commission under the Exchange Act to file periodic reports with the Commission containing 
+such information as the Commission prescribes by rule, and the information contained in such 
+reports is required to be complete and accurate.  Exchange Act Rule 13a-1 requires registrants to 
+file annual reports on Form 10-K, and Rule 13a-13 requires issuers to file quarterly reports on 
+Form 10-Q.  Rule 12b-20 provides that these reports must contain, in addition to disclosures 
+expressly required by the pertinent statutes and rules, such other information as is necessary to 
+ensure that the statements made in the report are not, under the circumstances, materially 
+misleading.  Section 13(b)(2)(A) requires registrants to make and keep books, records and 
+accounts which, in reasonable detail, accurately and fairly reflect transactions and dispositions of 
+assets.  Section 13(b)(2)(B) requires registrants 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. 
+ 4 
+6. The values of the shipping and other assets owned by the Leasing Funds, including 
+each of the vessels described below, were recorded on each Leasing Fund’s books at cost, net of 
+accumulated depreciation.  This value was referred to as the assets’ “carrying value” or “net book 
+value.”  Icon personnel were responsible for regularly reviewing carrying values and determining 
+whether those values were recoverable from (i.e. were equaled or exceeded by) estimated future 
+cash flows from the asset.  Under GAAP, Icon was required to perform such a “recoverability test” 
+on each asset any time there was an “indicator of impairment,” such as an appraisal below book 
+value or the renegotiation of lease terms.  ASC 360-10-35-21.  If the carrying value is estimated not 
+to be recoverable, GAAP requires that an impairment loss be recorded, measured as the difference 
+between the asset’s carrying value and its fair value, with the fair value recorded as the new 
+carrying value.  ASC 360-10-35-17.  Under GAAP, fair value is defined as the “price that would be 
+received to sell an asset or paid to transfer a liability in an orderly transaction between market 
+participants at the measurement date.”  ASC 820-10-20.  Under GAAP, Icon was also required to 
+evaluate the “residual” values of the Leasing Funds’ assets (i.e. an estimate of the remaining sale or 
+scrap values at the end of a vessel’s life) and adjust residual values when necessary.  ASC 360-10-
+35-22. 
+7. In early 2009, the drastic downturn in the world economy following the global 
+financial crisis and other economic factors resulted in a significant drop in shipping lease rates and 
+vessel sale prices.  Although shipping lease rates and vessel sale prices were historically volatile, 
+often with significant swings in both directions within relatively short periods of time, the steep 
+downturn in the market triggered by the financial crisis did not follow historical patterns and 
+continued unabated for years.  The daily lease rates, known as “spot market rates,” did not return to 
+even the lower end of the typical range of pre-2009 levels until the end of 2014 and stayed well 
+below recent historic lows throughout most of this period.  In response to the depressed market, 
+and after discussions with the Leasing Funds’ outside auditor, Icon adopted a methodology known 
+as the Hamburg Ship Evaluation Standard (“Hamburg Method”) for certain accounting purposes in 
+2009. 
+8. The Hamburg Method was developed by members of the shipping industry in early 
+2009 and relies on ten-year historical average prices to estimate future lease rates and scrap values.  
+The average prices used for the Hamburg Method are based on industry-wide averages provided by 
+an independent research resource and adjusted both for the type and age of the specific vessel in 
+question and for the costs and expenses associated with leasing those vessels.  In addition to using 
+those averages, the Hamburg Method uses historical ten-year averages of bond and equity 
+premium rates in arriving at the rate at which to discount estimated future cash flows.   
+9. As detailed below, Icon’s reliance on the Hamburg Method to make fair value 
+determinations in situations where it possessed relevant contemporaneous market data contravened 
+GAAP and, along with other accounting errors and internal accounting control lapses, resulted in 
+Icon's not taking certain necessary impairments, overstating post-impairment values and 
+overstating residual values, causing numerous material inaccuracies in the publicly filed financial 
+statements and periodic reports for Funds 9, 10, 11 and 12 from 2009 through 2012.  During this 
+period, Icon also omitted certain disclosures required under GAAP relating to certain of the 
+Leasing Funds’ residual values and made inaccurate disclosures related to the methodology used 
+for the Leasing Funds’ equity valuation mandated under ERISA. 
+ 5 
+Improper Impairment of the Mayon and Samar Vessels 
+10. Icon erred by not taking an impairment charge with respect to two vessels owned 
+and leased out by Funds 9, 10 and 12 (the Mayon and Samar) at the end of the Leasing Funds’ 
+2010 fiscal year and then failing to take the appropriate impairment for both vessels in the first 
+quarter of 2011.  As a result, the recorded values of the Mayon and the Samar was overstated on 
+the books and records of these three Leasing Funds starting as of December 31, 2010, which led to 
+inaccuracies in periodic reports subsequently filed by the three Leasing Funds. 
+Non-Impairment of the Vessels at Year End 2010 
+11. The Mayon and the Samar were both scheduled to come off lease in July 2011.  In 
+November 2010, Icon received appraisals that indicated that the fair market value of each of the 
+two vessels, on a “charter free” basis (i.e. calculating fair market value in the absence of whatever 
+income-generating lease was actually in place), was $9.86 million at the time of the appraisal and 
+$8 million as of July 2011, when the current lease was to end.  These amounts were well below the 
+carrying value of $31.2 million for each vessel and, as such, were an indicator of impairment under 
+GAAP.  Icon then conducted a recoverability analysis using assumptions of future rental income 
+that were based on the Hamburg Method and determined that the Mayon and the Samar did not 
+need to be impaired.  However, Icon’s assumptions and methodology were erroneous in at least 
+two respects. 
+12. First, Icon’s assumptions about future cash flow in conducting its recoverability 
+analysis were based on the Hamburg Method’s ten-year historical average, which was inconsistent 
+with future lease rates Icon anticipated it may actually be able to obtain for the two vessels in 2011.  
+In conducting its recoverability analysis, Icon relied on the Hamburg Method’s ten-year historical 
+average lease rate in assuming that it would be able to re-lease the Mayon and the Samar in July 
+2011 for three years at a daily rate of $11,267 and used that rate in its future cash flow analysis.  
+However, Icon’s own internal documentation and contemporaneous market communications with 
+third parties (from January 2011 through the filing of the relevant Leasing Funds’ Forms 10-Ks in 
+March 2011) regarding prevailing lease rates and the remarketing of the vessels show that Icon 
+expected that a $3,000/day lease rate for a three year lease was more likely when the vessels came 
+off lease in July 2011. 
+13. Under these circumstances, GAAP required that future cash flow estimates used to 
+test the recoverability of a long-term asset value incorporate the company’s own assumptions about 
+its use of the asset, consider all available evidence, and be reasonable in relation to the cash flow 
+assumptions used for other corporate purposes or for developing information communicated to 
+other parties.  ASC 360-10-35-30. 
+14. Second, Icon also did not account correctly for certain expenses in calculating 
+projected cash flows using the Hamburg Method.  Icon typically allowed for up to an additional $2 
+million expense for any vessel that would require an expensive and lengthy form of mandatory 
+periodic “dry dock” maintenance (i.e. when the vessel is not in service) known as a “special 
+survey,” and which party (the lessor or the lessee) would bear responsibility for such costs was 
+factored into lease negotiations.  Both GAAP and the Hamburg Method require this expense to be 
+ 6 
+included in future cash flow calculations, where applicable.  However, Icon did not deduct this 
+expense from its future cash flow calculations for the Mayon and the Samar even though both 
+vessels were due for special surveys during the prospective lease period.  Reducing future cash 
+flows – even using $11,267 per day figure as the starting point – by the amount of this expense 
+alone would have caused both vessels to fail the recoverability test, requiring Icon to determine the 
+fair value of the vessels and record an impairment charge if the fair value of the vessels was less 
+than their carrying values.  In fact, in February 2011 – one month before the Forms 10-K were filed 
+– Icon shipping personnel involved in the new lease negotiations for the two vessels realized that 
+they had neglected to include the vessels’ special survey costs when estimating projected returns 
+on the vessels.  The shipping personnel corrected this error in their work, which lowered expected 
+returns, and the projections they prepared for their work assumed a new lease rate consistent with 
+then current market conditions rather than the much higher $11,267 rate – sans special survey costs 
+– that Icon accounting personnel used in the recoverability testing. 
+15. Using the valuation methodology that Icon employed when impairing the value of a 
+different set of vessels in the prior year (discussed below at ¶¶ 25-29), the fair value of the Mayon 
+and Samar vessels as of December 31, 2010 (the relevant measurement date) was approximately 
+$13.3 million each, or approximately $18 million below the carrying value of $31.2 million per 
+vessel.3  Accordingly, an impairment charge of approximately $18 million each was required for 
+the Mayon and the Samar as of December 31, 2010, for a total of $36 million.  By not recording 
+the $36 million impairment charge, Icon overstated the carrying value of the two vessels by that 
+amount, resulting in inaccuracies in reported net income (loss) and members’ equity in the Forms 
+10-K filed by Funds 9, 10 and 12 for the year ended December 31, 2010, which were filed in late 
+March 2011.4  The misstated 2010 year-end financial results for Funds 9, 10 and 12 were also 
+reported in those Leasing Funds’ Forms 10-K for the year ended December 31, 2011, which were 
+filed in late March 2012. 
+Insufficient Impairment of the Vessels in the First Quarter of 2011  
+16. In the quarter ended March 31, 2011, Icon did cause Funds 9, 10 and 12 to take an 
+impairment charge for the Mayon and the Samar, but the charge was insufficient under GAAP and 
+                                              
+3  This method starts with the vessels’ appraised fair market value, which provides the 
+vessels’ “charter-free” (i.e., unleased) value, and then adds to that number the net present (i.e. 
+discounted) value of 100% of the existing lease rate through the end of the current lease to arrive at 
+fair value.  Here, the $13.3 million estimate of the fair value of the Mayon and the Samar vessels as 
+of December 31, 2010 is the sum of the appraisal’s current fair market value of $9.86 million and 
+the net present value of 100% of the existing lease rate of $17,000 per day through July 23, 2011, 
+the expiration date of the current lease.  The discount rate used for the net present value calculation 
+of the remaining lease payments was 5.48%, which is the same rate that Icon used when 
+performing a discounted cash flow analysis to estimate the fair value of the Mayon and the Samar 
+at March 31, 2011. 
+4  The quantitative impact of the accounting errors discussed herein on each of the relevant 
+Leasing Funds’ financial statements are  presented below in paragraphs 34-37 for each affected 
+reporting period. 
+ 7 
+resulted in each vessel’s recorded value still being overstated by approximately $7.5 million, which 
+led to inaccuracies in the same three Leasing Funds’ Forms 10-Q for the first quarter of 2011, 
+which were filed in mid-May 2011. 
+17. In May 2011 (before the first quarter Forms 10-Q were filed), Icon signed a three-
+year charter for both vessels that was to begin in July 2011 and that provided for $3,900 in daily 
+rental income, consistent with the offers it had received a few months earlier.  Having now locked 
+in a new lease rate far below the $11,267 average rate for the prior ten years, Icon conducted a cash 
+flow analysis using the new lease rate and, as a result, the Mayon and the Samar both failed the 
+recoverability test.  Icon recorded impairment charges of approximately $11 million for each of the 
+vessels, reducing their carrying values from $30 million to approximately $19 million.  However, 
+these impairment charges were insufficient under GAAP because Icon overestimated the vessels’ 
+fair value by using the ten-year historical average lease rate derived under the Hamburg Method 
+rather than relevant market data in selecting the measurement inputs and using a methodology that 
+excluded the relevant market data as inputs. 
+18. Under GAAP, fair value accounting requires the maximum utilization of market 
+data and relevant, available market data cannot be disregarded.5  In this instance, Icon had obtained 
+appraisals of both vessels in November 2010, and these appraisals, which were based on recent 
+sales of similar vessels, constituted relevant market data.  Comparable sales data are generally 
+considered to be observable, level 2 valuation inputs under GAAP.  In addition, in March 2011, 
+Icon had purchased two vessels similar to the Mayon and Samar, but two years newer, for $13 
+million each.  As part of that transaction, Icon received appraisals valuing those newer vessels at 
+$13-15 million each, well above the $9.86 million appraised value of the older Mayon and Samar 
+vessels in November 2010 but still far below the $31.2 million values recorded for each of the 
+older vessels on the Leasing Funds’ books as of December 31, 2010, just three months earlier. 
+19. Nevertheless, when valuing the Mayon and the Samar in May 2011, Icon did not 
+use the observable inputs that it had available, in the form of recent, comparable sales transactions, 
+as its inputs.  Icon incorrectly assumed that in light of the market downturn discussed above, the 
+vessel appraisals and the comparable sales relied on by the appraisers could be disregarded, and 
+Icon did not conduct any analysis of the circumstances pertaining to the sales on which the 
+                                              
+5  ASC 820-10-35-36 states that the methods used to measure fair value “shall maximize 
+the use of relevant observable inputs and minimize the use of unobservable inputs.”  ASC 820 
+prioritizes inputs used to measure fair value into three levels based on the observability of the 
+inputs.  The highest, and generally most reliable, level of inputs – Level 1 – are “quoted prices 
+(unadjusted) in active markets for identical assets or liabilities.”  ASC 820 -10-35-40.  Level 2 
+inputs are “inputs other than quoted prices included within Level 1 that are observable for the 
+asset or liability, either directly or indirectly.”  ASC 820-10-35-47.  Level 3 inputs, generally the 
+least reliable, are “unobservable inputs for the asset or liability.”  ASC 820-10-35-52.  ASC 820-
+10-35-53 further notes as follows:  “Unobservable inputs shall be used to measure fair value to 
+the extent that relevant observable inputs are not available , thereby allowing for situations in 
+which there is little, if any market activity for the asset or liability at the measurement date 
+[emphasis added].” 
+ 8 
+appraisals relied.  Instead, as was known to the Leasing Funds’ outside auditors, Icon used an 
+unobservable input in the form of an estimated “net charter” rate, calculated using the Hamburg 
+Method’s ten-year historical average.  This method resulted in a projected $11,164 per-day rate for 
+a prospective renewal lease assumed to begin in 2014.  The projected $11,164 daily rate was more 
+than double the $3,900 per day to which Icon had just agreed in the new lease scheduled to begin 
+in July 2011.  Icon’s use of this projected $11,164 rate for a prospective lease three years in the 
+future without giving weight to the contemporaneous, and observable, market data described above 
+– the type of data that Icon itself had recently used in determining similar vessels’ fair value – was 
+an improper use of a “Level 3” valuation input because, as noted above, GAAP mandates that 
+“[v]aluation techniques used to measure fair value shall maximize the use of observable inputs and 
+minimize the use of unobservable inputs.”  In addition, Icon’s own internal contemporaneous 
+documents and other evidence demonstrate that Icon lacked a reasonable basis for concluding that 
+it would have actually been able to sell either the Mayon or the Samar at that time at a price near 
+the $19 million calculated value figure yielded by its sole reliance on the “Level 3” inputs. 
+20. Using the methodology described above in footnote 3, which maximizes use of the 
+observable market inputs available to Icon at the time by adding the net present value of 100% of 
+the remaining lease payments due under the existing lease to the appraisal’s current fair market 
+value of $9.86 million, the fair value of the Mayon and the Samar vessels as of March 31, 2011 
+was approximately $11.8 million each.  This valuation results in an impairment charge of $18.5 
+million per vessel, $7.5 million higher than the $11 million impairment charge taken by Icon for 
+each vessel in the first quarter of 2011.  By not recording a total impairment charge of $37 million, 
+Icon overstated the carrying value of the two vessels by a total of approximately $15 million, 
+resulting in inaccuracies in reported net income (loss) and members’ equity in the Forms 10-Q for 
+the quarter ended March 31, 2011 filed by Funds 9, 10 and 12.    The misstated first quarter 2011 
+financial results for Funds 9, 10 and 12 were also reported in those Leasing Funds’ Forms 10-Q for 
+the first quarter of 2012. 
+Reversal of Reduction in Estimated Residual Values of Vessels Leased to Companies A and B 
+21. An additional accounting error involved Icon’s failure to lower the residual values 
+(which are an estimate of the sale or scrap values at the end of a vessel’s useful life) of eight 
+vessels owned by Funds 9, 10, 11 and 12 and leased to two separate shipping companies 
+(“Companies A and B”), resulting in inaccuracies on those Leasing Funds’ books and records and 
+in their publicly filed financial statements for interim and annual periods from 2010 through the 
+end of 2011. 
+22. In early 2010, Icon concluded that the residual values of the vessels leased to 
+Companies A and B needed to be reduced and depreciation expense therefore needed to be 
+increased.   Icon estimated that the residual value of the vessels to the four Leasing Funds had 
+decreased by amounts ranging from approximately $4.9 million to $11.1 million per vessel, for an 
+aggregate reduction of $66.9 million.  However, after discussions with the Leasing Funds’ outside 
+auditor, Icon reversed those reductions before filing the Leasing Funds’ Forms 10-Q for the quarter 
+ended March 31, 2010, and did not reinstate the reductions in any subsequent period, resulting in 
+inaccuracies in each of the relevant periodic reports through the end of 2011.  Ba sed on Icon’s own 
+residual value analysis, the proposed reductions in residual values and corresponding increases in 
+ 9 
+depreciation were appropriate, and there was no reasonable basis for forgoing those adjustments 
+from the first quarter of 2010 through the end of 2011. 
+23. By the beginning of 2010, charter (i.e., lease) rates had been depressed for some 
+time and recent appraisals of vessels’ fair market value were coming in significantly below their 
+carrying values, including appraisals for the vessels leased to Companies A and B, an indication 
+under GAAP that the residual values may be too high and should be evaluated.  ASC 360-10-35-
+22.  Consequently, Icon adjusted residual values for the vessels leased to Companies A and B on 
+the four Leasing Funds’ books as of January 1, 2010 in the amounts set forth above.  The financial 
+statement impact of these adjustments would occur over time, as depreciation expense increased in 
+order to depreciate the book value of the vessels to their new, lower residual value.  Icon recorded 
+these increases in depreciation expense, as reflected in the trial balances and drafts of the Leasing 
+Funds’ Forms 10-Q for the quarter ended March 31, 2010, which Icon provided to the Leasing 
+Funds’ outside auditor in connection with the quarterly review.  Contemporaneous Icon documents 
+and communications between Icon and the auditor indicate that Icon’s accounting personnel were 
+confident in the accuracy of the new, reduced residual values.  However, after those 
+communications with the auditor and shortly before the Forms 10-Q were filed, Icon reversed the 
+residual value and depreciation adjustments.  Neither Icon nor the auditor documented the reason 
+or factual basis for this change or that there was even an expectation, at that time, that the residual 
+values would recover. 
+24. Icon’s reversal of the reduction in residual values and increase in depreciation 
+expenses resulted in a number of inaccuracies in the four Leasing Funds’ financial statements and 
+periodic reports, as the residual values were overstated in multiple subsequent reporting periods as 
+well.  The net income (loss) and members’ equity for all four Leasing Funds were misstated for 
+each quarter of 2010 and for the year ended December 31, 2010 due to these residual value errors.  
+The net income (loss) and members’ equity for Funds 10 and 12 were also misstated for the year 
+ended December 31, 2011 and each interim period therein due to these residual value errors.  In 
+addition, the net income (loss) and members’ equity for Fund 11 was misstated for the first two 
+quarters of 2011 due to these residual value errors.  These misstated financial results were also 
+reported in each Leasing Fund��s subsequent corresponding periodic reports, as late as through year 
+end 2012 for Funds 10 and 12.  
+Insufficient Impairment of Vessels Leased to Company C 
+25. A further accounting error involved Icon’s failure to sufficiently impair the 
+recorded value of four vessels owned by Fund 11 and leased to Company C (“Company C 
+vessels”).  Icon made an error in its impairment analysis that resulted in an overstatement of the 
+value of the Company C vessels on Fund 11’s books and records and in inaccuracies in Fund 11’s 
+publicly filed financial statements for interim and annual periods from the third quarter of 2009 
+through the end of 2010.   
+26. As of September 30, 2009, Fund 11 was carrying the Company C vessels at a value 
+of $81.1 million on the Leasing Fund’s books.  In the third quarter of 2009, Company C was 
+experiencing financial difficulties and the parties renegotiated the four leases, resulting in lower 
+lease payments to Fund 11.  Icon recognized this event as an indicator of impairment under GAAP 
+ 10 
+and further determined that Fund 11 needed to recognize an impairment loss.  Ultimately, Icon 
+impaired the Company C vessels by approximately $35.1 million and recorded their new carrying 
+value at $46 million.  However, Icon made an error in calculating the estimated fair value of the 
+vessels, which led to an insufficient impairment and an overstatement of the recorded value for the 
+Company C vessels. 
+27. To estimate the Company C vessels’ fair value, Icon used the valuation method 
+described above in paragraph 15 and used “Level 2” observable inputs from different sources.  
+Icon had obtained independent appraisals of the Company C vessels’ fair market value as part of its 
+review of their carrying values, and Icon used one of the appraiser’s fair market value estimates as 
+an input in its valuation formula.  One appraisal estimated the current fair market value of the 
+Company C vessels ($22.1 million), and the other appraisal estimated their fair market value at the 
+end of the existing lease term ($20.8 million), both on a “charter free” basis (i.e. in the absence of 
+whatever income-generating lease was actually in place).  To determine fair value, Icon added the 
+appraiser’s current fair market value estimate to Icon’s own estimate of the net present value of the 
+rental cash flows it was entitled to receive from Company C during the term of the renegotiated 
+leases. 
+28. However, Icon failed to correctly calculate the net present value of the cash flows 
+from the leases.  Icon appropriately used the renegotiated lease rates and payment schedules and 
+then meant to apply a discount rate of 8% to determine the net present value of those future 
+payments.  Icon erred, however, by using an incorrect formula when discounting cash flows in its 
+present value calculation, resulting in an overstated present value estimate.  This flawed present 
+value calculation, recorded on the Leasing Fund’s books and records and in documents provided 
+by Icon to the Leasing Fund’s auditor, resulted in a suggested impairment of $33.4 million, leading 
+to a carrying value of $47.7 million.  For reasons unrelated to the fair value analysis, Icon further 
+impaired the vessels by another $1.7 million to a carrying value of $46 million, but despite this 
+additional impairment, there was still an overstatement of the Company C vessels’ recorded value.  
+Applying the 8% discount rate used by Icon, a correct calculation of the sum of the net present 
+value of the cash flows due over the course of the leases and the appraisal’s current fair market 
+value results in a fair value of approximately $43.1 million, $2.9 million less than the $46 million 
+recorded by Icon.  The impairment of the Company C vessels should therefore have been $2.9 
+million greater than what Icon recorded, or $38 million. 
+29. By not recording the required $38 million impairment charge at that time or in 
+subsequent reporting periods, Icon overstated the carrying value of the Company C vessels by $2.9 
+million, resulting in a number of inaccuracies in Fund 11’s financial statements and periodic 
+reports.  Due to these impairment errors, Fund 11’s net income and members’ equity were 
+misstated in financial statements in its Forms 10-K for both the year ended December 31, 2009, 
+and the year ended December 31, 2010, as well as in financial statements in its Forms 10-Q for the 
+third quarter of 2009 and the first three quarters of 2010.  These misstated financial results for 
+Fund 11 were also reported in that Leasing Fund’s subsequent corresponding periodic reports 
+through year end 2012. 
+ 11 
+Non-Impairment of Auto Equipment Owned by Fund 11 
+30. Icon also did not impair auto parts manufacturing equipment owned by Fund 11 
+and leased to a French company (“Auto Equipment”) at the time required by GAAP.  Icon’s failure 
+to impair the Auto Equipment resulted in an overstatement in the value of the Auto Equipment of 
+approximately $3.1 million, which led to an overstatement of Fund 11’s assets and net income in 
+its Forms 10-Q for the second and third quarters of 2010 and of 2011. 
+31. In early 2009, the lessee of the Auto Equipment declared bankruptcy and the Auto 
+Equipment came under the jurisdiction of a French bankruptcy court.  As a result, Icon recorded, as 
+of December 31, 2009, an allowance for the past due balances owed by the lessee on the lease and 
+disclosed that income from the lease would be recorded on a cash basis.  Nevertheless, Icon did not 
+impair the Auto Equipment assets at that time, even though the decision to record an allowance and 
+to record income on a cash basis – a clear indication that Icon considered the collectability of the 
+future lease payments to be in doubt – indicates that Icon may have had difficulty establishing that 
+future cash flows would have been sufficient to recover the asset’s value.  In fact, Icon did not 
+perform a recoverability analysis at all because it mistakenly used an incorrect (lower) book value 
+in its impairment review.  That lower net book value led Icon to conclude incorrectly that the Auto 
+Equipment assets’ estimated fair value was greater than the recorded book value and that therefore 
+there was no indication of impairment. 
+32. In June 2010, Icon signed an agreement with the original lessee and a new lessee 
+transferring the Auto Equipment to the new lessee and amending the terms of the lease to provide 
+for lower rental payments to Fund 11.  At that point, impairment was required because the reduced 
+lease rate resulted in future cash flows that were lower than the asset’s carrying value.  However, 
+Icon still did not record an impairment charge at that time because, according to Icon, the Icon 
+personnel who executed the new lease agreement failed to provide the lease to the relevant finance 
+and valuation personnel until February 2011. 
+33. Icon eventually recorded an impairment charge on the Auto Equipment for Fund 11 
+in the amount of approximately $3.1 million, but not until the fourth quarter of 2010.  Icon’s failure 
+to record the impairment charge by the second quarter of 2010 caused Fund 11’s books and records 
+to overstate the carrying value of the Auto Equipment in the second and third quarters of 2010, 
+resulting in inaccuracies in reported net income (loss) and members’ equity in Fund 11’s financial 
+statements and interim periodic reports for the second and third quarters of 2010, including for the 
+nine months ended September 30, 2010.  These misstated financial results for Fund 11 were also 
+reported in its Forms 10-Q for the second and third quarters of 2011. 
+Impact of the Foregoing Errors on the Leasing Funds’ Financial Results 
+34. Fund 9’s reported financial results were misstated for the relevant periods due to 
+both Icon’s failure to lower the residual values of the vessels leased to Companies A and B (the 
+“RV” error) and by Icon’s failure to properly impair the recorded value of the Mayon and Samar 
+vessels (the “M/S” error), as follows: 
+ 12 
+ Net Income/(Loss) Overstatement/ 
+Understatement 
+Members’ Equity 
+Overstatement 
+Accounting 
+Errors 
+1Q2010  591% 4.0% RV 
+2Q2010  259% 8.0% RV 
+3Q2010 $1.3 million  ($0.1 million) 12.3% RV 
+YE2010 $6.8 million  ($11.2 million) 78.1% RV, M/S 
+1Q2011  (42.7%) 32.6% M/S 
+ 
+35. Fund 10’s reported financial results were misstated for the relevant periods due to 
+both the RV and M/S errors, as follows: 
+ 
+ Net Income/(Loss) Overstatement/ 
+Understatement 
+Members’ Equity 
+Overstatement 
+Accounting 
+Errors 
+1Q2010  101% 1.6% RV 
+2Q2010  $0.36 million  ($0.76 million) 3.3% RV 
+3Q2010  81.4% 5.0% RV 
+YE2010 $6.2 million  ($4.2 million) 18.9% RV, M/S 
+1Q2011  (53.5%) 10.4% RV, M/S 
+2Q2011  (9.5%) 4.4% RV 
+3Q2011  290% 5.2% RV 
+YE2011 (17.0%) 6.2% RV 
+ 
+36. Fund 11’s reported financial results statements were misstated for the relevant 
+periods due to Icon’s erroneous present value calculation with respect to the Company C vessels 
+(the “PVC” error), Icon’s failure to impair the Auto Equipment at the appropriate time (the “AE” 
+error), and the RV error, as follows: 
+ 
+ Net Income/(Loss) Overstatement/ 
+Understatement 
+Members’ Equity 
+Overstatement 
+Accounting 
+Errors 
+3Q2009  (5.2%) 1.8% PVC 
+YE2009 (5.2%) 1.8% PVC 
+1Q2010  (41.5%) 3.3% RV, PVC 
+2Q2010  (43.5%) 8.5% RV, PVC, AE 
+3Q2010  (11.5%) 12.5% RV, PVC, AE 
+YE2010 (49.8%) 10.8% RV, PVC 
+1Q2011  17.1% 10.5% RV 
+2Q2011  $1.9 million  ($0.1 million) 13% RV 
+ 
+37. Fund 12’s reported financial results were misstated for the relevant periods due to 
+both the RV and M/S errors, as follows: 
+ 
+ 13 
+ Net Income/(Loss) Overstatement/ 
+Understatement 
+Members’ Equity 
+Overstatement 
+Accounting 
+Errors 
+1Q2010  100% 0.9% RV 
+2Q2010  78.8% 1.2% RV 
+3Q2010  208% 2.7% RV 
+YE2010  $11.9 million  ($3.5 million)  6.6% RV; M/S 
+1Q2011  (80.8%) 5.1% RV; M/S 
+2Q2011  (44.1%) 4.2% RV 
+3Q2011  $1.47 million  ($0.06 million) 5.1% RV 
+YE2011 $2.95 million  ($3.18 million) 5.9% RV 
+ 
+Non-Disclosure of a Material Change in Estimate 
+38. In the second quarter of 2009, Icon reduced its estimate of the residual value of four 
+vessels leased by Fund 11 to Company D but failed to disclose that change in Fund 11’s 
+subsequent periodic reports, as required by GAAP.  This change in estimate did not have a material 
+impact on Fund 11’s financial statement results for the second quarter of 2009, but it was expected 
+to, and did, have a material impact on Fund 11’s reported results in future periods and, under 
+GAAP, was therefore required to be disclosed. 
+39. In Fund 11’s Form 10-Q for the second quarter of 2009 (and subsequent periodic 
+reports), Icon disclosed that Company D had terminated its lease for the four vessels on June 24, 
+2009, approximately two years before the end of the lease term.  While Icon did not impair those 
+vessels at that time, Icon reduced the residual value of the vessels by $14 million on Fund 11’s 
+books and records.  Going forward, Icon projected an increase in depreciation expense of 
+approximately $5.6 million per quarter as a result of this reduction in the estimated residual value 
+of the vessels.  Because this change in estimate was not disclosed in Fund 11’s Form 10-Q for the 
+second quarter or in subsequent periodic reports, Fund 11’s financial statements for the quarter and 
+nine months ended September 30, 2009, and the year ended December 31, 2009 did not comply 
+with GAAP, which requires disclosure of changes that are expected to materially impact future 
+quarters.  ASC 250-10-50-4.   
+40. The additional $5.6 million in depreciation expense represented approximately 
+10.5% of the net loss for the quarter, and 23.5% for the nine months, ended September 30, 2009.  
+The total increase in depreciation expense due to the reduction in residual value was approximately 
+$11.2 million for the year ended December 31, 2009, which was approximately 25.5% of the loss 
+reported for 2009 and 8% of members’ equity.  The disclosure was also required to have been 
+included in Fund 11’s Form 10-K for the year ended December 31, 2010, as that periodic report 
+reiterated the financial statements at issue. 
+41. The reduction in the residual value estimate and the resulting impact on Fund 11’s 
+financial results was particularly relevant because residual values were a key component of the 
+Leasing Funds’ business model.  The Leasing Funds’ ability to achieve their anticipated rates of 
+investment return depended in large part on Icon’s ability to realize their assets’ value at the end of 
+the leases, and the possible inability to realize the estimated residual asset values was identified as 
+a risk factor in the Leasing Funds’ Forms 10-K. 
+ 14 
+Inaccurate Disclosure of the Methodology for Calculating ERISA Valuation 
+42. In addition, Icon failed to accurately disclose in multiple Forms 10-K for Funds 9, 
+10, 11 and 12 the methodology used to calculate the estimated value of Leasing Fund interests for 
+ERISA reporting purposes.  Under applicable rules, the Leasing Funds were required to calculate 
+and report the estimated value of their member interests for ERISA purposes in the event that the 
+Leasing Fund “assets were sold in an orderly liquidation as of the close of [the] fiscal year and all 
+proceeds from such sales, without reduction for transaction costs and expenses, together with any 
+cash held by [the Leasing Fund], were distributed to the members upon liquidation.” 
+43. Until 2014, the relevant annual reports stated that this value was calculated as 
+follows:  
+[W]e calculated the sum of:  (i) the unpaid finance lease and note receivable payments on 
+our existing finance leases and notes receivable, discounted at the implicit yield for each 
+such transaction; (ii) the fair market value of our operating leases, equipment held for sale 
+or lease, and other assets, as determined by the most recent third-party appraisals we have 
+obtained for certain assets or our Manager’s estimated values of certain other assets, as 
+applicable; and (iii) our cash on hand.  From this amount, we then subtracted our total debt 
+outstanding and then divided the difference by the total number of Shares outstanding 
+[emphasis added]. 
+44. However, Icon did not disclose in the annual reports that to determine the “fair 
+market value” of assets for these purposes, Icon used the greater of net book value or fair market 
+value when impairment was not taken.  For example, in the 2010 Forms 10-K for Funds 9, 10, 11 
+and 12, Icon’s ERISA methodology resulted in Icon using the $31 million net book value of the 
+Mayon as its “fair market value” for purposes of the ERISA calculation, which was substantially 
+below the vessel’s appraised and fair values for the reasons discussed above in paragraphs 11-15. 
+45. Icon subsequently corrected this omission and, beginning with the year ended 
+December 31, 2013, changed the disclosure in the Leasing Funds’ Forms 10-K to expressly state 
+that the “greater of net book value or fair market value” was used in the ERISA calculation. 
+VIOLATIONS 
+46. By reason of the foregoing, Icon was a cause of the relevant Leasing Funds’ 
+violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 
+Rule 13a-13 and 12b-20 thereunder.  As described above, Funds 9, 10, 11 and 12 filed annual and 
+quarterly reports that included financial statements that were not prepared in accordance with 
+GAAP, as required by Regulation S-X.  Those Leasing Funds also violated Section 13(b)(2)(A) by 
+not keeping accurate books and records, and violated Section 13(b)(2)(B) by not devising and 
+maintaining a sufficient system of internal accounting controls.  As the entity that performed and 
+was responsible for the Leasing Funds’ accounting functions, including their recordkeeping and 
+internal control functions, and for the preparation of the Leasing Funds’ financial statements and 
+periodic reports, Icon caused the Leasing Funds’ violations of these financial reporting, 
+recordkeeping and internal control provisions. 
+ 15 
+IV. 
+In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
+agreed to in Respondent Icon’s Offer. 
+Accordingly, it is hereby ORDERED that: 
+A. Pursuant to Section 21C of the Exchange Act, Respondent Icon cease and desist 
+from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), 
+13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.  
+B. Respondent shall pay a civil money penalty of $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).  Payment shall be made in installments according to the 
+following schedule: 
+ An initial payment of $150,000 due within 10 days after the entry of this Order. 
+ An additional payment of $85,000 due within 90 days after the entry of this Order. 
+ An additional payment of $85,000 due within 180 days after the entry of this Order. 
+ An additional payment of $85,000 due within 270 days after the entry of this Order. 
+ An additional payment of $85,000 due within 360 days after the entry of this Order. 
+ An additional payment of $85,000 due within 450 days after the entry of this Order. 
+ An additional payment of $85,000 due within 540 days after the entry of this Order. 
+ An additional payment of $90,000 due within 630 days after the entry of this Order. 
+C. 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. 
+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 
+ 16 
+E. Payments by check or money order must be accompanied by a cover letter 
+identifying Icon as a Respondent in these proceedings, and the file number of these proceedings; a 
+copy of the cover letter and check or money order must be sent to Sanjay Wadhwa, Division of 
+Enforcement, Securities and Exchange Commission, New York Regional Office, 200 Vesey Street, 
+Suite 400, New York, New York 10281. 
+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 issued by the Commission in this 
+proceeding. 
+By the Commission. 
+ 
+ 
+Brent J. Fields 
+Secretary 

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+UNITED STATES OF AMERICA 
+Before the 
+SECURITIES AND EXCHANGE COMMISSION 
+ 
+SECURITIES EXCHANGE ACT OF 1934 
+Release No. 78113 / June 21, 2016 
+ 
+ACCOUNTING AND AUDITING ENFORCEMENT 
+Release No. 3784 / June 21, 2016 
+ 
+ADMINISTRATIVE PROCEEDING 
+File No. 3-17305 
+ 
+ 
+In the Matter of 
+ 
+ANALOGIC 
+CORPORATION and 
+LARS FROST, 
+ 
+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 Analogic Corporation (“Analogic”) and Lars 
+Frost (collectively “Respondents”).  
+ 
+II. 
+ 
+ In anticipation of the institution of these proceedings, Respondent Analogic has submitted 
+an Offer of Settlement which the Commission has determined to accept.  Solely for the purpose of 
+these proceedings and any other proceedings brought by or on behalf of the Commission, or to 
+which the Commission is a party, Respondent Analogic 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 anticipation of the institution of these proceedings, Respondent Lars Frost has also 
+submitted an Offer of Settlement which the Commission has determined to accept.  Solely for the 
+purpose of these proceedings and any other proceedings brought by or on behalf of the 
+Commission, or to which the Commission is a party, and without admitting or denying the findings 
+herein, except as to the Commission’s jurisdiction over him and the subject matter of these 
+ 2 
+proceedings, which are admitted, and except as provided herein in Section V, Respondent Lars 
+Frost consents to the entry of this Order, as set forth below.   
+ 
+III. 
+ 
+ On the basis of this Order and Respondents ’ Offers of Settlement, the Commission finds1 
+that:  
+ 
+Summary 
+ 
+1. This matter concerns violations of the books and records and internal accounting 
+controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Analogic, a medical device 
+manufacturer headquartered in Peabody, Massachusetts, and by Lars Frost, a citizen and resident of 
+Denmark and the former Chief Financial Officer of Analogic’s wholly-owned Danish subsidiary, 
+BK Medical ApS (“BK Medical”), which sells ultrasound equipment.2 
+   
+2. From at least 2001 through early 2011, BK Medical participated in hundreds of 
+highly suspicious transactions at its distributors’ direction which posed a significant risk of bribery 
+or other improper conduct.  The suspicious transactions involved BK Medical’s distributor in 
+Russia, as well as, to a lesser extent, its distributors in Ghana, Israel, Kazakhstan, Ukraine, and 
+Vietnam.  The transactions routinely involved fictitious invoices issued by BK Medical at inflated 
+prices, overpayments to BK Medical from the distributors against the inflated invoices, and 
+subsequent payments by BK Medical out of the distributors’ excess funds to unknown third parties 
+all over the world for unknown reasons.  In short, for at least nine years, BK Medical acted as a 
+conduit for its distributors to funnel money to parties, and for reasons, unknown to BK Medical.  
+Approximately $20 million flowed through BK Medical from these distributors, with over $16 
+million from BK Medical’s Russian distributor. 
+ 
+3. BK Medical and, by extension, Analogic derived millions in profits from its sales to 
+the distributors that directed these suspicious transactions.  BK Medical’s participation in the 
+transactions resulted in Analogic failing to maintain accurate books and records.  Analogic also 
+failed to devise and maintain an adequate system of internal accounting controls sufficient to 
+prevent and detect this improper conduct that occurred over nearly a decade.   
+ 
+4. Respondent Lars Frost, who was BK Medical’s Chief Financial Officer from 2008 
+to 2011, personally authorized approximately 150 conduit payments to unknown third parties 
+during his tenure at BK Medical despite knowing that the payments violated BK Medical’s internal 
+accounting controls.  Frost also submitted numerous false quarterly sub-certifications to Analogic.  
+As a result of his conduct, Frost was a cause of Analogic’s violations described herein. 
+ 
+                                                 
+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  Lars Frost is not related to Analogic’s current Chief Financial Officer, who shares the same last 
+name. 
+ 3 
+Respondents 
+ 
+5. Analogic Corporation is a Massachusetts corporation that designs and 
+manufactures advanced medical imaging, ultrasound, and security technology systems.  Its 
+corporate headquarters is in Peabody, Massachusetts and its common stock is registered pursuant 
+to Section 12(b) of the Exchange Act and traded on the NASDAQ under the symbol “ALOG.”  
+Among others, Analogic has a wholly-owned subsidiary in Denmark named BK Medical ApS, 
+which focuses on the manufacture and sale of ultrasound systems.  Analogic acquired BK Medical 
+in 1996 and BK Medical’s financial results are wholly incorporated into Analogic’s.  
+ 
+6. Lars Frost, age 50, is a resident and citizen of Denmark.  From approximately 
+October 2008 through September 2011, Frost was the Chief Financial Officer of BK Medical.  In 
+this role, he reported to Analogic’s corporate controller and chief accounting officer in the United 
+States. 
+ 
+Facts 
+ 
+7. Analogic’s ultrasound business is primarily pursued by BK Medical, which sells 
+ultrasound products to end users – e.g., clinical practitioners – throughout the world.  During the 
+relevant period, BK Medical sold ultrasound products (i) directly to end users through BK 
+Medical’s direct sales force, and (ii) indirectly to end users through distributors.  The transactions 
+detailed below took place in connection with BK Medical’s sales to distributors, which sold BK 
+Medical’s ultrasound systems to government-owned hospitals, among other end users. 
+ 
+A. BK Medical’s Participation in Improper Payment Arrangements 
+ 
+8. From at least December 2001 through early 2011, BK Medical participated in an 
+improper payment arrangement scheme with its principal distributor selling BK Medical’s 
+ultrasound products in Russia.  The Russian distributor, located in Moscow, was BK Medical’s 
+largest distributor by revenue.  The arrangement was employed in connection with the majority of 
+BK Medical’s sales to the Russian distributor during the relevant period and generally involved 
+three steps, each of which the Russian distributor directed. 
+ 
+9. The first step involved the creation of one or more fictitious documents reflecting 
+an inflated purchase price for the product or products BK Medical was selling to the Russian 
+distributor.   
+ 
+a. After BK Medical and the Russian distributor reached agreement on the terms of a 
+particular sale, the Russian distributor would request that BK Medical create a 
+fictitious, second invoice at an inflated price.  The Russian distributor would send 
+BK Medical a template invoice with the inflated price, which was regularly well in 
+excess of 100% of the original, agreed-upon price.  BK Medical’s distributor sales 
+staff understood the inflated price to reflect the price the ultimate end user would 
+pay to the distributor. 
+ 
+ 4 
+b. BK Medical’s customer service staff would cut and paste BK Medical’s logo onto 
+the template invoice and complete other pertinent fields, such as an invoice number.  
+These steps were taken outside BK Medical’s standard invoice-generation system, 
+in violation of BK Medical’s internal accounting controls.  The fictitious, second 
+invoice would subsequently accompany the ultrasound products when they were 
+shipped to Russia.  An invoice prepared by BK Medical’s standard invoice-
+generation system reflecting the agreed-upon, actual price would also be sent to the 
+Russian distributor, often electronically. 
+ 
+c. Separately, the Russian distributor also often sent BK Medical a purported contract 
+for the sale that listed the higher, inflated price.  One of BK Medical’s distributor 
+sales staff – often an administrative assistant – would execute the contract on behalf 
+of BK Medical.  BK Medical maintained copies of certain of the fictitious contracts 
+and fictitious, second invoices. 
+  
+10. Next, rather than pay the agreed-upon, actual price for the products, the Russian 
+distributor would pay BK Medical at the inflated price via wire payment.  BK Medical recorded 
+only the agreed-upon, actual price as revenue and credited the excess amount to its accounts 
+receivable account for the Russian distributor.  At times, this resulted in BK Medical’s accounts 
+receivable balance for the Russian distributor to be in a net credit position – in other words, BK 
+Medical effectively owed the Russian distributor money, rather than vice versa. 
+ 
+11. Then, at some point weeks or months later, the Russian distributor would direct BK 
+Medical to make a wire payment out of the excess funds to a third party that was otherwise 
+unknown to BK Medical.  BK Medical complied with the directives, despite not knowing the 
+purpose of the payments or the nature of the payees. 
+   
+a. The directive often came in the form of an email or fax, with only the payee’s wire 
+information and the amount.  The payees ranged from apparent shell corporations 
+located in places such as Belize, the British Virgin Islands, Cyprus, and Seychelles, 
+to specific individuals in Russia.  At times, a fictitious invoice for marketing, 
+logistics, or other services ostensibly rendered to BK Medical by the payee would 
+accompany the directive from the Russian distributor.  These invoices were not 
+entered into BK Medical’s accounts payable system, as BK Medical’s internal 
+accounting controls required. 
+ 
+b. Two approvals were generally required before BK Medical made the payments.  
+First, an individual in BK Medical’s distributor sales staff would approve the 
+payment.  Next, an individual in BK Medical’s finance staff would review and 
+approve the wire transfer.  The payee banks to which the payments were sent were 
+located all over the world, although approximately half of the payments went to 
+banks in Latvia, on Russia’s border. 
+ 
+c. The payments were not made through BK Medical’s accounts payable system, as 
+was required by BK Medical’s internal accounting controls.  Instead, BK Medical 
+ 5 
+simply credited its cash account and made an offsetting debit to its accounts 
+receivable account for the Russian distributor.  In those instances where the Russian 
+distributor had provided a fictitious invoice from the payee, the authorizing 
+signatures would be applied directly on the fictitious invoice, which would 
+subsequently be kept in BK Medical’s files. 
+ 
+d. For the majority of the payments to third parties, the payment amount was less than 
+the sum of the amounts the Russian distributor had previously overpaid BK 
+Medical and that remained as excess funds in BK Medical’s accounts receivable 
+account for the Russian distributor.  On at least two occasions, however, payments 
+to third parties were made before sufficient overpayment funds had been paid to BK 
+Medical.  In those two cases, BK Medical made approximately $95,000 in total 
+payments to unknown third parties, for unknown reasons, before receiving the 
+funds from the Russian distributor.  
+ 
+12. In total, during at least the period December 2001 to early 2011, BK Medical 
+served as a conduit for at least 180 of these payments to third parties pursuant to this arrangement 
+with its Russian distributor, totaling approximately $16.1 million.  Over this period, BK Medical, 
+and by extension Analogic, recorded approximately $21.6 million in revenue on its sales to its 
+Russian distributor. 
+ 
+13. During this same period, BK Medical participated in similar arrangements, but to a 
+lesser degree, with its distributors in Ghana, Israel, Kazakhstan, Ukraine, and Vietnam.  The 
+arrangements broadly followed the same structure, though the degree to which fictitious documents 
+were created varied by distributor.  Over this period, BK Medical served as a conduit for at least 80 
+payments to third parties pursuant to arrangements with these other distributors, totaling 
+approximately $3.8 million. 
+ 
+14. BK Medical’s participation in these payment arrangements with its distributors 
+created a significant risk that BK Medical was facilitating bribery or other prohibited conduct, such 
+as embezzlement or tax evasion. 
+ 
+B. Identification of Bribery Risks Associated with Distributors 
+ 
+15. In or around 2004, BK Medical’s Vice President of Sales for distributors asked his 
+principal contact at the Russian distributor about the purpose of the payments to third parties and 
+later memorialized his understanding in the form of a ghostwritten email from the contact to 
+himself.  The email stated, among other things, that the payments were necessary due to “Russian 
+market conditions”; that “the level of official salaries in many sectors are still extremely low”; that 
+the payments are for, among other things, “general improvements of the standard of living of … 
+persons on high levels”; and that “[i]f you cannot continue to help us with the money transfers, we 
+will risk up to 90% of our B-K business.”  The email then stated: “Please understand that your 
+western word ‘bribe’ is not used in our Russian market.  We talk about customer obligations, 
+nothing else ….”  Notwithstanding these red flags, the payments to unknown third parties 
+continued for six more years. 
+ 6 
+ 
+16. In 2008, a Senior Vice President at Analogic concluded that BK Medical presented 
+a “significantly greater risk” of violating the FCPA than Analogic’s other business lines, because 
+BK Medical’s products “go in completed form to … hospitals, many of which are government 
+owned.”  In addition to recommending that BK Medical implement a FCPA training program, the 
+Senior Vice President recommended in an email to Analogic’s senior management that BK 
+Medical put in place an “official process for validating that their distribution partners do not, or are 
+not likely to engage in prohibited behavior.”  Analogic then provided a business ethics and FCPA 
+compliance training to BK Medical sales and finance staff, but no official process was 
+implemented, and no steps were taken to validate whether its Russian distributor or any other 
+distributor was engaged in prohibited behavior. 
+ 
+C. Analogic Failed to Make and Keep Accurate Books and Records and Maintain 
+an Adequate Internal Accounting Control System  
+ 
+17. BK Medical’s participation in the transactions involved the routine creation and/or 
+ratification of several types of fictitious documents, which BK Medical maintained in its books and 
+records and, in some cases, used to support payments made to third parties.  These documents 
+included fictitious BK Medical invoices, contracts, and invoices from third parties for services 
+never rendered to BK Medical.  Moreover, BK Medical made and recorded hundreds of 
+transactions in its books and records for which BK Medical did not know the business purpose and 
+therefore was unable to account for accurately.  These recorded transactions, and the fictitious 
+documents upon which they were predicated, were incorporated into Analogic’s books and 
+records, which were rendered inaccurate as a result. 
+ 
+18. Analogic’s internal accounting controls system was also deficient.  BK Medical 
+was able to process hundreds of sham, conduit transactions involving millions of dollars in 
+payments outside the company’s accounting systems for nearly ten years.   
+ 
+D. Lars Frost’s Role in Analogic’s Inaccurate Books and Records and  
+ Internal Accounting Controls Failures  
+ 
+19. Frost joined BK Medical’s finance department in 1999 and was promoted 
+ultimately to BK Medical’s Chief Financial Officer position in approximately October 2008, which 
+position he held until Analogic caused BK Medical to terminate his employment in September 
+2011.  In the CFO role, Frost was BK Medical’s chief accounting officer, was responsible for 
+ensuring BK Medical’s compliance with its internal accounting controls, and reported directly to 
+Analogic’s corporate controller and chief accounting officer in the United States. 
+  
+20. During his tenure at BK Medical, Frost approved approximately 150 payments 
+outside of BK Medical’s accounts payable system to unknown third parties, approximately 10 of 
+which were while he was the BK Medical CFO.  At times, he authorized the payments by applying 
+his initials to fictitious invoices from third parties for services never rendered to BK Medical.  BK 
+Medical had regularly participated in these transactions before Frost became CFO of BK Medical 
+and he took no steps to stop them after he became CFO. 
+ 7 
+ 
+21. Frost authorized payments to unknown third parties outside the accounts payable 
+system knowing that doing so was inconsistent with – and circumvented – the internal accounting 
+controls in place at BK Medical, which required all payments to be processed through accounts 
+payable.  Further, both before and after he became BK Medical’s CFO, Frost executed internal 
+sub-certifications for Analogic on a quarterly basis certifying BK Medical’s compliance with its 
+accounts payable controls, among other internal accounting controls, notwithstanding knowledge 
+that the payments violated those controls.  As BK Medical’s CFO, Frost also signed quarterly 
+financial-statement sub-certifications for Analogic, certifying that all material financial 
+transactions at BK Medical had been properly recorded, notwithstanding that Frost did not know 
+the business purpose of the payments to third parties.  Both of these sets of sub-certifications were 
+incorporated into Analogic’s books and records.  Frost was also aware of the fictitious contracts 
+that BK Medical’s Russian distributor requested BK Medical execute.  Finally, Frost also 
+completed quarterly checklists for Analogic’s controller, the purpose of which was to identify 
+unusual transactions and changes in the status of internal controls, among other matters.  Frost 
+failed to disclose the payment arrangements in connection with these checklists or in related 
+discussions with Analogic’s controller.  These incomplete checklists were also incorporated into 
+Analogic’s books and records. 
+ 
+Violations of the Recordkeeping and Internal Accounting Controls Provisions of the FCPA 
+ 
+22. As a result of the conduct described above, Analogic 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.  
+ 
+23. As a result of the conduct described above, Analogic also 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 executed in accordance with management’s general or specific authorization. 
+ 
+24. As a result of his conduct described above, Lars Frost was a cause of Analogic’s 
+violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. 
+ 
+25. As a result of his conduct described above, Lars Frost also 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. 
+ 
+Analogic’s Self-Report, Cooperation, and Remedial Efforts 
+ 
+26.  Upon discovering the payment arrangements at BK Medical, Analogic halted the 
+transactions, conducted an internal investigation, and subsequently self-reported its findings, 
+including an accounting of all of the suspicious payments to third parties by distributor and 
+ 8 
+recipient.  Analogic thereafter generally cooperated with the Commission staff’s investigation.  
+Analogic further took a number of remedial efforts, including (1) terminating BK Medical’s 
+relationship with eight distributors; (2) improving BK Medical’s distributor due diligence and 
+distributor agreements; (3) terminating a number of BK Medical employees (including Lars Frost 
+and the Vice President of Sales for distributors) and disciplining other BK Medical employees 
+involved in the transactions; (4) enhancing Analogic’s general oversight of BK Medical and hiring 
+a corporate compliance officer; (5) remediating and improving BK Medical’s internal accounting 
+controls; and (6) requiring additional and ongoing compliance training for BK Medical and 
+Analogic employees. 
+ 
+27. In determining to accept Analogic’s Offer, the Commission considered Analogic’s 
+self-report, cooperation, and remedial acts. 
+ 
+Non-Prosecution Agreement 
+ 
+28. BK Medical has entered into a non-prosecution agreement with the United States 
+Department of Justice that acknowledges responsibility for conduct relating to certain of the 
+findings in this Order. 
+ 
+29. Respondent Analogic acknowledges that the Commission is not imposing a civil 
+penalty based in part upon BK Medical’s payment of a $3,402,000 criminal fine as part of BK 
+Medical’s settlement with the United States Department of Justice. 
+ 
+IV. 
+ 
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
+agreed to in Respondents’ Offers. 
+ 
+ Accordingly, it is hereby ORDERED that: 
+ 
+ A. Pursuant to Section 21C of the Exchange Act, Respondent Analogic cease and desist 
+from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and 
+13(b)(2)(B) of the Exchange Act. 
+ 
+ B. Pursuant to Section 21C of the Exchange Act, Respondent Lars Frost cease and 
+desist from committing or causing any violations and any future violations of Sections 13(b)(2)(A), 
+13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder. 
+ 
+ C. Respondent Analogic shall, within 14 days of the entry of this Order, pay 
+disgorgement of $7,672,651 and prejudgment interest of $3,810,311 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. 
+ 
+ 9 
+D. Respondent Lars Frost shall pay a civil money penalty 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).  Payment shall be made in the following installments: $5,000 
+within 14 days of entry of this Order; $2,500 within 120 days of entry of this Order; $5,000 within 
+240 days of entry of this Order; and $7,500 within 360 days 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 the 
+civil money penalty, plus any additional interest accrued pursuant to pursuant to 31 U.S.C. § 3717, 
+shall be due and payable immediately, without further application.   
+ 
+Payment must be made in one of the following ways:   
+ 
+(1) Respondents may transmit payment electronically to the Commission, 
+which will provide detailed ACH transfer/Fedwire instructions upon 
+request;  
+ 
+(2) Respondents may make direct payment from a bank account via Pay.gov 
+through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or  
+ 
+(3) Respondents may pay by certified check, bank cashier’s check, or United 
+States postal money order, made payable to the Securities and Exchange 
+Commission and hand-delivered or mailed to:  
+ 
+Enterprise Services Center 
+Accounts Receivable Branch 
+HQ Bldg., Room 181, AMZ-341 
+6500 South MacArthur Boulevard 
+Oklahoma City, OK 73169 
+ 
+Payments by check or money order must be accompanied by a cover letter identifying 
+Analogic or Lars Frost as a Respondent in these proceedings, as appropriate, and the file number of 
+these proceedings; a copy of the cover letter and check or money order must be sent to Paul G. 
+Block, Assistant Director, Division of Enforcement, Securities and Exchange Commission, Boston 
+Regional Office, 33 Arch Street, Boston, MA 02110.   
+ 
+ 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 Lars Frost 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 Lars Frost 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” 
+ 10 
+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 Lars Frost, and further, any debt for disgorgement, prejudgment interest, civil penalty 
+or other amounts due by Respondent Lars Frost 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 Lars Frost 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 
+ 
+